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Reconcile Multiple Streams of Cash Receipts Against Customer Balances


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Assurance of cash balances is a crucial part of your company’s accounting. In cash reconciliation, multiple financial systems are involved, and often cash balances do not match across these systems.



Table of Contents

Introduction: Cash Reconciliation vs Bank Reconciliation

4 Common Cash Reconciliation Systems

Importance of Cash Reconciliation Solutions

Problems When Reconciling Cash Receipts

Conclusion


Introduction: Cash Reconciliation vs Bank Reconciliation


The cash reconciliation process involves verifying the completeness of a transaction or sale across a business’ financial systems. Many people confuse cash reconciliation with bank reconciliation, but they are rather different.


Bank reconciliation is a process of matching transactions reported in bank statements against those recorded in your company’s general ledger (GL). Its aim is to make sure that the cash balance recorded in the GL is aligned with the cash balance in the bank account.


Reconciling cash receipts is generally more comprehensive and complex than reconciling bank statements, since it involves the whole financial technology stack of a company.



4 Common Cash Reconciliation Systems


These reconciliation systems may vary depending company size, technological maturity, and/or business model. Furthermore, in general, cash balances across the systems do not match. This is why it is a good idea to perform daily cash reconciliation.


Payment Processor


Payment processors (also called “payment service providers” or “acquirers”) complete transactions by relaying the customer’s payment information to both the company’s bank and the customer’s bank. The transaction will go through as long as there are enough funds.


There can be many fees associated with this system, including chargeback, transaction, start-up, termination and credit card processing equipment. However, it is a popular way to accept debit or credit card payments from customers.


Examples of payment processors include PayPal and Stripe


Billing System


Billing systems allow customers to pay for their purchases through creating and managing bills and customer invoices. They include software that transmits bills and invoices offline and online to customers.


Examples of billing systems include Chargebee and Recurly.


Revenue Recognition System


Such a system computes revenue for the present period and liabilities for deferred future revenues. It processes data from payment processors and billing systems to perform calculations as per your company’s policies and arrangements.


Examples of revenue recognition systems include NetSuite ARM and Leapfin.


Company’s Bank


A company’s bank is a bank used by a company to collect and deposit money from transactions that have been processed successfully by payment processors. In a cash reconciliation process, it is the final system involved.


Examples of such banks include JP Morgan Chase and the Bank of America.


Importance of Cash Reconciliation Solutions


Avoid Accounting Errors


Reconciling cash receipts helps you avoid cash balance errors and maintain accuracy in your accounting records.


Confirm Financial Statement Accuracy


Banks can and do make mistakes. Cash reconciliation services help you avoid errors and confirm that you bank statements match your financial statements.


Accurate tax returns


Reconciliation of bank statements are necessary to generate accurate tax returns.


Detect Fraudulent Activity


Accounting fraud is something you want to look out for. When it comes to cash reconciliation, one of the top priorities is checking for signs of fraudulent activity.


Ask yourself questions such as: Are there missing payments? Have payments been made without permission?


Improve Cash Forecasting


You can face major long and short term consequences for making business decisions based on erroneous cash balance. Investing in daily cash reconciliation will help you avoid this and also keep your accounting operations organized, leading to improvements in cash flow.


3 Common Problems When Reconciling Cash Receipts


Reconciliation is one of the more frustrating and tedious parts of accounting, and it is easy for problems to spring up. That’s why many companies prefer going for professional cash reconciliation solutions instead of doing it themselves.


Here are some of the most common problems that occur when conducting cash reconciliation.


Timing Differences


Differences in cash can be caused by timing differences across your financial systems.


Typically, these will include differences between:

  • RevRec system or billing system & Payment processor payouts

  • Payment processor payouts & bank cash

Such timing differences are generally more prevalent among businesses with high transaction, small dollar volumes. They are also tedious to identify at month-end, especially if done manually, so we recommend considering automating your cash reconciliation and matching process.


Foreign Exchange


If you are dealing with foreign currency, you will also be dealing with foreign exchange (“forex” or “FX”). All the different currencies will require forex rates depending on the interactions.


Forex rates fluctuate daily, and changing the rates will impact your realized gains and losses on your financial statements.


Realized losses or gains indicate that your customer has settled an invoice or you have settled a refund. Forex differences in functional currency are the primary drivers of FX; losses and gains are reported on the income statement.


Consider an example:


On May 5th, a customer in Melbourne, Australia, purchases a 6-month subscription for $100 and elects to pay in CAD. On May 9th, the customer cancels the subscription and gets a full refund.


The exchange rate on May 5th is 1 CAD to 1.0984 AUD.

The exchange rate on May 9th is 1 CAD to 1.0870 AUD.


Foreign Currency


Today, many companies operate in more than one currency. Examples include selling to customers all around the world and intercompany transactions between subsidiaries. While these are normal business activities, such transactions lead to currency differences.


The various types of currencies you should be familiar with are transaction currency, functional currency, and settlement currency.


Conclusion


Reconciliation solutions will help you prevent fraud and maintain accurate financial statements.


However, reconciliation can be tedious and frustrating. That’s why NextGen was founded – to take care of it for you. We give you reliable documentation, every day. If it doesn’t pass audit, we pay the fees. Our management team has decades of experience and includes former executives of Barclays Bank, Bank of America, and ICBC.


If you want to lessen your workload with reconciliation services, contact us today!

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