It’s Black Friday, and your store is seeing an influx of traffic. Customers are excited about your discounts and ready to purchase, but discrepancies in your inventory data means you sold products you no longer have in stock. The result? Canceled sales, unhappy customers, and a diminished brand reputation. This could have been prevented with diligent order reconciliation.
This article discusses the ins and outs of order reconciliation, including the benefits of implementing an effective reconciliation process that improves operational performance.
What is order reconciliation?
Order reconciliation is the process of verifying and matching a purchase order against a business’s inventory and sales data, bridging the gap between what’s expected and what actually occurs. It involves aligning information from various sources—customer orders, inventory records, supplier details, and financial accounts—to guarantee they all present a consistent and accurate view of business operations.
Because the reconciliation process involves a purchase order, it is sometimes known as PO reconciliation or PO recon in the retail industry.
The goal of order reconciliation for retail businesses is two-fold. First, it aims to provide an accurate real-time snapshot of inventory, preventing overselling or underselling of products. This helps you optimize inventory turnover. Second, purchase order reconciliations help ensure financial accuracy. By correctly tracking sales, payments, and returns, businesses gain a precise understanding of their revenue, costs, and profit margin.
Why should businesses prioritize order reconciliation?
Most retail companies conduct order reconciliation as a routine task. Here are some of the benefits:
Maintain inventory accuracy
If a clothing retailer sells 50 units of a particular sweater, reconciliation ensures those 50 units are properly deducted from inventory. By cross-checking sales and inventory data, businesses can detect inventory discrepancies, helping you pinpoint items that are misplaced or even stolen.
Ensure financial precision
Reconciling orders allows a retail organization to accurately track sales and match them against incurred expenses. For example, this process might help you identify discrepancies in shipping records from a particular vendor and help you save money.
Detect fraud and theft
Order reconciliation can detect and deter fraud and theft. By regularly reconciling orders, you can spot suspicious activities early, minimizing potential losses. This practice sends a message to employees, suppliers, and stakeholders that the business is committed to financial integrity, promoting a culture of accountability.
Improve supplier relationships
Accurate order reconciliation can help businesses manage their relationships with suppliers. Discrepancies in order data can indicate issues with supplier deliveries, allowing for timely communication and resolution. This fosters mutual trust and understanding, contributing to more reliable and effective supplier partnerships that improve supply chain efficiency.
Enhance operational efficiency
Through consistent order reconciliation, businesses can identify issues that cause discrepancies—from data entry errors to technological glitches. By identifying these patterns and refining their processes, businesses can turn these insights into opportunities for improvement, preventing future problems.
Support audit and compliance
Order reconciliation helps in both internal and external audits. Consider a retail business in the skin care industry. During a store audit, employees notice expired products. Without regular order reconciliation, this issue might have gone unnoticed. This could lead to a violation of regulations that apply to the beauty and cosmetics industry. Accurate records reduce the chance of audit complications and ensure businesses comply with regulations.
How to reconcile purchase orders
- Collect relevant order data and records
- Organize order data
- Compare all available order data to identify discrepancies
- Investigate and resolve order discrepancies
- Update and conduct a review of your business records
Reconciling purchase orders ensures accurate inventory and financial records. Here's how to carry out this process effectively:
1. Collect relevant order data and records
The first step of order reconciliation is collecting all your company’s order and sales data.
Here are the key data sources:
- Sales receipts. These transaction records, often generated by and stored in your point-of-sale (POS) system, provide information on what products were sold, how many units were sold, and at what prices.
- Inventory records. Comparing sales data with inventory records can help identify any discrepancies in the number of items sold versus the decrease in inventory.
- Purchase orders. These should include details such as the product name, quantity, and price, which can be compared with received goods and billed amounts. Merchants using Shopify POS can create, track, and manage purchase orders with the Stocky app.
- Supplier invoices. Cross-referencing invoices with purchase orders and delivery notes ensures you’re billed correctly.
- Delivery notes. Verify the received quantities and types of products against your purchase orders and supplier invoices.
Establish a system for regularly collecting and updating this data to ensure the effectiveness of your reconciliation strategy.
2. Organize order data
Once you’ve collected the relevant data, organize it in a way that simplifies reconciliation. A well-structured data system helps you cross-reference and efficiently identify discrepancies.
Start by categorizing your data according to a common attribute or several attributes such as:
- Order number. This method ensures a unique identifier for each transaction. This makes it easier to compare corresponding documents like sales receipts, purchase orders, and supplier invoices.
- Supplier. This categorization allows for targeted reviews of each supplier’s performance and billing accuracy.
- Date. Using a calendar date can help monitor the timeliness of deliveries and payments and flag any unusual delays.
- Product. Organizing product data helps track individual product sales and inventory movements, offering insights into product performance.
Digital tools can automate this process, reducing human errors and saving valuable time spent on reviewing documents manually.
3. Compare all available order data to identify discrepancies
The crux of order reconciliation lies in the meticulous comparison of all data. To spot and reduce discrepancies, retail businesses can adopt a three-way match-order reconciliation method, which verifies purchase orders, received goods, and invoices before payments are approved. Retail software can aid transaction reconciliation, combining the power of automation with advanced analytics to help you identify discrepancies and proactively address issues.
4. Investigate and resolve order discrepancies
Errors can hurt financial performance, resulting in invoices paid for incorrect product quantities. Finding the root cause of each discrepancy could involve opening a dialogue with suppliers to clear up any misunderstandings, or it may require a detailed review of your internal processes, such as inventory management or order fulfillment.
Upon determining the root cause, it is time to take corrective measures. If overbilling from a supplier is the issue, you might need to request a credit or refund. If the discrepancy results from an internal counting error, you will need to pinpoint how the mistake occurred and then revise your inventory records.
5. Update and conduct a review of your business records
Once you’ve investigated and resolved discrepancies, you can reflect the changes in your records. This might involve adjusting your inventory numbers, amending supplier invoices, or rectifying sales receipts.
The process doesn't stop at updating. A well-managed order reconciliation process evolves to suit your growing retail business.
Order reconciliation FAQ
What are the main steps of reconciliation?
Reconciliation involves gathering data from various sources, organizing it for comparison, identifying any discrepancies, investigating and resolving discrepancies, updating records to reflect changes, and regularly reviewing the process for potential improvements.
Is order reconciliation primarily a manual process?
While manual processes may be used in order reconciliation, many businesses use automated systems to streamline the process, reduce errors, and increase efficiency.
Is order reconciliation an ongoing process or a one-time task?
Order reconciliation is an ongoing process. Regular and timely reconciliation is essential to maintain accurate inventory and financial records and promptly address any discrepancies.
Is order reconciliation only necessary for businesses that deal with large volumes of orders?
While order reconciliation becomes increasingly critical as order volumes grow, it is beneficial for retail organizations of all sizes. Small businesses can reap benefits like improved inventory accuracy, financial precision, fraud detection, and operational efficiency.
