The Covid-19 pandemic has significantly affected startups worldwide. It has also changed how customers perceive brands and marketplaces. And, because Direct-to-Consumer (D2C) channels meet customer and business needs effectively, over 800 conventional brands in India have recently gone direct to customers. Further, new-age D2C brands such as Bombay Shaving Company, Mamaearth, BoAt, Pepperfry, Country Delight, etc. are challenging traditional brands such as LG, Havells, and Piaggio.
India’s D2C sector had a total valuation of $44.6 billion in 2021 compared to $33.1 billion in 2020. As per reports, the total D2C market value is forecasted to grow threefold and reach $100 billion.
Expected to add approximately 200 million customers by 2025, it is a profitable industry and offers lucrative opportunities to grow business faster. But, when you ask an eCommerce business owner about their biggest pain point, it’s likely they’ll say accounting.
Payment reconciliation is one such pain point that most sellers find overwhelming. If you love accounting, give us a high five because it’s rare.
That is not all. As your eCommerce business grows, your transactions will become more complicated. Sales, returns, commission, banking fees – all monetary movements will need to be monitored, analysed, and controlled or else it will lead to revenue leakage.
Without a proper accounting process, you can be quickly overwhelmed, especially if you receive payments from multiple marketplaces that might be using a different payment cycle than yours.
Do you know how the lack of efficiency with respect to managing your books can lead to huge revenue loss? We’re going to tell you; before sharing some best practices for eCommerce reconciliation.
What is eCommerce reconciliation?
Reconciliation takes centre stage in every accounting practice. But, it becomes a critical issue for some business models, especially those with loads of transactions. The eCommerce industry is the most obvious example where a high volume of transactions is common.
Payment reconciliation in the eCommerce industry refers to comparing financial reports regarding commissions and payments from various marketplaces. It is performed regularly to ensure the accuracy of your balance sheets.
Let’s say, for instance, you sold a product worth Rs. 700 via Amazon. The platform will simply cut its commission, which might vary between 8% to 15%. Suppose it charges 8% commission, the final payment that should reflect in your account is Rs. 644. But, it pays you Rs. 600. That’s where the reconciliation process begins. Now, you will simply request a monthly transaction report from the platform, and match it with your books and bank statements to figure out Rs. 44.
The key to a successful month-end close is reconciling every balance sheet account. Almost all the startups we speak with will say, “We only need to record the transactions and we’ll be done. Simple!” But, that’s merely the beginning.
Your issues with recording and maintaining your books of accounts, and understanding the payment processing from eCommerce platforms might lead to accounting discrepancies. Therefore, it is recommended to have an accounting expert who will keep your books right and help overcome reconciliation challenges with ease.
So, what are the challenges you may face as a D2C business owner?
As more and more eCommerce businesses leverage cloud accounting systems, they overcome the most common challenges of payment reconciliation. You no longer need to keep paper receipts to track your business expenses and payments. However, a few things remain the same, especially in eCommerce transactions.
Dealing with multiple channels
As an eCommerce business owner, you would probably advocate for the pros of having a multi-channel approach. But, your perception might change rapidly when you learn that it hinders account reconciliation.
Keeping track of payment from different channels along with merchant fees can be the biggest hassle, and perhaps the least favourite part of even those who love accounting. Since each channel has a different approach, it aggravates the problem and makes it challenging.
The commission nightmare
Another challenge that pinches most eCommerce business owners is that each platform charges different commissions. It adds extra hassle to the reconciliation process as you need to specifically account for those fees at the end of every accounting period.
If you don’t do so, a large part of your revenue might get slashed. Additionally, it leads to major accounting discrepancies, such as estimating the amount of tax that you owe.
Volume versus value!
Compiling the transaction data is yet another challenge that needs to be overcome to ensure proper account reconciliation. Even if you have just a small doubt, you will need to go through consumer, sales, vendor and product data to validate that transaction.
Though there are automatic accounting systems that can do this in a minute, they will only provide you with numbers. Identifying the source of transactions in such a case might become complicated and time-consuming.
The most difficult part – refunds
Improper refunds are another reason why your bank balance never corresponds to your financial records. Sadly, refunds are quite common, especially in the eCommerce industry. But they are important; thus, it is crucial to record them accurately.
For proper payment reconciliation, it is essential to record each sale and keep the sale and refund records aligned. What makes it even more complicated is that some vendors might charge you an extra fee for issuing refunds, and all this needs to be recorded properly in your books.
I’m sure you will try your best to overcome these challenges. However, if you’re still facing these reconciliation complications, below are some quick tips to avoid them.
Best practices you can implement for smooth and hassle-free eCommerce reconciliation
The eCommerce industry has always been at the forefront of technological advancement, and the digital shift has significantly impacted back-office operations. It is most likely that you will have an automatic eCommerce transaction reconciliation system. But, do you think it works efficiently? Let’s find out the best practices to reconcile e-commerce transactions with ease.
With huge volumes of transactions to deal with, more often than not, it will be extremely difficult to track and enter everything in your books of accounts. So, here are a few tips you can keep in mind to combat these challenges.
There may be several situations where you have transaction issues or are charged twice by the bank during the process of buying, selling, and shipping the products or services. Check that your bank account matches your accounting software or book records (which will show you any issues you have) or just ensure that every credit and debit has been executed correctly.
Do this on a monthly basis so you can figure out what’s causing the imbalance and respond fast and correctly. At the conclusion of each month, accounting software allows you to run the reconciliation report automatically.
Manage your returns and chargebacks efficiently
If you’re selling your products on a platform like Amazon that allows returns, you’ll need to categorise them as Sellable, Damaged, Customer Damaged, Carrier Damaged, or Defective. This not only allows you to watch the progress of your items and client satisfaction, but it also ensures that your inventory is not expensed twice.
When a credit card issuer asks you to return monies paid to a customer’s credit card for some reason, this is known as a chargeback. You should also keep track of it as a cost or fee.
Use Excel sheets and Vlookup formulas
If you don’t want to pay for software or can’t afford it, keeping a manual record is your best chance. To keep track of payment reconciliations, most sellers utilise spreadsheets like Microsoft Excel.
In the excel sheet, insert order details and track marketplace payments using formulas and techniques such as Pivot Table and VLOOKUP.
You can use VLOOKUP to search your spreadsheet for specific data. You could, for example, search for a certain item’s price if you have a list of products with prices.
When you need to find items in a table or a range by row, VLOOKUP is the tool to use. You can look up a product’s pricing and the commission paid/charged by the partner, for example.
Count on automated tools
Despite the fact that e-commerce transaction volumes have skyrocketed in recent years, only a few businesses have established comprehensive systems that can predict fraud and decrease risk by authenticating all transactions from various online marketplaces and payment service providers.
If you have to manage multiple points of sale at the same time, things might get a lot more complicated. Furthermore, transaction traceability between different POS and PSP service providers is difficult to follow and analyse. As the processes and regulations become more complex and time-consuming, this may have a detrimental impact on the company’s profitability.
eCommerce management software such as UniCommerce and eVanik can simplify your accounting activities and eliminate revenue leakage by addressing all transactional reconciliation and matching issues. With fully automated reconciliation, you can easily detect breaks and discrepancies as soon as the MTR report is available.
Payment reconciliation is an important aspect of every organisation’s financial management and finance process. Account reconciliation, like its companion, has a number of processes to it, all of which benefit from automation. If you are curious to know how you can simplify this process, connect with Savage & Palmer today. We are a leading accounting firm in Mumbai. We can help you design and deploy a well-thought-out eCommerce reconciliation process. Schedule a free consultation now!