Want to Protect Your DSO? AR Reconciliation is Key

Shaun Jex

When it comes to accounts receivable, there are few KPIs as important as your Days Sales Outstanding (DSO) — the average number of days it takes a company to receive payment for a sale.

It helps measure the liquidity of your company’s current assets. A low DSO should translate to a higher level of cash flow. Conversely, the longer it takes your company to get paid, the greater the risk of payments being defaulted on. 

One of the key factors in optimizing this is accounts receivable reconciliation. When there are discrepancies between ledgers, there will be a difference between what the customer believes they owe, and what you expect to be paid. This slows the collection process down and drives up your DSO. 

Given the impact that it has on a company's financial health, it’s worth taking a closer look at some best practices to make the process as effective as possible.

What’s the big deal?

Despite its importance, many companies do not give reconciliation the attention it is due. In fact, in a survey by Citi, 19% of respondents said that they did not view it as important. Here’s why that’s a problem.

Reconciliation ensures that the general ledger figure listed for accounts receivable is justified. This clarifies what you are owed, versus what customers may believe they owe, ensuring that your company gets paid the correct amount in a timely manner. 

How often should you reconcile AR?

At the bare minimum, the process should be undertaken at the end of each fiscal year, preparing your company for external audits.

Typically, however, it takes place as part of month-end before financial statements are issued. This helps to ensure that there are no material inaccuracies when those figures are released.

ar-reconciliation

Where should you start?

The first step in reconciliation is to update all transactions for the relevant period, recording all invoices and payments that have occurred. An automation solution such as YayPay can ease the workload associated with this, as it documents this info in a centralized location and helps you obtain detailed reports on the data.

When this is complete, run an aged trial balance report, which will help you locate and fix any discrepancies between the balance in your total ledger and your AR aging report

Can your customers help?

It is worth contacting your customers to ask if they are willing to provide a copy of their accounts payable ledger, which you can compare with your AR. This can help quickly identify a discrepancy between what you believe the client owes, and what they have on file. 

Why do variances occur? 

The most typical reason for an inconsistency in the data is that information may have been entered in the general ledger but bypassed the subsidiary. Other possibilities include differing cut-off dates on reports, or information being posted to the wrong general ledger account. 

How do you resolve variances after they are discovered?

When there is a difference between your general ledger and the aging report, it needs to be promptly investigated to determine the cause so that it can be corrected. Adjusting entries should then be made. 

Ideally, you should reverse the incorrect entry and re-enter it with accurate information. You will also want to provide a clear description of each transaction for auditing purposes.

What other tools do you need? 

An automation solution will make the process of reconciliation easier than any other resource in your arsenal. Software like YayPay integrates with things like your ERP and CRM, giving you immediate access to all relevant back-office data. 

In addition, it provides customers with a way to quickly file dispute invoices and gives your collections team the ability to promptly resolve the issue, so that there are fewer discrepancies between what your customer believes they owe and what you are seeking to collect. 

To learn more about best practices that will keep your company’s finances healthy, sign up for one of Yaypay’s upcoming webinars