The lifecycle of an enterprise-wide reconciliation approach
Defining reconciliation
We all do it. We use the term "reconciliation" to mean different things in relation to financial data. Think of two examples: bank reconciliation and general ledger reconciliation. Then consider what meanings these terms might have in general conversation. Bank reconciliation can easily mean the daily comparison of transactions between a statement provided by the bank and those in the cash account within the general ledger. General ledger (GL) reconciliation can mean the quarter-end verification of a balance in a suspense account in the GL. Totally different, but we often use - or confuse - the terms. So for clarity, let's refer to the former activity as "matching", and to the latter as "reconciliation".
The reconciliation lifecycle
Overall reconciliation activities take place with different frequencies, have very different data types being compared and verified, and often are handled in many varied ways and levels of automation within all organizations. At the end of the day, however, a periodic lifecycle exists regardless of how we address each of the stages and components. So what are they?
Stage 1 Import and Enrichment - Firstly we gather all the data. In an automated environment this would likely be delivered electronically, often overnight. In the first example above a file would be delivered by, or made available and electronically collected from, the bank; then a corresponding file would be extracted from the GL. As the data is imported into a reconciliation solution it may be manipulated or enriched to assist with stage 2.
Stage 2 Matching - Any number of pre-defined rules are then applied to maximize the number of successful comparisons, allowing for one-to-one, one-to-many, or many-to-many transactional matching. The goal is to maximize the match rate. The "fallout" moves to stage 3.
Stage 3 Exception Management - Items that were expected to match and did not denote potential risk and require investigation. So now processes are deployed, often involving a combination of people and technology, to assist with the review and resolution of these. Increasing the level of technology - where appropriate -can help to lower operational costs but, often more importantly, ensure adherence to corporate compliance policies. Hence, workflow-style case management can have a role to play depending on the number and type of breaks.
Stage 4 Reconciliation - The exception management process rarely ends, but periodically a reconciliation statement is produced, reviewed, signed off, and filed. This represents the true "Reconciliation" of the account - verifying the balances and explaining any differences and how they will be addressed. For bank accounts this could be daily. But what about GL balance sheets accounts whose balances only require review and verification on a less frequent basis, maybe at month or quarter end? It's a similar process just in a different guise: verifying two numbers and explaining any differences. Reconciliation!
Benefits of an enterprise-wide total lifecycle reconciliation approach
We are all performing the above tasks, but often in a multitude of disintegrated ways: different systems, varying degrees of automation, data located in many places. Consider having all of this data and all reconciliation-related activities across all stages of the lifecycle in one integrated solution. The benefits can be significant and rapidly self-funding: a lowering of operational costs, the reduction and mitigation of operational risk, and the easily proven adherence to regulatory requirements to ensure full compliance at all times.
Defining reconciliation
We all do it. We use the term "reconciliation" to mean different things in relation to financial data. Think of two examples: bank reconciliation and general ledger reconciliation. Then consider what meanings these terms might have in general conversation. Bank reconciliation can easily mean the daily comparison of transactions between a statement provided by the bank and those in the cash account within the general ledger. General ledger (GL) reconciliation can mean the quarter-end verification of a balance in a suspense account in the GL. Totally different, but we often use - or confuse - the terms. So for clarity, let's refer to the former activity as "matching", and to the latter as "reconciliation".
The reconciliation lifecycle
Overall reconciliation activities take place with different frequencies, have very different data types being compared and verified, and often are handled in many varied ways and levels of automation within all organizations. At the end of the day, however, a periodic lifecycle exists regardless of how we address each of the stages and components. So what are they?
Stage 1 Import and Enrichment - Firstly we gather all the data. In an automated environment this would likely be delivered electronically, often overnight. In the first example above a file would be delivered by, or made available and electronically collected from, the bank; then a corresponding file would be extracted from the GL. As the data is imported into a reconciliation solution it may be manipulated or enriched to assist with stage 2.
Stage 2 Matching - Any number of pre-defined rules are then applied to maximize the number of successful comparisons, allowing for one-to-one, one-to-many, or many-to-many transactional matching. The goal is to maximize the match rate. The "fallout" moves to stage 3.
Stage 3 Exception Management - Items that were expected to match and did not denote potential risk and require investigation. So now processes are deployed, often involving a combination of people and technology, to assist with the review and resolution of these. Increasing the level of technology - where appropriate -can help to lower operational costs but, often more importantly, ensure adherence to corporate compliance policies. Hence, workflow-style case management can have a role to play depending on the number and type of breaks.
Stage 4 Reconciliation - The exception management process rarely ends, but periodically a reconciliation statement is produced, reviewed, signed off, and filed. This represents the true "Reconciliation" of the account - verifying the balances and explaining any differences and how they will be addressed. For bank accounts this could be daily. But what about GL balance sheets accounts whose balances only require review and verification on a less frequent basis, maybe at month or quarter end? It's a similar process just in a different guise: verifying two numbers and explaining any differences. Reconciliation!
Benefits of an enterprise-wide total lifecycle reconciliation approach
We are all performing the above tasks, but often in a multitude of disintegrated ways: different systems, varying degrees of automation, data located in many places. Consider having all of this data and all reconciliation-related activities across all stages of the lifecycle in one integrated solution. The benefits can be significant and rapidly self-funding: a lowering of operational costs, the reduction and mitigation of operational risk, and the easily proven adherence to regulatory requirements to ensure full compliance at all times.
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