What are the different reconciliation models that your team can employ and what are the pros and cons?
Whether you're trawling through spreadsheets or have automated processes for your payment reconciliations, you're using one of the reconciliation models in this article. There are pros and cons for each model, depending on the size and needs of your business, the scale and complexity of your payments and the level of work involved in the reconciliation process. In this article, we aim to demystify these models to help you understand the right model for you in 2023.
Typically, there are 5 core steps involved in a reconciliation process, whether it's reconciling your bank credits to your payment provider's processed transactions, an internal reconciliation or otherwise:
1) Data Collection: Collecting data from a source, for instance a settlement report from your payment provider's website.
2) Data Transformation: Changing the original data collected in step 1 into something meaningful that can be easily reconciled.
3) Reconciliation: Performing the reconciliation between multiple data sources based on whatever criteria you require.
4) Reconciliation Break Management: Resolving any reconciliation breaks that appear in step 3.
5) Financial Close: Ensuring all breaks are completed and performing any follow-up tasks at the end of the financial close period.
In practice, when most companies look to optimise their reconciliation process, they focus on step 1 and sometimes step 2. Rarely do they focus on steps 3 to 5, which are often the most time-consuming and manually-intensive steps in the reconciliation process.
Manual reconciliations typically involve lots of Excel spreadsheets, one or more people - often a Financial Controller or Reconciliation Specialist - and a great deal of pain! Nevertheless, having fully manual reconciliations is better than having no reconciliations at all (we're not even considering that as a model for this article!) and can be created quickly and easily by small teams. If you're scaling quickly, have complex payment requirements or you're already a large company, you should consider moving to a more automated solution as soon as possible.
Pros:
- Easy to implement
Cons:
- Time-consuming (hidden costs)
- High degree of risk
- Does not scale
Semi-automated is the glass half full way of saying 'semi-manual'! Of course, semi-automated reconciliation processes can lead to improvements over fully manual reconciliations, but oftentimes, the automation occurs in steps 1 and 2 of our Reconciliation Steps outlined above. In some respects, because of the initial build and upkeep of these reconciliation processes, you might end up worse off than just keeping a fully manual reconciliation. If you've built semi-automated reconciliations internally, consider the reconciliation steps and how much of the flow you actually still do manually.
Pros:
- Simplified data flows versus fully manual reconciliations
Cons:
- Rarely end-to-end semi-automation: typically only addresses data collection and sometimes transformation
- Requires in-house build and maintenance
- Still time-consuming versus more automated alternatives
- User adoption and ramp up time costs
- High degree of risk remains
- Does not scale
Automated solutions are the nirvana, right? They're certainly more robust and scalable than manual reconciliation processes, but not all automated reconciliations are built equally. Building an automated reconciliation process in-house can appear to give companies control, but in reality they detract from what that company does best by allocating team members, funds and other resources away from revenue growth and towards building an maintaining complex systems. Before deciding to go down this route, consider whether your product and engineering teams are reconciliation experts, whether your finance team has the time to spend with them to design and test the product and whether owning and maintaining proprietary reconciliation software will genuinely benefit your business.
Pros:
- Reduced level of risk versus manual and semi-automated alternatives
- Reduced time cost for reconciliation process when implemented
Cons:
- Expensive to build and maintain
- Distracts teams from revenue generation and other strategic business priorities
- User adoption, testing and ramp up time costs are hidden costs that impact the finance team, product team and engineering team
The final reconciliation model to highlight in this article is automated, but keeps your team focused on its strategic objectives and gives you access to a purpose-built specialist reconciliation solution. There's always going to be some level of personal involvement in reconciliation break resolution (e.g. contacting payment providers about missing transactions or changing internal records to reflect a sale that happens outside the system), but Equali aims to automate as many steps in the process as possible and give your team back time for more meaningful work.
Pros:
- Reduced level of risk versus manual and semi-automated alternatives
- Reduced time cost for reconciliation process when implemented
- Focus on strategic business priorities
- Lower up-front costs vs proprietary system build
- No maintenance costs
- Price scales with needs
Cons:
- User adoption and ramp up time costs
Now that you have an understanding of the different reconciliation models that you and your company could adopt, which model do you fall under and crucially, where do you want to be in 2023? Given the cost implications - either hidden costs or development costs - and the current state of global finance, 2023 might be a better time than any to consider moving to an outsourced solution like Equali. To find out more, check out our Calendly link below to book some time with the team or email us at hello@equali.io.
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