What are you risking by sticking with batch-level reconciliation?

What are you risking by sticking with batch-level reconciliation?
Ira Fridman
August 2, 2023
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TL;DR

  • Batch-level reconciliation is an efficient way for businesses with straightforward finance operations to close the books
  • But for businesses that handle a high volume of transactions and/or complex payment flows across a fragmented stack of payment gateways, not having the ability to easily drill down into individual transactions can be risky
  • Without transaction-level visibility, finance teams are more likely to miss errors that lead to real material losses
  • Sticking to batch processing can also lead to longer and more costly audit preparation and a higher risk of errors being discovered when the audit is underway
  • There are a number of tax implications and regulatory risks associated with batch reconciliation, especially for marketplaces and e-commerce companies
  • Teams that do aggregate-level reconciliation often take longer to identify errors, jeopardizing customer, client, and user relationships
  • Businesses that handle a high volume of transactions with limited visibility and monitoring capabilities are more vulnerable to internal fraud
  • Finance teams need to take a scale-oriented approach to growth and be ready to implement automated systems that provide transaction-level visibility

When and why batch-level reconciliation stops working

Many finance teams that we speak to do batch-level reconciliation at the end of the month, and for a lot of businesses, that’s fine.

If your finance operations are relatively straightforward, it’s an efficient way to close the books. Any discrepancies you might find on a transaction level aren’t likely to be that material, and from an ROI perspective, it would take too much time, money, and resources to achieve transaction-level visibility, either via manual work or implementing automation.

But then there are finance teams who deal with any or all of the following:

  • A high volume of payments and transactions 
  • Data that’s disconnected in different siloes of PSPs, databases, an ERP, and banks
  • Multiple revenue lines
  • Multiple currencies
  • A complex flow of funds
  • Complex fee structures

For businesses like these, finance operations are anything but straightforward. That’s when batch-level reconciliation – and specifically, not having the ability to easily drill down into individual transactions to see exactly what’s going on – can become a high-risk process.

Here’s what finance teams working at these businesses are risking by sticking with batch-level reconciliation.

1. You’re more likely to incur material losses and mess with your P&L

You can’t catch what you don’t see, and for businesses handling a high volume of transactions across a fragmented stack and/or a complex flow of funds, errors and discrepancies are both more likely to occur and more likely to go undetected when they occur.

And here’s the kicker – this is an ongoing operational risk that has the possibility to cause real damage at scale. 

  • Even if you’re only working with Stripe, mistakes can and do happen when you’re funneling an enormous amount of transaction data into production. One finance team we work with suddenly found they had $600K missing and couldn’t account for it, and only later realized it was due to a simple integration configuration change that Stripe made that went unnoticed 
  • Another marketplace we spoke to had negotiated a 2.5% processing fee with Braintree but then was charged 2.53%. If they were only processing $1 million of transactions, it might not have been that big of a deal, but they were handling close to $1 billion, and it came to a difference of $300K. Months passed before they discovered the error.
  • Even the chance of your team not noticing issues like an ACH return is relatively high when you’re dealing with a massive volume of data

Gaining visibility into your operations, down to the transactional level, means that you can identify errors and discrepancies immediately when they happen and quickly work to recoup funds and minimize losses. It also means that you can have confidence in your P&L and make decisions with the confidence that you have a clear and accurate understanding of your actuals.

2.  You’re increasing overhead costs related to investigations across the organization

When something goes wrong and you don’t know why, you’re incurring significant costs across the organization. Your team needs to drill down to find the transaction, retrace its journey, and figure out what happened to it, down to the penny. This can often be very resource-intensive, time-consuming, and complicated manual work. 

And the work goes way beyond finance – it often also requires resources from customer success and operations teams. The downstream implications are enormous, and the longer it takes to resolve, the more costly it becomes.

In this economy, when efficiency is paramount and everyone is working to cut costs and increase profitability, that kind of inefficiency and waste of resources is very difficult to justify.

3. You’re risking a more painful and costly audit that can delay liquidity events

While you always need to be prepared for an audit, some audits are a bigger deal than others. If you’re facing an acquisition, plan to IPO, or are taking on debt, you’ll face an audit of especially intense scrutiny. 

First there’s the preparation – you’ll need to gather the backup information the auditor will need to sample at the transaction level. This retroactive prep process can be a total nightmare that requires a tremendous investment of time and resources.

And then you’re risking a more painful outcome once the audit is underway. If an auditor finds an error – and they’re more likely to if you’re operating at scale with complex operations – they’ll increase the sample size and take an even deeper dive. The pain, costs, amount of work required, and delays can compound – and this is all with the pressure of an acquisition or IPO hanging over your head.

4. You’re exposed to tax compliance and regulatory risks

There are a number of serious tax implications associated with batch reconciliation. 

Tax obligations often depend on when revenue is recognized, and because batch processing is never in real-time, closing your books once a month could potentially shift revenue from one tax period to another, muddying a clear picture of taxable revenue.

And since the Supreme Court’s ruling on South Dakota vs. Wayfair in 2018, online marketplaces and e-commerce companies have had far more complex state tax laws to comply with. If they don’t pay sales taxes per transaction where the taxable items sold were delivered, they risk fines, penalties, and potential investigations.

Interestingly enough, when deliberating the case, the Supreme Court justices acknowledged that compliance with paying different sales taxes on a transaction level would be extremely difficult, but concluded that “accounting software would become available to solve the problem.”  

Even the Supreme Court agrees that the status quo of batch processing doesn’t cut it for marketplaces and e-commerce companies with a complex flow of funds.

5. You could do real damage to customer, client, and user relationships

Whether your business is B2B or B2C, and whether you’re a SaaS company or a marketplace, a wrong payment is not just a reconciliation error for your team to fix; it’s a relationship you’re potentially damaging. 

Teams that do aggregate-level reconciliation take much longer to identify any errors or issues to begin with and then take much longer to resolve them. This can erode customer trust and ultimately lower LTV in a down economy when customer retention is paramount.  

If you can’t quickly and clearly explain to a seller on your marketplace why you paid them $500 when they were expecting $1,000, they might choose to conduct business elsewhere, and that loss is especially painful given that CAC costs are increasingly through the roof. The same goes for all customers and users – the payment experience is the customer experience.

6. You’re more exposed to internal fraud

While internal fraud might not be a top concern for many finance teams today, businesses that handle a high volume of transactions and that have limited visibility and monitoring capabilities should remember that they are vulnerable to it.

Take the marketplace giant Zulily earlier this year. One of their software engineers, apparently inspired by the film “Office Space,” wrote some malicious code that routed small fees from individual transactions to his private Stripe account. 

He ultimately stole more than $300,000 before getting caught. Zulily’s fraud team was actively investigating the losses and it still took them nearly six months to determine what was going on, likely an indication of just how much data they had to wade through as a $1.5 billion company with 5 million active customers and a complex flow of funds.

You don’t have to be the size of Zulily to still need internal control mechanisms in place to monitor and prevent fraud. Auditors require it and in an era where fraud is skyrocketing, your business depends on it.

The only way forward is automating complex finance processes

The need for transaction-level visibility is a bit of a Catch-22: businesses need it most when the complexity of their finance operations balloons, but that complexity is exactly what makes it so hard to achieve. As large volumes of data become increasingly disconnected and siloed, the margin of error starts to increase exponentially, but finding these errors is as difficult as finding needles in multiple haystacks.

To solve for this, some businesses might invest in building a data warehouse in Excel that’s manned by multiple FTEs around the clock. But managing these kinds of operations manually in Excel is only a stop-gap solution – it’s inefficient, prone to errors, and doesn’t provide the real-time insights that finance teams need in today’s fast-paced world.

A better route is real automation of finance operations that can provide transaction-level data in real-time, no matter how high your volumes or how complex your flow of funds. By implementing automated systems that can actually keep up with your company’s growth, not only are you taking a scale-oriented and forward-looking approach; you’re protecting your organization from real and present dangers.

Are you ready for transaction-level visibility?

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