Credit Matters Blog

Customer and Supplier Account Reconciliations

Kim Radok 29 February 2012


Completing customer and supplier account reconciliations is a normal function of business. Reconciliations are designed to maintain customer and supplier accounts in  good working order, just as you would for any other asset of the business. 

A business may have a maintenance program to keep their machinery working, or to keep the sales team's motor vehicles on the road. At the same time, they may not have a mainatianance program for their customers or suppliers accounts.

Historically, customer and supplier reconciliations were completed each month. The purpose of these reconciliations was to identify the outstanding items which remain unpaid or not processed at the end of the previous month.

Somewhere in the last 10 to 15 years, management decided that reconciling these accounts was no longer important and/or required at the end of each month. Reconciliations were deemed to be too costly and time consuming to complete on a monthly basis. Furthermore, reconciliations were not seen as adding any value to sales or the net worth of the business. 

Inevitably down the track, management found they were not being paid for a large number of old invoices and there were often large numbers of credit claims and adjustments to be processed. Consequently when a reconciliation was finally completed, it was an expensive exercise and even more expensive to clear up the outstanding items.

There were also two more factors at play.

The first factor was, management was surprised and embarrassed by what they found when the first reconciliation was completed. They were staggered by the number of outstanding dollars that should have been collected at that time, the extra costs of correcting the situation, and the amount of dollars which had to be written off as uncollectable.

Furthermore, they found the customer was always able to slow down future payments by claiming their credit claims or adjustments had not been processed, Then the customer would advise they would not pay anything more until the account was cleaned up and their issues settled.

The second factor was, management never seemed to have learnt from what had happened when reconciliations had not been maintained. Therefore they perpetuated the sins of the past by failing to complete future reconciliations in a timely manner.

Another effect is that now, the purpose of completing reconciliations has been lost by management, and the art of completing these reconciliations has also suffered. The open-item system of accounts receivable systems has been another contributor to this situation.

So where are we today?

Currently we see in many cases, management has not learnt the lessons of past. Remember the old saying which says something like

"Failing to learning to learn from the past, means you are doomed to repeat the same mistakes in the future."

One of the best examples which demonstrates this failure to learn, is the shared accounts payable and accounts receivables offices created by large corporations.

In effect, these are largeoffices of people who process vast numbers of items very efficiently. They can do this because they 'specialise' in the one task. These tasks might be dealing with outstanding invoice enquiries, processing credit claims, or following unpaid invoices, etc.

However the employees are all disconnected from one another and their supplier or customer. As a result, no one person sits down and actually connects all the dots together see the picture of the trading relationship.

In the mid - sized business, management only views reconciliations as another expense and a distribution of resources away from the key functions of selling and purchasing.

Finally, and equally important, management has never learnt to appreciate the story a reconciliation statement reveals on completion. At best, management will 'see' a certain number of items and dollars to be processed. They will not see the picture of the trading relationship they have with their customers and suppliers.

If management, could only learn to see these pictures, then they too would learn how valuable completing these reconciliations are to their business. Yes, there may be a few more upfront costs at first. The long-term benefit however is increased  cashflow, reduced expenses and greater efficiencies.

May you be paid today rather than tomorrow.

Kim Radok