Have one set of numbers is the dream, isn't it?!

I don't think I have ever started working with a start-up or scale-up that doesn't have issues with this topic.  And it generally sits with the Commercial team and the Finance team.

There is nothing worse (well there is, but hear me out) than a founder telling me that the sales team have told them that they managed £500K in revenue for the month, but the management accounts only say £425K.  It's dis-heartening, particularly if you have prepared your board slides and there is a discrepancy.

There are many reasons for these discrepancies.  Timing is often one of them, but also revenue recognition, deals that haven't finalised, human errors and a disconnect between all the software systems.

This is where triangular reconciliation needs to be part of your month end processes.

So not the most exciting topic, but it's something that I see go wrong a lot.

If you're FCA regulated, or a financial regulated company, then this process of triangular reconciliation is very familiar to you. As you need to ensure every single day that an external and internal reconciliation is performed, particularly if you have client monies.

But when you have a digital business, or even performing sales invoices in a more traditional sense, you really need to tighten up what the sales team or Commercial team believes that they have sold, and what cash is received at the end of the day.

So with the above graphic, the reconciliation that needs to happen between cash and the general ledger, generally happens in all businesses and isn't a concern.  

What's often missing is the reconciliation between finance and what you have in your internal systems. So whether you're using HubSpot as a CRM, or Salesforce or if you have an internal database that is managing all of the Billings, it's that piece that is often missed reconciling.

There's one company that I'm working with at the moment, where we're really trying to tighten this reconciliation up as the sales team have one version of the truth, then we have the cash payments, which may or may not have an invoice, and then we have the general ledger with a different amount and it's just a bit of a mess. So I'm trying to introduce a triangular reconciliation process. 

There are a few reasons as to why a triangular reconciliation is imperative and needs to be part of your month end processes.

1. The most obvious being you want one version of the truth. If you're creating board packs, or you're doing presentations to the leadership team, the finance report revenue number and Commercial or sales team revenue number needs to be the same. Otherwise, you will start losing trust in the numbers. And that's not good for anyone.
2. Operationally, if the sales team have triggered a sale and the product or the service is going to be delivered to the customer, if an invoice hasn't been raised or payment hasn't been received, then there's a severe disconnect. If a service / product is being delivered and it hasn't been paid for and having to go back to the customer and ask for payment is not a very good experience for the customer.  They're going to think that your business is quite disorganised, which is true. And it's not great for reputation.
3. This can also be affecting your working cash flow. If you're paying for goods or services going out to the customer, and you're not getting paid for it, then it's going to really affect your working cash flow.

Now you may be thinking, "oh, we've already got a pretty good process in place. The chance of something being sold to the customer without them paying for it may be next close to zero."

In this instance, it's still worthwhile doing this triangular reconciliation, not only because you'll understand that it's true and it hasn't happened and the systems are working well, and therefore it's a very quick reconciliation. But it also then helps with the one set of numbers as you may find in this instance that the timing may be different. Establishing when to recognise a particular revenue, there may be a nuance between the commercial team and the finance team. So doing that triangular reconciliation helps with that difference.

You may have pretty good processes a triangular reconciliation is another way of checking that your processes are working, and that you only have one version of the truth.

As a leader, you are the one that sets the processes, you are the one that sets the policies. And if there is a huge issue between what the sales team take and the cash that's collected, then it's your responsibility, and you're the one that needs to answer to the CEO/Founder. So ensuring that you tighten up that process with triangular reconciliations is really important.  

Links:

1. Try our Quiz!  Financial Leadership Foundations Scorecard.  
2. Join our next Workshop on the FLF Framework.
3. Work with me in the Financial Leadership Foundations course  that includes monthly Q&A sessions where we can discuss all of your questions and how to apply your learnings to your current role. 
4. Work with me as a Founder needing guidance and support from experienced Finance leaders. Take a look at our guide on Outsourced bookkeeping.