The real cost of payment reconciliation errors

The real cost of payment reconciliation errors
Tal Kirschenbaum
September 4, 2023
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TL;DR

  • Many finance leaders are unaware of all the hidden costs that are associated with reconciliation errors
  • First, there’s the direct loss of material funds 
  • Then the finance team must invest massive amounts of time and resources into investigations and resolutions
  • Downstream, there are cross-org costs for support tickets, operations, etc
  • Zooming out, reconciliation errors can do serious damage to critical customer, client, and user relationships 
  • Finally, reconciliation errors can have ripple effects that impact investor relations, a company’s valuation, and its market performance
  • If payments are the lifeblood of your business, ongoing reconciliation errors are simply not something you can afford 

5 hidden costs of payment reconciliation errors

For years, finance teams managing complex finance operations have done their best to keep up with detecting and resolving reconciliation errors via manual processes, resigning themselves to the fact that it’s a painful, time-consuming, and highly imperfect process. 

They miss things. That’s the cost of doing business.

But times and attitudes have changed dramatically in just a few short years. 

Now that everyone is hyper-focused on efficiency and profitability, unglamorous work such as improving reconciliation processes has shot up to the top of the priority list.

That’s because reconciliation errors are far from just niggling discrepancies in some back-office statements; they actually have an enormous impact across all areas of the organization with significant downstream implications.

Here are 5 ways reconciliation errors can incur real costs for businesses.

Cost #1: Direct material loss of funds

Teams drowning in a high volume of transactions flowing in and out of the business are far more likely to accidentally make errors or miss errors that occur externally. 

Maybe they…

  • Fail to identify missed payments for money they’re owed
  • Accidentally make duplicate payments
  • Make a spreadsheet error
  • Miss an ACH return
  • Are overcharged by payment processors
  • Fail to detect fraudulent activity
  • Make errors in tax calculations
  • Make mistakes in disbursement to users

Whatever it is, reconciliation errors can and do result in direct material losses. 

The real kicker is that this is an ongoing operational risk that has the possibility to cause real damage at scale. You can’t catch what you don’t see, and for many businesses, all too often these reconciliation errors need to be written off as sunk costs.

Cost #2: Labor-intensive & complicated investigations

When recon errors go undetected, your team will eventually be alerted in one or more of the following ways:

  • A seller or customer will complain about a payment or invoicing issue
  • There’s a discrepancy between your books and the bank that you can’t explain 
  • There’s a mismatch between inventory counts and the levels you have recorded
  • There are unexpected fluctuations in your company’s cash balance
  • An issue is detected during auditing and sampling

And when that happens, your team will need to drill down into individual transactions, retrace their journeys, and figure out what happened, down to the penny. 

Given that many teams manage multiple data sources that are completely siloed and disconnected, these investigations can be incredibly time-consuming and challenging. 

Cost #3: High resource costs across the organization

The impact of a reconciliation error can reverberate way beyond the immediate finance team and into the rest of the organization.

PSPs like Stripe can and do make configuration changes to their integrations, which can cause customer payments to be improperly recorded in your system. Let’s say the error goes undetected for a month, leading to a gradual accumulation of discrepancies. 

Suddenly the customer success team begins receiving a flood of complaints and support tickets. They escalate the issue to the finance team, who then engages with product development to try to identify the root cause.

Finally the operations team gets involved to adjust project deadlines due to resources being allocated away from other critical tasks. These are all significant company-wide costs incurred by a simple technical glitch that went unnoticed.

Even one-off errors are a pretty common occurrence and can require a significant investment of time and resources, including a lot of back and forth on status updates between finance, customer support, the customer, and around again until the issue is resolved. 

In an economic climate where improving productivity and working efficiently is paramount, this reconciliation error amounts to an enormous waste of time, money, and precious resources.

Cost #4: Damage to customer, client, and user relationships

Jonathan Golden, who led payments as Director of Product at Airbnb and now is a partner at NEA, Ledge’s lead investment partner, explains it best: payments are the customer experience, period.

“We realized how important payments were to facilitating human interactions. We needed to create trust between individuals and Airbnb handling the flow of funds was paramount. Payments is arguably the most critical piece of commerce, whether it’s online or offline…if you can get that right, you can really enable a much better experience… Ironically, by handling the transaction seamlessly, we make the experience between guests and hosts less transactional and more human.”

This is truer than ever today, when CAC is through the roof, LTV is down, and retention is paramount. 

Your business has likely invested thousands of dollars simply to acquire one individual as a paying customer; what’s critical now is to retain that customer and extract more revenue where you can. 

Poor reconciliation processes, in which the individual might be invoiced twice for something they already paid or did not receive the pay-out they were expecting, can jeopardize these critical relationships. 

The subsequent impact this can have on NPS and churn comes with enormous financial consequences.

Cost #5: Damage to investor relations and stakeholders 

Finally, simple accounting errors such as reconciliation discrepancies can have ripple effects that impact investor relations, a company’s valuation, and its market performance. 

In regard to SentinelOne’s recent drop in valuation, OnlyCFO speculated that it was largely due to lost trust over a reporting error:

“No forecast is ever perfect and everyone has made financial modeling errors, but I would expect a company at the scale of SentinelOne to have things a bit more buttoned up. There should be controls, multiple checks, etc on the most important financial metric for software companies. How they react and change is important.”

There are plenty of horror stories of accounting errors that have brought big companies to their knees, but errors don’t need to be newspaper-worthy to do real damage to your reputation, making your business a far less attractive investment. 

What’s more, during economic times like these when it’s hard to raise funds, having your books in order means that you can complete due diligence and close funds faster.

It’s time to face the cost of inefficient reconciliation processes

Just like brushing your teeth or watering the plants, reconciliation is one of those good hygiene habits that you just gotta do, and it’s easy to overlook how high stakes it really is.

But the truth is that identifying and resolving payment errors in a consistent and systematic way is critical to preventing material loss and incurring significant downstream costs.

A robust reconciliation process also ensures that the company has accurate financial records, which every business needs to properly operate, function, and grow, whether it’s for cash management, budgeting, forecasting, or fundraising. 

Payments are the lifeblood of your business; if that data is wrong, it directly impacts the accuracy of your P&L, MRR/ARR, forecasting, and the sheer viability of your company. 

Considering just how mission-critical reconciliation is for a business’ short-term and long-term viability, teams need to invest in systems and processes to prevent these errors, identify them in real time when they do occur, and work quickly to resolve them to prevent losses. 

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