Why your manual reconciliation process doesn’t scale
We know that reconciliation is hard to get right. You or your team have most likely mentioned the challenges of reconciliation. At the surface, it can sound like a simple task - match a transaction recorded in your system to a transaction recorded by your provider.
As a company scales, however, the complexity or managing reconciliation increases. According to PWC, finance teams spend up to 30% of their time just reconciling transactions with barely any time to focus on more strategic value-add work. Anyone who has been tasked with reconciling thousands, or even just hundreds of transactions, has experienced firsthand how challenging it can be. This is especially true as new payment providers are onboarded and new payment methods or terms are offered to customers.
What do we mean when we say reconciliation
Reconciliation processes can look different from company to company, but generally if you process customer payments at scale, as your company grows you will likely start performing at least a few of the reconciliation processes below. If you already perform a number of these processes then you likely already feel the pain of getting a real time view of your cash, trying to understand your AR and AP mid month, and the struggle of trying to close your books on time. There are few key reconciliation types:
Payment processor reconciliation
- Reconciling transactions between provider, bank, and internal records
- Reconciling payment processor settlements to bank settlements
Bank payments reconciliation
- Reconciling incoming / outgoing bank payments to open invoices in your billing or ERP systems
- Reconciling bank statements to GL
You can’t afford to get reconciliation wrong
If financial reconciliation is done incorrectly, it can have serious consequences for a business or organization. Here are some downsides of getting financial reconciliation wrong:
- You can’t manage cash flow – If you don’t reconcile accurately or regularly, you will not have a view of your cash flow in real time and run the risk of inaccurate financial statements. Inaccurate data leads to inaccurate decisions. Without a real-time view on cash flow, AR, and AP - you will not be able to make decisions that impact your spend or cash flow until weeks after the month is closed.
- You could incur financial losses – Incorrect financial reconciliation can result in missed payments, incorrect charges, or even fraud and embezzlement. These losses add up quickly and can impact your bottom line.
- You run a compliance risk – Many businesses are required to perform reconciliation to comply with financial regulations like SOX, IFRS, GAAP and more. Incomplete or inaccurate financial reconciliation may lead to noncompliance, leading to fines, penalties, and legal action.
- You risk reputation damage – Incorrect financial data damages the reputation of a business or organization. Stakeholders like investors and other key partners may lose trust in the accuracy and reliability of your financials.
- You may encounter audit issues – If auditors identify errors or discrepancies, businesses are forced to make time-consuming and costly corrections.
The challenges of scaling reconciliation
Our team has spent years building and streamlining financial operations and seen firsthand how and when reconciliation processes break. Here are some of the most common challenges to look out for that can have large impacts on your business and operations.
Transaction volume can become unmanageable
It might be fine to manage reconciliation over spreadsheets in the early days. However, manual matching over reports, files, queries and spreadsheets becomes highly inefficient and error-prone once your business grows and you start reaching tens or hundreds of thousands of transactions a month. All of a sudden a process that took days might now take weeks.
Global operations introduce new complexities and risks
Once you go global, you have to start dealing with multiple entities, new providers, cross-currency and multi-currency reconciliation - which means new recon flows to prepare, new logic and data to handle, and matching transactions across multiple currencies with fluctuating FX rates.
Systems that don’t speak to each other
While you may start with one payment processor and one bank, you’ll eventually need to manage across multiple bank accounts, payment processors, and ERP systems. As none of these systems communicate with each other, you’ll find yourself with the headache of logging into dozens of portals and patching together different data sources and systems that don’t speak the same language.
Risk of human error, fraud, and money leakage
As your payment volume grows, human error that seemed like a small detail in the past all of a sudden becomes a real concern. What was once a $100 mistake can now become a $100,000,000 mistake. With cross-functional input required across product, engineering, finance, data, and customer support, the opportunity for human error only grows. This can lead to significant losses and money leakage that your company can’t afford.
Delayed financial and cash flow reporting
Running reconciliation manually means you won’t have real-time cash visibility, but also means that closing the books every month can take weeks. This means that you won’t know your April numbers until deep into May, when it’s time to start the process all over. You won’t be in a place to identify issues, manage real time balances or invoices, or optimize cashflow in real time which can impact your customers and your revenues.
Scaling your reconciliation processes
Reconciliation is one of the most mission critical tasks in a company especially when it comes to properly managing your cash flow. While many companies address the problem by hiring growing teams of bookkeepers and financial operators, it doesn’t have to be this way. By automating your reconciliation process, you can keep your headcount under control and keep your team focused on the strategic tasks that move the needle.