Corporate TreasuryDealing with the reconciliation challenge

Dealing with the reconciliation challenge

Reconciliation might not be any team’s favourite task, but it crucially underpins a dizzying range of operational activities. Nash Riggins explores the key issues that make reconciliation so difficult, and simple solutions to overcome those challenges.

Treasury teams are constantly under pressure to deliver greater value using less resources. They’re being increasingly asked to play a bigger strategic role within their respective organisations while simultaneously extending their already expansive operational to-do lists – and as a result, financial leadership is spread thin. That’s why PwC’s most recent Global Corporate Treasury Benchmarking Survey revealed 67% of the professionals who are responsible for regularly carrying out treasury functions don’t even report directly to their company’s treasurer anymore.

According to the 2019 Treasury Perspectives Survey Report by consultancy Strategic Treasurer, 34% of treasury practitioners no longer even have enough time to perform all their duties. Cash management and forecasting tasks are often the first areas to get swept under the rug – and while this fragmentation can typically be remedied by taking on a largescale and time-consuming programme of consolidation, there are actually several quick wins treasury professionals can achieve in order to free up their time to focus more time on broader strategic initiatives.

Streamlining reconciliation is one of those quick wins. A majority of small firms now report reconciliation is among the top three operational activities that require the most time and energy, versus only a fifth of large organisations. Yet in order to speed up the reconciliation process and unlock value in smaller companies, treasury teams must first tackle several common hurdles as part of their own unique reconciliation challenge. Fortunately, those hurdles are relatively easy to overcome.

Why is reconciliation so important?

Reconciliation encompasses a fairly wide range of corporate activity. At its core, reconciliation simply refers to the process of confirming two or more sets of records or data are in agreement. Reconciliation is a fundamental internal control that protects an organisation against fraud and costly errors – and on the flipside, it helps firms to maintain healthy strategic partnerships and ensure transactions have the intended financial effect by levelling out deviating opinions on what should be identical transactions.

Bearing that in mind, it’s little wonder reconciliation plays such a rucial role in cash management, the validation of financial statements, risk management and in front, middle and back office operations.

Because front office operations are responsible for trade order management and deal structuring, team members rely on reconciliation checks to validate trade structures against internal booking systems. More important still, those reconciliation checks must ordinarily be carried out on a daily basis to avoid any discrepancies between front and back office records.

Meanwhile, middle office professionals perform reconciliation works to identify unused or underperforming funds that could be effectively redeployed elsewhere – subsequently speeding up payments and optimising working capital. Middle office reconciliation tasks also include post-settlement processes which are responsible for identifying real-time exceptions that can resolve any incoming discrepancies. Without investigating and managing exception payments, it can be nigh impossible for a firm to figure out which payments have or haven’t actually been made.

Finally, back office teams rely on reconciliation to work out daily profit and loss calculations and confirmation matching trade terms.

While it’s fair to say reconciliation should be fully embedded in the various day-to-day activities of virtually every single treasury professional, the vast majority of reconciliation concerns that arise in various roles largely trace back to simple issues of data input, headcount requirements or human error.

Because so many individuals are now involved in reconciliation, one of the biggest challenges teams face is the sheer volume of data that needs to be handled. The number of trade transactions that must be reconciled, the complexity of those instruments and increasingly tedious compliance demands that vary across global markets pose a key challenge to teams that are already under immense pressure to streamline operations.

Meanwhile, smaller firms without access to any dedicated information management solution are often likely to fall at the first hurdle in terms of reconciliation, which is to achieve data consistency. In order to reconcile trades, deals or accounts, it’s first necessary to have access to comparable data from multiple sources. Depending upon which datasets are required, this means  one of the trickiest aspects of reconciliation can often be acquiring sufficient data that includes all the obligatory parameters.

For example, banking data that truncates transaction fields or fails to include detailed payment references can make matching a nightmare for teams performing manual checks, bringing the reconciliation process to a standstill.

Mounting regulatory pressures also pose a major reconciliation challenge – particularly where transfer pricing is concerned. Because many treasury teams are so thinly spread or lacking centralised function, firms tend to run the risk of data mismatches and insufficient reconciliation mechanisms that result in undocumented interpretations, ambiguous deals or uncontrolled processes. Much of this boils down to human error, and even tiny mistakes can be incredibly costly.

How can treasurers overcome these challenges?

Like it or not, treasury is currently in the midst of a proverbial fintech renaissance – which is why the answer to unlocking the so-called reconciliation challenge rests largely with innovation.

While a number of smaller organisations struggling to cope with mounting reconciliation activities may already have a dedicated information system or digital processes in place, the truth is a lot of the existing legacy accounting platforms that are being used handle post-trade processing were designed more than a decade ago. Trade requirements, transaction volumes and the complexity of asset classes have all totally evolved over that period, while landmark regulations such as MiFID II and Basel IV have introduced new obligations around matching data that older platforms and simple spreadsheets simply cannot factor for.

Quite a few firms have been able to circumnavigate this shifting regulatory ecosystem by outsourcing reconciliation operations or through the deployment of internal captive centres – although these utilities tend to support only a limited range of assets or equities, meaning they’re only a short-term fix for long-term challenges. That’s why treasury teams must instead explore the use of centralised TMS or ERP solutions capable of streamlining and automating workflows in both the front and back offices.

Matching ledger entries is incredibly simple with help of a cloud-based ERP or TMS system, because all transactions can be automatically fed into the system’s internal ledger and then subsequently cross-referenced on a line-for-line basis against provided statements or other source data. Using auto-reconciliation features, an ERP or TMS can then use a pre-defined range of interchangeable criteria in order to independently match everything. The only manual intervention a team will ever really need to make is when an exception is identified and needs to be investigated.

Responsive industry leaders like Kyriba, AutoRek and BlackLine have accordingly rolled out a range of robust bank relationship management and intercompany reconciliation modules and standalone solutions that can be effortlessly integrated into many existing TMS dashboards in order to supplement systems with streamlined and automated reconciliation functionality. The key benefit of these bolt-on products is that they can automate the statement retrieval process, standardise every output and transform statements instantly as they’re delivered to a company’s ERP or TMS.

That being said, many of these auto-reconciliation modules now come pre-built into major white label or flagship treasury management solutions, and so it’s worth shopping around to ensure systems can be integrated to deliver maximum functionality with minimal friction.

Reconciliation certainly isn’t the most exciting operational activities, which is probably one of the biggest reason it’s often neglected. Yet by implementing a dedicated reconciliation solution or integrating auto-reconciliation modules as part of an existing treasury management system, treasurers can mitigate the threat of human error, streamline data input and achieve compliance obligations at minimal cost.

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