Why Bank Reconciliation is Important for Small Businesses?

In any business, cash is the lifeblood. Cash helps in performing day to day business activities. The payment of employees also depends upon the availability of cash. Marketing of goods and services also requires cash. So, bank reconciliation plays an important role to ensure there is availability of cash. Just as you need to reconcile your personal checkbook, the same way your bank account needs to be reconciled to ensure your balances are accurate.

What is Bank Reconciliation?

A Bank Reconciliation is a document that matches the cash balance on a company’s balance sheet to that of bank statements. Reconciling the two accounts helps determining if accounting changes are needed. It is carried out at regular intervals to ensure the company's cash records are accurate. If there is any fraud or theft it can be determined through reconciliation. It is used to compare your records to those of your bank and the result could be an overdrawn bank account, bounced checks and overdraft fees.

The bank reconciliation is a process to verify that all transactions in your bank or credit card account are recorded in the general ledger as cash receipts, cash Disbursements and general entry adjustments. For this you require your monthly end of statement. Reconciling monthly statements and reviewing general ledger accounts at regular intervals of time will help in making right decisions for the growth of the small business and would also help in reducing overhead expenses.

As a small business owner, you should be reviewing your monthly bank statements each month to make sure that the funds being withdrawn or deposited in the bank are correct and accurate to prevent bank errors and detect potential fundamental activity.

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The importance of bank reconciliation for small businesses:

  • It helps in creating a correct general ledger.
  • The late fees and interest charged can be managed and minimized
  • It helps in recording true liabilities of the business
  • The missing receipts or online purchases can be recorded
  • It also helps in recognizing fake charges, illegal purchases and wrong postings in account.
  • It helps in fixing unrecorded entries and accuracy of the books can be maintained.
  • It helps in analyzing lost checks, deposits and unauthorized transactions
  • Put an end to unjustified bank charges and ensure transactions are posted correctly in the bank.
  • Prevent frauds of funds within the company
  • It helps to identify bank errors and you must notify your bank of any discrepancies that you come across during the bank reconciliation process.
  • It helps to prevent overdrafts, this can reduce the potential for overdrawing.
  • It permits you to forecast like a pro which is nice to have accurate statistics to accomplish the goal.

Procedure of Bank Reconciliation statement:

  1. On the bank statement, compare the company’s list of issued checks and deposits to the checks shown on the statement to identify uncleared checks and deposits in transit.
  2. Using the cash balance shown on the bank statement, add back any deposits in transit.
  3. Deduct any outstanding checks.
  4. This will provide the adjusted cash balance of the bank.
  5. Next, use the company’s ending cash balance, add any interest earned and notes receivable amount.
  6. Deduct any bank service fees, penalties, and NSF checks. This will arrive at the adjusted company cash balance.
  7. After reconciliation, the adjusted bank balance should match with the company’s ending adjusted cash balance.

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You must reconcile a bank account each time you receive a statement from our bank. This is often done at the end of every month and even at the end of each day by businesses that have large numbers of transactions on a daily basis. When reconciling make sure you have a copy of your bank and credit card statement.

To execute the reconciliation process in better way, keep the following things in mind:

· Self-awareness:

Be aware of your team’s ability to handle and record the bank account and credit card transactions as only correct entries will fetch you accurate reconciliation results.

· The Right attitude:

It is important to have the right attitude and get rid of traditional/ outdated processes for having a competitive edge. Adapt the changing technology and the ever changing laws and regulations.

· Trusting Employee’s adaptation Ability:

Trusting your employees ability will boost their energy and productivity. You need to trust their decision making ability and how they handle financial records will surely not let you down.

· Standardized and Centralised approach:

If your reconciliation approach is standardized and centralised, it will remove all the hurdles of financial transactions and will bring your teams’ quality levels to a certain standard.

· Adopt innovation:

Your old approach would be somewhat working. But it’s time to adopt the new technology to make your task quicker and easier. Adoption of innovation will help you meet new challenges that come with the increased number of electronic transactions.

· Use Accounting Software:

Now softwares like QuickBooks has made credit card and bank reconciliation a lot easier. The software also stores information like charges and payments which can be accessed and utilized for next reconciliation making the process effortless.

Conclusion:

Bank Reconciliation services are a healthy way to lower-down risk and fraud in the business. Small businesses must reconcile bank statements every month to avoid fraud, detect errors and take business decisions like a pro.