What is Ecommerce Reconciliation and how to make it more effective
Introduction
The global Ecommerce industry, as we know, has witnessed unprecedented growth in recent years - from contributing just 4.2% of retail sales globally in 2010 to leapfrogging to >19% in 2022. More & more consumers have turned to it on account of the convenience, 24/7 availability, accessibility & product selections, and the competitive pricing (and many more advantages over conventional retail) it offers. The Ecommerce industry in India is no exception and is expected to reach USD 150B in market size in 2026 from USD 83B in 2022.
Businesses, across the globe, have also increasingly gravitated towards online retail as more & more buyers preferred to buy online. According to estimates, the number of businesses selling online has increased 6x during this period, and the number of Amazon sellers has increased 4x.
However, this rapid increase in online commerce has brought along a host of operational challenges for Ecommerce companies, one of the most significant being Reconciliation (also termed as Ecommerce Reconciliation) that we will cover at length today.
Why is Reconciliation needed by Ecommerce companies?
In a recent blog, we explored the topic of Financial Reconciliation, what it is, why it is needed, and how companies manage it today.
As we covered in that blog, Financial Reconciliation is an important internal control for Finance teams to ensure that their financial statements are without any discrepancies and reflect the reality. It ensures not just that the transactions being maintained by companies internally are accurate, but also that any potential financial impact on the company is identified & minimized. And is particularly important for industries with a high volume of transactions such as Ecommerce.
If you would like to know more about Financial Reconciliation, please do read the last blog here.
While we established in the last blog why Reconciliation is an important internal control, in this blog post, we will delve into the complex world of Ecommerce Reconciliation. Let’s start by exploring the key types of reconciliations needed by Ecommerce companies today.
Types of Reconciliation
While the most commonly discussed form of reconciliation by Ecommerce sellers is Payment Reconciliation, there are other forms of reconciliation that also have a potential to significantly impact an Ecommerce business. Below, we have covered some of the key reconciliations performed by Ecommerce sellers:
Payment Reconciliation: which entails matching of the expected commissions, fees or charges against a Markeplace’s Settlement Report to identify any discrepancies.
Bank Reconciliation: which entails matching of Sales Orders, receipts, payments with Bank transactions.
Payment Gateway Reconciliation: which entails matching of own-website sales made through a Payment Gateway against bank receipts & pre-agreed PG charges.
GST Reconciliation: which entails matching of a company’s own books with those of your Vendors & Customers to ensure correct statutory filings by the company, and to minimize any bottomline impact on account of missed Input Tax Credits, if filings have been done incorrectly by Vendors.
Inventory Reconciliation: which entails matching of a company’s Inventory per the WMS against the Accounting Software and with the Inventory Report from Marketplaces (in case their Warehouses have been availed) to minimize loss of inventory.
Returns Reconciliation: which entails matching of SKUs received at warehouse as part of returns from Marketplace customers with the master returns file.
Shipment Reconciliation: which entails matching of Shipment/Logistics invoices with per unit pre-agreed terms with Shipment Partners to prevent excess charges by them.
Challenges faced during Ecommerce Reconciliation
While Reconciliation, by its very nature, is a complex, tedious, manual & error-prone process, it tends to become even more so for high-volume transaction industries such as Ecommerce companies. According to research, Ecommerce companies can end up losing up to 5% of Revenue, if reconciliation is not done right.
Given a significant potential impact of reconciliation errors on the bottomline & cashflow of a company, it becomes imperative to remove any possible error from the process. Let’s explore some of the complexities in the reconciliation process:
Multichannel selling
Most, if not all, Ecommerce sellers utilize multiple Marketplaces to reach a wider customer base across customer or regional cohorts which might prefer one or more martketplaces over others. However, this wider reach comes with a unique challenge - each marketplace has its own report types & their formats, report & payment frequency, fee structure, and payment methods. This disparate data that is presented to companies in varying formats, makes data gathering & consolidation, and in turn reconciliation extremely difficult for companies.
Commissions & fees
Each of the marketplaces has their own fee structures, payment terms, penalties, return policies & commission rates. These fee structures & the fees themselves vary widely, depending on the type of products you sell, your sales volume, and your seller status.
Moreover, most marketplaces also charge their fees based on product categories. Therefore, if a seller sells products across multiple categories, they need to classify each of their products to calculate the fees & commissions accurately. Moreover, D2C brands also engage their customers directly through their own website to significantly lower their operating costs.
Some of the different types of fees charged by marketplaces are:
Commission/Referral fee: is generally charged by marketplaces as a percentage-based fee on the product sold and varies based on the product category.
Collection fee: is collected by marketplaces for the mode of payment offered to sellers and, therefore, varies by payment type.
Closing fee: is charged everytime a product is sold on a marketplace. It is usually charged as a fixed fee based on the price range of the product. It may also vary based on the fulfilment channel being used.
Shipping fee: is charged by marketplaces based on weight, size & delivery location, in case sellers choose to avail the shipping service provided by a marketplace.
Warehousing fee: is charged for storage & packing by marketplaces in case a seller chooses to avail their storage/warehousing service
Other fees: marketplaces may also charge sellers other fees based on the type of fulfilment
Discounts: discounts may be offered by both sellers as well as marketplaces. In case of seller discounts, marketplaces deduct the discount amount before making the payment.
Understanding and keeping track of the fee structures for each marketplace you use can be a daunting yet important task to ensure that excess or unnecessary charges do not erode your profits.
Payment discrepancies
Payment Gateways are the lifeblood of Ecommerce. However, due to the complex nature of Ecommerce business on account of delayed settlement, refunds, currency conversions, transaction fees, discrepancies are often seen between what sellers expect to receive from them, and actual funds received. Therefore, Ecommerce sellers need to closely monitor and reconcile online transactions to maintain accuracy & financial health.
Inventory management
One of the biggest challenges faced by Ecommerce companies is to ensure accurate inventory records. Ecommerce companies very often struggle with variance in inventory reported by their own Inventory Management System (IMS), and that reported by marketplaces, in cases where they opt for warehousing and fulfilment services of these marketplaces. Additionally, in most cases, there is an inventory mismatch between the IMS and the ERP used by Ecommerce companies, leading to delayed or even cancelled orders due to inventory unavailability. Therefore, Ecommerce companies need to ensure accuracy of inventory records across each system to ensure it doesn’t affect sales.
Returns
High product return rates is a reality that Ecommerce companies need to live with. According to estimates, the average return rate in Ecommerce globally is between 20-30%. However, in some categories the return rate is as high as 35-40%. These are whopping numbers and pose a massive challenge for companies not just in the form of high operational costs, but also accounting of refunds, and reconciliation to ensure that the returned product has been received by the company & to identify damaged returns. Failure to accurately reconcile returns could result in huge losses in the form of missing/damaged inventory given the high return rates.
How often should Ecommerce companies reconcile?
The frequency at which an Ecommerce company should perform reconciliation varies depending on a number of factors including the number of transactions, availability of data, type of reconciliation, & complexity of finance operations, among others. Therefore, Ecommerce companies perform reconciliation with different frequencies: daily, weekly, monthly or quarterly. While more frequent reconciliation is recommended for companies to identify the discrepancies & risks in time, there are practical limitations such as availability of data & resources that prevent Ecoomerce companies from doing so. Therefore, you may consider the following as a general guideline:
Daily:
Bank Reconciliation: Bank Reconciliations can be performed by companies with their accounts daily to identify any discrepancies or errors promptly.
Payment Gateway Reconciliation: Ecommerce companies often use multiple Payment Gateways on their website. They may consider reconciling payments collected through Payment Gateways daily to identify missing/excess payments.
Weekly:
Inventory Reconciliation: Weekly inventory reconciliation can help companies ensure that stock levels are maintained, identify missing or damaged returns, and prevent stock-outs.
Monthly:
General Ledger (Vendor & Customer) Reconciliation: Ecommerce companies may consider performing these reconciliation at a monthly frequency. This doesn’t just ensure that the invoices from suppliers match the purchase orders and receipts, but can also help in identifying discrepancies or billing errors.
Financial Statements: Most companies prepare their financial statements on a monthly bases. However, before finalizing these financial statements, companies need to perform reconciliation of their financial accounts to ensure accuracy.
Besides the above, Ecommerce companies may also often need to perform ad-hoc reconciliations when unexpected issues arise such as chargebacks & disputed transactions.
Ultimately, the best frequency for different types of reconciliations depends on the complexity of the company’ finances, its risk tolerance, and its specific needs. However, companies need to ensure that they strike a good balance between the cost, time & resources invested in reconciliation processes and the need to maintain & report accurate financial records that reflect the reality.
How is reconciliation managed by companies today?
Ecommerce companies, despite the significant challenges posed by the complex nature of business & high volume of transactions, continue to rely on manual, time-consuming & error-prone processes that consume significant resources. Some of the other key challenges faced by Ecommerce companies while performing manual reconciliations are:
Delayed insights: manual reconciliation surfaces discrepancies with a delay due to the tedious & time-consuming nature of the activity & hinders timely decision-making by Ecommerce businesses.
Lack of scalability: with business growth, the volume & complexity of transactions of an Ecommerce is also expected to grow. Manual reconciliation processes are difficult to scale, as they require significant ramp up of resources making them impractical & expensive.
Difficulty in managing large volumes of data: Ecommerce businesses, as we know, manage high volume of transactions & data. This high volume data, especially for a high growth company, becomes extremely challenging to manage & reconcile manually in Excel Sheets or Google Sheets, as there are practical limits on the amount of data that can be managed in them.
Difficulty in tracking discrepancies: manual reconciliation, due to its limitations, takes longer to identify discrepancies, & given the time-sensitive nature of some of these reconciliations increases the risk of financial losses for companies. Moreover, companies find it difficult to keep a track of discrepancies identified in the past, and the corrective action taken so that they don’t recur.
Compliance risks: manual reconciliations, that are prone to errors, may increase the risk of non-compliance with regulations. Ecommerce businesses, like other businesses also need to comply with regulatory requirements related to tax reporting, financial transparency, and record-keeping. This could result in penalties & legal issues.
Is there a better way to perform reconciliations?
Thankfully, the answer to this question is Yes. Ecommerce companies can now adopt an automated reconciliation software to not just take the pain out of managing it manually, but to also mitigate the above challenges & risks posed by manual reconciliations. Following are some of the advantages of automated reconciliation over manual processes:
Accuracy: It eliminates errors by automatically comparing and matching data & improves data accuracy.
Saves time: It saves a significant amount of time spent by Finance teams in reconciling data manually, and fastens closing, reporting & decision-making.
Cost efficiency: It offers significant cost savings, which become a lot more pronounced as a company grows.
Real-time visibility: Provides real-time visibility into financial data, enabling companies to make faster data-driven decisions.
Scalability: Scales easily to process increasing transaction volumes as company grows, eliminating the need to hire additional resources to manage reconciliations.
Reduced risk of fraud: They come with built-in controls and audit trails that help detect and prevent fraudulent activities.
Audit preparedness: Simplify the audit process by providing an audit-trail of all the financial transactions & reconciliations.
If you aren’t sure about how to pick the right reconciliation software that fits your needs, we will have you covered shortly. Please keep an eye out for our next blog that will share a helpful framework for how to adopt that reconciliation software that works for you.
FinanzOS Reconciliation for Ecommerce companies
FinanzOS offers a comprehensive AI-powered Reconciliation platform for Ecommerce companies to fully automate every reconciliation process.
FinanzOS is a no-code platform purpose-built for Ecommerce companies to address their Reconciliation needs. It also empowers Ecommerce businesses to make better, faster decisions by offering real-time data & analytics, and automates their manual Finance processes including Accounting & Bookkeeping, saving up to 70% on these costs.
FinanzOS effortlessly integrates with 100+ most used platforms by Ecommerce companies to perform reconciliations, including ERP/Accounting Software, Marketplaces, Payment Gateways, Order Management Systems, Warehouse Management Systems, and Banks, and leverages AI, ML & Distributed Computing to highlight any discrepancies in data in real-time - saving up to 80% of time & resources. It end-to-end automates data gathering, aggregation and data matching & cross-referencing, and offers actionable insights into discrepancies including overcharges by Marketplaces, Shipment partners, & Payment Gateways.
Some of the Reconciliations FinanzOS helps companies automate are:
Settlement Reconciliation (Amazon, Flipkart, Myntra, AJIO, and more)
Payment Gateway Reconciliation (Razorpay, Cashfree, PayU, PhonePe, and more)
Inventory Reconciliation
Shipment Reconciliation
Returns Reconciliation
GST Reconciliation
To know more about how FinanzOS’ Reconciliations platform is helping companies streamline & automate their reconciliation processes, please reach out to us at [email protected] or [email protected] or click here.