You made the sale, but all of the money did not make it to your bank account. Payment processors and ecommerce platforms sometimes hold part of a seller’s money in reserve. Shopify Payments, Stripe, PayPal and Amazon can all hold funds under certain circumstances. This can create a cash flow problem, but it can also create an accounting problem if the reserve is not recorded correctly.
The first thing to understand is that money held in reserve may still belong to your business. You just cannot use it yet. Therefore, you cannot simply look at the bank deposit to determine how much revenue you earned.
Why Do Payment Processors Hold Your Money?
Payment processors use reserves to protect themselves against refunds, disputes, chargebacks and other potential losses. A processor may hold a percentage of every transaction for a certain period. In other cases, it may maintain a fixed reserve balance.
A growing ecommerce business can run into this problem at the worst possible time. Sales increase, so you need more inventory. You may also spend more on advertising and fulfillment. Meanwhile, the processor is holding some of the cash generated by those sales.
A Reserve Is Not an Expense
This is where the accounting matters. If a processor holds $25,000, you generally did not suddenly incur a $25,000 expense. Instead, part of your money is sitting somewhere other than your bank account.
For example, assume you have $100,000 of gross sales. The processor deducts refunds, fees and chargebacks. It also holds $10,000 in reserve. Recording the net deposit as sales will not accurately reflect what happened. Your accounting needs to record the sales and the individual deductions. It also needs to account for the $10,000 that remains with the processor.
Rolling Reserves Make Reconciliation More Important
Some processors use rolling reserves. They may hold part of today’s sales while releasing money they held from sales several months ago. As a result, money can move into and out of the reserve every month.
This is another reason ecommerce businesses need to reconcile their processor activity instead of simply recording bank deposits. The reserve balance should make sense. If it does not, you may have missing transactions, incorrect mappings or other accounting problems.
Amazon sellers can face similar issues with account-level reserves. Amazon may hold funds for refunds, claims and chargebacks. Therefore, Amazon sales, available funds and the eventual bank deposit may all be different numbers.
Reserves Can Create a Real Cash Flow Problem
Proper accounting does not solve the cash flow problem. If a processor is holding $50,000 that you need to buy inventory, knowing where the money is does not make it available.
However, good accounting tells you why the cash is missing.
That distinction matters. There is a big difference between losing money and making money that you cannot access yet. An ecommerce owner needs to know which one is happening.
Your Accounting Should Tell You Where the Money Is
If you have a strong sales month but the bank account does not seem to reflect it, there should be an explanation. Maybe you spent more on inventory or advertising. Perhaps refunds increased. Or your payment processor may be holding a significant amount of your cash.
Your accounting should answer that question without requiring you to guess. When sales, fees, refunds, reserves and bank deposits reconcile, you can see what the business earned and where the money actually went.