Now, more than ever, careful financial management is essential for self-employed individuals and small business owners to survive in these troubled times. Many have suffered due to the measures to contain the pandemic and, while we know it will eventually end, there’s no telling how long it will last. In hopes of providing some aid, we’ll be covering Bank Reconciliations and why you shouldn’t avoid them.
To keep things simple, a bank reconciliation is an internal control measure used to ensure that the cash within your bank account matches the amount within your books by comparing the transactions and items on the bank statement. At a basic level, you only need to compare the bank statement and the journal entries along with the final balances and make sure they all match. But, depending on the nature of the business, you’ll have to account for pending deposits, outgoing checks, credit memos, debit memos, and so on.
Bank reconciliations exist to help catch any errors that can occur whether internally or externally. In the case of internal situations, it will notify you of genuine mistakes (such as missing a payment to a vendor) or malicious practices (such as illegal use of business funds) before they escalate into serious problems. Externally, it can inform you of mishaps with the bank (such as errors with the system) or fraud, so you can sort them out as soon as possible.
Business owners are ultimately in charge of their own finances, so if there is a discrepancy in the reconciliation they are responsible for seeking out the problem and fixing it. The reconciliation provides the means of doing so by giving them a trail to follow. A reconciliation can also help with budgeting by allowing you to spot inefficient spending patterns when combined with other financial statements, such as the Profit and Loss statement.
When a bank reconciliation should be carried out will vary depending on the business and industry in question. Some businesses can go for an entire financial quarter without needing a reconciliation, but others need one done weekly due to a substantial amount of financial activity or a higher chance of fraud. The average for most tends to be monthly, so it would be beneficial to set aside time in the first week of every month to do so.
Bank reconciliations can be time-consuming, especially if you have multiple bank accounts. But it is better to be safe than sorry. If you need help or want someone else to take the load off your shoulders, feel free to Contact Us for a consultation and we’ll see what we can do to help you.
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