Accounts reconciliation is a tough nut to crack. It gets challenging even for the best of them. While it all sounds so simple to just match the transactions in your system to the transactions with the provider, it can become a nightmare, especially when done manually month after month.
As businesses scale, tracking payments and monitoring every transaction becomes nearly impossible. This is very prominent in a fast-growing industry like eCommerce. As customer convenience becomes the forefront, everyone prefers shopping online over visiting a store in person. According to a report from Statista, online marketplaces have captured a 35% share as the preferred shopping destination, leaving traditional retail behind at 13%.
Given this fast growth, maintaining spreadsheets or using outdated legacy tools is no longer feasible. These manual processes hinder growth and come with hidden costs that can significantly impact your business. Manual reconciliation is a prime example.
In this blog, we'll explore the hidden expenses of manual reconciliation and how automation can help save costs.
Account Reconciliation and its Significance in eCommerce
In an industry where financial agility is key to staying competitive, account reconciliation is not just a routine task—it’s a strategic imperative that underpins the financial health and operational success of e-commerce businesses.
Reconciling accounts involves comparing internal financial records with bank statements to record the cash flow accurately. For an eCommerce business, regular reconciliation is crucial to maintain an accurate understanding of their financial position, which in turn supports informed decision-making.
Timely and accurate reconciliation is important for e-commerce businesses where transaction volumes are high, frequent, and varied.
Benefits of Account Reconciliation
- Helps e-commerce businesses maintain financial integrity by ensuring up-to-date and accurate recording of all transactions.
- Helps in detecting errors or fraudulent activities, and in preventing costly mistakes that could impact the business's bottom line.
- Regular reconciliation mitigates the risks of discrepancies/, ensuring that financial statements reflect true business performance.
- Supports better cash flow management, allowing businesses to make informed decisions about spending, investments, and growth strategies.
- Ensures compliance with regulatory requirements, reducing the risk of audits and penalties.
How the Manual Reconciliation Impacts eCommerce Business
Even today the accounting teams in the eCommerce industry rely on traditional methods for recording transactions and managing other accounting activities, which involves a lot of manual activities. During manual reconciliation, finance teams or accountants typically review each transaction, line by line, to ensure that every payment, receipt, and expense is accounted for in the business's financial records. If discrepancies are found, they must be investigated and resolved, which can be a time-consuming and error-prone task.
The Hidden Costs of Manual Reconciliation for eCommerce
As e-commerce businesses grow, the complexity and scale of transactions make manual reconciliation increasingly difficult to manage, often leading businesses to face multiple challenges.
Tracking high-volume invoices
Using spreadsheets initially can seem like a viable solution—a low-hanging fruit—but manually matching hundreds of transactions quickly becomes inefficient. As your eCommerce business grows, your volume of transactions will increase exponentially, making manual reconciliation time-consuming and error-prone. If you have a dedicated team for accounts reconciliation, you may need to hire additional employees to keep up with the growing workload, which adds to your costs of hiring and retaining staff.
Identifying data errors
Manual reconciliation is naturally prone to human error. Imagine going through hundreds of line items every day and probably even amping up the speed during the month-end closing as you have to complete reconciliation and submit your accounts for finalization. Incorrect data can also lead to problems during tax filing. Some common mistakes are:
- Data entry mistakes
- Misinterpretation of financial records
- Not collecting enough right data and materials for reconciling
- Inaccuracies in financial reporting
Issues with inventory management
Inventory management is the heart of the eCommerce business. Manual reconciliation can lead to inaccuracy in tracking inventory. For instance, stock discrepancies can lead to overstocking or understocking of materials both of which have a financial impact on the business. Overstocking leads to unsold inventory while understocking means missed sales opportunities or dissatisfied customers. Incorrect stocking data can also disrupt the supply chain causing delays in stock fulfillment and restocking.
Impact on cash flow and working capital
When you manually reconcile your accounts, you miss identifying due payments early in time. Given this late payments can strain your relationship with vendors or suppliers leading to an impact on your creditworthiness. And as we all know a good credit reputation is the basis for credit purchases. Such delayed payments can lead to uncertain cash flows and hinder budgeting and finances.
Challenges with revenue leakage
Revenue leakage happens when you don’t capture all the potential revenue as a part of reconciliation. Manual reconciliation can result in unmatched transactions, where payments are not accurately linked to corresponding invoices. This can lead to unrecognized revenue, as payments may be overlooked or misallocated.
The above mentioned challenges of manual reconciliation can lead to business risks and can impede business growth, here’s how:
- Cash flow management becomes challenging, potentially leading to financial strain.
- Financial losses may occur due to missed payments or duplicate vendor payments.
- Non-compliance with regulations such as GAAP, IFRS, and SOX can expose your company to fines, penalties, and legal actions.
- Auditors may discover errors, resulting in costly corrections.
To address these shortcomings, it's important to consider automation. Account reconciliation automation saves time, improves efficiency, and reduces the risk of financial losses.
Reconciliation is a critical task that significantly impacts your cash flow and provides a clear picture of your financial health. While expanding your reconciliation team might seem like a solution, automation offers a better approach. It allows your team to focus on more productive tasks rather than the repetitive and exhausting job of manual account matching, ultimately preventing burnout and boosting overall productivity.
Unlock the benefits of automated reconciliation for your eCommerce Business
FAQs
1. What are the basic steps of account reconciliation?
The primary step in the reconciliation process is comparing internal statements to bank accounts and finding discrepancies. It involves comparing deposits and withdrawals, and income and expenses against bank and company books. Any differences are then identified and adjusted before proceeding to make financial close statements.
2. Why do you need to reconcile accounts as a part of your financial process?
Comparing internal statements with bank statements will help identify any differences in numbers that might have been caused due to data errors or misses. The process of reconciliation will ensure that these are captured and adjusted or accounted for so the stakeholders can make the right financial decisions.
3. What are the common challenges in the reconciliation process?
Some of the most common challenges in the reconciliation process are rectifying duplicate transactions, adjusting missed transactions or entries with errors, balancing oversights, other errors, and transaction delays.
4. How can you improve the accounts reconciliation process?
The first foe to the reconciliation process is not upgrading to automation for redundant and manual tasks. Manual data entry or tasks can delay the whole accounting process leading to inefficient reporting and analysis. Automation can handle large volumes of transactions, flag discrepancies, reduce errors due to manual data entry, and save time.
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