As companies scale, relying on manual and outdated reconciliation processes can lead to inefficiency and risk. A flexible, scalable reconciliation system is not just beneficial, but essential. Today, we’re breaking down the key considerations for implementing a financial reconciliation platform.
By the end of this post, you’ll have a better understanding of the considerations for key questions:
- When should I implement a reconciliation platform?
- How do I know if my current reconciliation processes work for my team and company?
- Should I buy or build a reconciliation platform?
If you’re interested in a deep dive into the basics of financial reconciliation processes, be sure to check out our series, A Guide to Financial Reconciliation.
First, what is reconciliation?
Reconciliation is the process that ensures that each transaction on your system of record agrees with your bank, payment partners, and your internal expectations. It may seem trivial on the surface, but payments are a uniquely complex blend of technical, regulatory, and business requirements involving bank records, internal ledger records, and third party payment vendors.
The reconciliation process is pivotal for ensuring the accuracy of your financial records. If you're handling money on behalf of others, reconciliation ensures you're safeguarding customer funds and accurately moving money on their behalf. For financial audits, it is critical to have robust reconciliation processes that serve as the foundation for your financial controls.
A sound reconciliation process:
- Ensures money movement matches your expectations: When it comes to payments, we often say that it is not a matter of if something unexpected will happen, but when. And when money is not in the right place, reconciliation is the process that makes you aware and allows you to take the proper steps towards resolution.
- Enables successful financial and regulatory audits: Bank partners, processors, and regulators can routinely request details related to transaction data and customer balances. Reconciliation not only ensures that the reporting you provide is accurate, but it enables you to show how you know it is accurate.
- Empowers finance and product teams to operate efficiently: Without a great reconciliation process, finance and product teams are often unable to confidently know where cash balances stand or close the books quickly at the end of the month. This is especially true of companies that provide any kind of financial services to their customers. Oftentimes, product and finance teams are in the dark - and when issues arise, roadmaps slow to a halt as product, engineering, and operations teams go searching for needles in a haystack.
- Maintains a great customer experience: Customers are ultimately impacted when money goes missing. Even if 99% of your payments are successful, a single payment that does not arrive on time or in the expected amount could mean huge distress and negative impact to your customer, especially for large transaction amounts like paychecks or payouts.
When to implement automated reconciliation
With all these considerations, a key question arises: when should a company transition from a manual reconciliation process to a more robust and automated reconciliation platform? How do you know if your existing processes are becoming insufficient?
There are a few common indicators that it is time to implement automated reconciliation:
- Growing scale and complexity: As the scale of your operations begins to strain manual processes, it’s time to consider implementing a dedicated platform. Whether it's the sheer volume of transactions, the diverse transaction sources, or a rapidly growing customer base, your growth should not be constrained by outdated reconciliation methods.
- Needed risk mitigation: Financial discrepancies—even minor ones—can lead to significant trust issues, regulatory scrutiny, and financial losses. If you're noticing even occasional errors or discrepancies, it's a clear sign that your current reconciliation system may not be sufficient.
- Decreasing operational efficiency: If your finance and operations teams are spending an inordinate amount of time on manual reconciliation tasks—especially if it's hampering other responsibilities or initiatives—it's an indicator that it may be time to transition to a more efficient platform.
- Increased regulatory and compliance demands: Money movement comes with robust regulatory standards to uphold. The need to ensure that every penny is accounted for and that all transactions are transparent and traceable becomes paramount. If you're encountering increased regulatory oversight or facing audits, a robust reconciliation system becomes a must-have.
- Strained customer experience: The more seamless your internal processes, the better your customer experience. But if customers are highlighting discrepancies or if your support teams are frequently dealing with financial queries, it might indicate a deeper issue related to your reconciliation processes.
If your company manages the funds of others, reconciliation should be an ingrained part of your operations from day one. And as your business grows and the landscape becomes more intricate, transitioning to a dedicated reconciliation platform ensures that you can maintain trust, meet compliance demands, and operate with efficiency. With this in mind, lets consider the question of whether buying or building a reconciliation platform is right for your company.
Buying vs building a reconciliation system
There's lots to consider when deciding how to implement an automated reconciliation system, including costs, expertise, reliability, and scale. Each company has unique needs and circumstances, but below are some general guidelines for framing your decision.
When to Build
- You have a single payment processor with a simple funds flow: If your organization's financial interactions are centralized around one or two types of transactions or data sources and these are unlikely to evolve significantly in the near future, an in-house solution might be feasible for your needs.
- You have the required in-house expertise: The build decision becomes more feasible if you're already equipped with a team of experts, well-versed in your specific reconciliation needs. This approach also assumes you have the bandwidth to allocate adequate engineering resources both for the initial build and the inevitable ongoing maintenance.
- You can manage the up front cost & risk considerations: Building a system internally often implies a willingness to absorb the higher upfront costs and risks associated with developing and maintaining a proprietary solution. These risks include potential technical bugs, compliance issues, or adaptability challenges as your financial ecosystem evolves.
When to Buy
- You're experiencing high growth and an evolving product: If your business is on an accelerated growth trajectory and maintaining momentum is crucial, an off-the-shelf solution might be the ideal pick. It allows you to quickly integrate a tested system without the lead time of building from scratch. And allows you to quickly pivot your financial operations processes to meet the needs of the business.
- You have diverse financial processes and funds flows: Organizations juggling multiple payment channels or transaction sources typically find value in established systems that already cater to a broad spectrum of financial interactions.
- You're subject to audits: A pre-built solution often comes with established frameworks for meeting regulatory standards and facilitating audits, offering peace of mind in these crucial areas.
- You're resource constrained: Investing in a ready-to-implement system can free up your internal resources, allowing your teams to focus on core projects and strategic initiatives rather than the intricate details of reconciliation platform development.
Overall, automating your reconciliation processes can be a key accelerant to your financial operations and your business, allowing your teams to operate efficiently and maintain complete financial data integrity. Whether you opt for building a bespoke solution or take advantage of the efficiencies of a pre-existing platform, the key is recognizing the pivotal role reconciliation plays from the outset and reducing manual, error-prone processes for your staff and finance team. In future posts, we'll be breaking down the details of buying vs building in more depth, along with guides for what to look for in the ideal reconciliation system.