Why We Built an Automated Reconciliation Tool and What the Future Holds for It
A big part of finance management is a business process called reconciliation. This operation ensures the accuracy and validity of the company’s financial information and resolves any discrepancies that it may have detected. By doing so, reconciliation plays a crucial role in maintaining the integrity of your financial data.
Reconciliation emerged due to the lack of data associated with money movement. Understanding the reason behind funds entering your bank account is more complex than you might think, and it quickly becomes very challenging to do. It involves analyzing small pieces of information found on transactions, like amount and name, and forensically matching them with previous sales you made.
At Melio’s scale, we needed a more efficient solution–so we built our own reconciliation engine. But by doing so, we also unleashed the true power of keeping financial records in check. In this blog post, I will show what that power actually looks like.
Why is reconciliation so complicated?
Basically, contrary to common belief, the financial system isn’t always reliable and error-free. Data inaccuracies are a real problem finance teams struggle with daily, particularly because of human involvement — people mistake amounts and even send payments to the wrong business.
Add to that the increase in digitization that brought more choices to customers with new payment methods, each with its own standards(!), and you get inconsistent data scattered across multiple repositories (bank, PayPal, cards, ApplePay, etc.).
Due to bad data, companies employ dedicated teams tasked to make sense of it all by verifying sales against incoming funds in their bank account each month. Unfortunately for them, they often lack insight into the customer relationships that generated these invoices. Instead, they are limited to observing the outcome of those relationships — the actual transfer of monies — which makes their work harder and demands a significant amount of time.
So what drives the need for reconciliation? It all boils down to accounting practices. Without a way to link transactions back to a specific customer and purchase, it becomes incredibly difficult to figure out how much of the money in your bank account is actually revenue from sales, and how much is something else.
Additionally, it helps answer critical business questions like “which customers have outstanding payments?’, “how much much revenue is still uncollected?”, “did I spend more than I needed to?”, “did I lose funds I believed were collected?”, and many others.
Introducing Reco
Melio was facing a twice-as-hard challenge managing its financial data. Not only do we keep track of money movements for the sales we’ve made, but also–and even more importantly–for the transactions we’ve facilitated on behalf of our customers. No off-the-shelf product we explored was good enough for our needs and standards. So we decided to build our own reconciliation platform, Reco, and enable the scaling of the business through automation.
Reco’s engine can easily identify and match bank records (transactions that happen in the real world) to our database (transactions that we planned to execute in the real world) and helps us maintain strong financial supervision while we work to provide an excellent customer and payment experience.
Reco solved the challenge of reliability and control over our financial data. We can now automatically and accurately reconcile all of our financial information–customers’ and company’s funds alike–and have a clean data set for all our finances. Achieving this was a huge task for the team.
But I want to argue that this engine can serve a much greater purpose than just tracking bank records. Having such clarity over the finances can actually help generate powerful insights that leaders can leverage for the benefit of the business. This is our shared vision for a predictive finance system, or how Reco could work, told through a fictional character as an illustrative example.
What predictive finance actually looks like
Consider the hypothetical scenario of Rachel Torres, the CFO of a leading, publicly-traded financial services company, Digital Finance Co. Rachel leads her team with a clear and data-driven approach to financial management, using advanced tools and technologies.
Rachel’s role extends far beyond finance. She plays an instrumental role in shaping the company’s overall direction and strategy and is the force behind the company’s continued success in a rapidly-evolving industry. Working in close collaboration with the CEO and other executive team members, Rachel brings her unique financial perspective to the table, helping to develop and execute the company’s strategic plan and ensuring its ongoing financial viability and competitiveness.
As Digital Finance Co. prepares to release its quarterly earnings report later this week, Rachel is entrusted with ensuring that all financial data is up-to-date, reliable, fully compliant with regulations, and ready to be presented to the public.
She starts her day by reviewing the financial reports and assigning tasks to ensure there are no surprises in the upcoming report. Thanks to Reco’s advanced abilities of regularly matching transactions and flowing this data into the company’s ERP, Rachel is feeling confident in the reliability of the generated reports. The efficiency and accuracy of Reco have saved her team hundreds of hours, allowing them to dedicate their time and expertise to more strategic initiatives.
Rachel then meets the CEO to discuss any potential obstacles and issues that can arise during the earnings call. They are going through various scenarios and questions that may come up. Rachel is well-prepared. Armed with real-time data from the Reco dashboard, she can quickly explain the factors that impacted key financial metrics, such as losses and revenues. She brings up a collection issue that occurred two months ago as the primary source for the increase in losses this quarter.
Thanks to Reco, this issue has been thoroughly addressed. Reco’s real-time alerts immediately notified of the irregularity, and Rachel was able to quickly advise the relevant engineering team on the appropriate course of action.
As the discussion shifts to projections for the second half of the year, Rachel is thrilled to share that Reco’s advanced forecasting abilities predict the company is expected to reach a record-breaking $1 trillion in total payment volume. However, it also highlights a potential challenge–a significant increase in transactional costs. As they wrap up their meeting, Rachel feels assured that they are well-positioned to deliver a successful earnings call and maintain their position as a leader in the industry.
Rachel and her team are now ready to start identifying the root cause of this cost increase. With her expert guidance and leadership, the team works to develop a plan that will reduce operational expenditures and maximize profitability.
As the day comes to a close, Rachel reflects on her team’s progress in implementing Reco as a main component of the company’s financial operations. Reco has enabled the team to transition from reactive to proactive, giving them the power to shape the company’s financial future. They were able to make more informed decisions, focused on strategic work that would secure the company’s financial outlook, and mitigate issues before they even came up.
Finance as strategy
The role of finance leaders has evolved from traditional bookkeeping to a more strategic function. Predictive finance is the future of financial management and will play a key role in making leaders successful. It will allow finance leaders to understand their data better and be proactive in identifying risks, opportunities, and trends. They will also be able to manage costs better, prevent losses, and optimize their capital structure. Reconciliation is critical in ensuring the accuracy and validity of financial information and the foundation upon which such systems can be built. With such tools and technology, they can stay ahead of the curve and achieve greater financial outcomes.
