In our previous articles, we talked about the Order to Cash (O2C) process and how financial leakage happens when there are discrepancies in the reconciliation of transactions. Leakage is the revenue lost because not all transactions are matched correctly, leading to unreported losses and risks in audits and compliance. Leakage can range from 0.05% to 0.5% of total sales, which may seem small but can result in huge losses for large retailers processing over EUR 100 million in card payments every year.
Now that you understand what leakage is and how it can affect your business, the next step is to evaluate whether your current reconciliation processes are good enough. If they aren't, it's important to measure how much leakage could be costing you. In this article, we’ll provide tools and resources for retailers to evaluate their leakage, including a Financial Leakage Impact Calculator and a checklist for assessing reconciliation processes.
Finding and measuring leakage is important because it helps CFOs and finance teams understand the true cost of incomplete reconciliation. Leakage doesn’t just hurt profit margins, it also impacts audit compliance, cash flow, and the overall efficiency of your financial team. With the rise of electronic payments and the challenge of managing multiple sales channels, leakage can quickly add up to a significant issue, which makes it important to fix these discrepancies as soon as possible.
By assessing your leakage exposure, you can answer these key questions:
How much revenue are you losing because of incomplete reconciliation?
What is the financial impact of unreconciled transactions on your profits?
How can automated reconciliation solutions help you eliminate leakage and improve financial control?
Let’s take a look at the tools that can help you evaluate leakage.
To help large retailers figure out the financial impact of leakage, we’ve created a Financial Leakage Impact Calculator. This tool helps estimate potential leakage based on your yearly card sales, reconciliation practices, and additional costs that come from dealing with unreconciled transactions.
Here’s how the calculator works:
Using this calculator, CFOs and finance teams can estimate the true cost of leakage, including unresolved discrepancies and additional resource costs. It provides a clear picture of how incomplete reconciliation affects profitability and cash flow.
In addition to calculating the cost of leakage, it’s important to evaluate how effective your current reconciliation processes are. We’ve created a Reconciliation Process Checklist to help you assess whether your current system can manage O2C reconciliation well and prevent leakage. This checklist includes the following questions:
Do You Reconcile Transactions Across All Sales Channels?
Are you reconciling transactions from physical stores, e-commerce, mobile apps, and other sales channels?
Are Aggregated Payments Properly Matched to Individual Transactions?
Can you accurately break down aggregated payments from acquirers and match them to individual sales transactions?
How Much Time Does Your Finance Team Spend on Manual Reconciliation?
How many hours per week are spent manually reconciling transactions? Could these efforts be automated?
Do You Have Real-Time Reconciliation Capabilities?
Are you able to reconcile transactions in real time or on a daily basis, or is reconciliation delayed until the monthly close?
Is Your Reconciliation Process Automated or Manual?
Are you using automated tools for reconciliation, or is it mostly a manual process? Automation can reduce errors and prevent discrepancies.
How Are Exceptions Handled?
Do you have a systematic way to identify, manage, and resolve reconciliation exceptions as they happen?
Do You Have a Clear Audit Trail for All Transactions?
Can you provide a detailed audit trail for every transaction to show compliance during audits?
Have You Quantified Your Leakage Exposure?
Have you calculated how much revenue may be lost to leakage and are you aware of its financial impact?
By answering these questions, CFOs can identify gaps in their current reconciliation processes and figure out where improvements are needed to reduce leakage and strengthen financial control.
Once you’ve evaluated your current reconciliation processes and estimated the potential impact of leakage, the next step is to address any gaps. Manual reconciliation is not enough for large retailers dealing with high transaction volumes, different payment channels, and international operations. Automation is key to achieving full reconciliation, reducing discrepancies, and stopping leakage.
Automated reconciliation solutions can:
Reconcile in Real Time: Ensure that all transactions are reconciled as they happen, eliminating the risk of discrepancies building up over time.
Identify Exceptions Immediately: Automated tools provide exception management capabilities, highlighting discrepancies for quick resolution.
Reduce Manual Workload: Automation cuts down the time finance teams spend on manual reconciliation, allowing them to focus on more strategic work.
Provide an Audit Trail: Automated solutions create a detailed audit trail for every transaction, ensuring compliance and transparency during audits.
Financial leakage is a hidden cost that can greatly impact profitability if not addressed. For large retailers, managing transactions across multiple channels and payment methods can be complex, making leakage a real risk. By using tools like the Financial Leakage Impact Calculator and the Reconciliation Process Checklist, CFOs and finance teams can assess their exposure to leakage and understand the real cost of incomplete reconciliation.
In the next article, we’ll explore the challenges of managing reconciliation across multiple sales channels and why manual processes are no longer enough in today’s complex retail environment. Stay tuned as we continue to provide insights into strengthening your financial controls and protecting your profits.