Vendor payments account for the largest cash outflow in most organizations. One of the best ways for accounts payable managers to sleep easily at night is reconciliation of vendor statements. While the benefits are numerous and discussed below, this task is often overlooked as it can be time consuming and tedious. An effective process for reconciling vendors must therefore be used.
What are vendor statements and reconciliation reports?
A vendor statement is a document from the vendor’s accounting system listing all unpaid invoices at a certain date. It can also contain other uncleared items such as credit notes and payments. Reconciliation of this vendor statement requires matching the invoices and other lines to documents from your own system. Unmatched documents are discrepancies and comprise the vendor statement reconciliation report. All of the possible issues with your vendor account are represented on this single report.
What are the benefits of the vendor statement reconciliation process?
Late processing of invoices can lead to disruption of future supply, and sometimes lost settlement discounts. Identifying vendor invoices you do not have allows you to request the vendor to resend these documents, often with proof of delivery, and pay valid invoices timorously.
Invoices can be captured onto incorrect vendors in your accounting system, and the incorrect vendor will be paid. When the correct vendor queries this, you may then also pay this vendor, thus duplicating the payment. Similarly, invoices may be duplicated on the same vendor if your accounting system does not have a suitable duplicate invoice check, or if the invoice number is captured slightly differently (say with a dash in it). These duplicate payments can be avoided by matching invoices to the vendor’s statement. If the invoice reconciliation is performed before payment, then duplicate payment can be avoided. Even if the reconciliation is only processed after payment, these duplicates can be identified.
The reconciliation report will identify payments you made but that your vendor has not yet received or allocated, or discounts your vendor has not passed, or pricing claims and returns that have not yet been credited. All of these reduce the total payment to the vendor. These deductions should be posted as early as possible to maximize cash flow – and a timeous vendor reconciliation report should therefore be an early indication of money you can get back.
If your system’s vendor pricing master data is incorrect, or if the vendor invoice is self-generated in your system, or captured at the incorrect price, you could overpay. Similarly, during invoice processing, available discounts may be erroneously omitted. Matching your system’s vendor line items to the vendor statement will either prevent or at least identify these overpayments.
The procure to pay process often uses a GRIR (goods receipt – invoice receipt) account. Goods that have been received, but the vendor invoice not yet processed, will be recorded in this account. Long open GRIR postings should be cleared to profits and reduce balance sheet liabilities. If the vendor statement does not list an invoice for the goods, this is a reliable early indicator that the GRIR account can be cleared. Conversely, if the GRIR account is matched to a statement invoice, you know you have the goods and can actively chase posting of the invoice.
Internal and external audit controls often use the vendor statement to validate the vendor liability on the balance sheet. In the case of annual audits, often a material sample of vendor statements is selected. If you use a vendor reconciliation tool or system, a consolidated reconciliation report across all vendors will quickly identify any material differences. Accruals or provisional journals can be posted on this basis.
The vendor statement reconciliation is the litmus test at the end of the procure to pay process. It identifies the issues between your system and your vendor’s accounts. A single clear report will reduce vendor queries, improve your vendor relationship and tighten your control over vendor spend.
I will be tackling this in more detail at Next years SAP-Centric Financials conference from February 21-22 in Dallas Texas. Be sure to join me!
Written by: Henry Curtis
SAP solutions for Accounts Payable to reconcile supplier statements