Bank reconciliations: Why it matters

One of the most important financial controls for any business is to ensure that you properly account and identify every transaction on your bank statement. It is almost guaranteed; if you try to match the transactions in your bank statement against those in your accounting journal every month, they will not match perfectly. That is why bank reconciliation is essential: it is the exercise of reconciling the difference between your accounting records and your bank during a given period.

Why you need them

As a business grows, it becomes more and more crucial to make informed decisions with a clear and updated view of the financial position of your company. Through cloud accounting technology and services, you can have updated and frequent financial statements to base your strategic decisions on.

1. Detect fraud and errors

Bank reconciliation allows you to detect possible fraud or errors in your payments. For example, if someone withdraws money from your account fraudulently or if a supplier modifies a cheque that you have issued, this would be detected since the withdrawal would not match any transaction in your books.

2. Manage your cash flow accurately

As most business owners would say: cash is king! You can easily see how much money is in your bank account at any time but are you really sure that that balance is reliable? If you use the accrual method of accounting, your bank statement and your cash balance per books would probably not match. Deposits from your clients may have not yet cleared or you may have forgotten about a cheque you issued but that has not been deposited yet (especially if you issue post-dated cheques as is common in the Philippines). Bank reconciliation allows you to determine your accurate should-be bank balance and to plan your cash flow efficiently and accurately.

3. Maintain accurate balances

Especially for SMEs, business owners may have to issue payments on-the-go and can forget to inform their accountant. Bank reconciliation would highlight any transaction on your bank statement that was not properly recorded in the books.

When and how often should bank reconciliations be done

That depends a lot on the volume of transactions and the nature of your business. For example,  retail stores, restaurants and large online merchants normally deal with a lot of daily transactions. It would be wise for them to reconcile daily.

As a SME you should at least be conducting bank reconciliations every month. Having to reconcile several months of bank statements can become a daunting task. It would also be more likely that you would not remember a particular transaction.

If you are managing your cash flow and working capital closely you would also need to reconcile your bank balances often to avoid surprises.

Best practices

The standard bank reconciliation process would follow three stages:

  1. Compare your bank statement against your cash balance per books
  2. Identify the differences and adjust your balances
  3. Produce a bank reconciliation statement which will provide a detailed report of the differences (outstanding deposits, withdrawals and unidentified transactions).

Most accounting solutions provide efficient tools to conduct bank reconciliation by connecting your bank feed online or by easily importing a bank statement. You can then easily match them and identify all the unreconciled items.

As a business owner if you manage your bookkeeping yourself, bank reconciliation is probably not the most exciting part of your job. But it is a necessity if you do not want to worry about your cash flow or potential fraud. If you fall in that category you may want to look into outsourcing your bookkeeping and consider the benefits that cloud accounting solutions and providers can offer.

Founder & CEO of CloudCfo Inc.
Mickael Cardoso

We are constantly seeking for innovative ways to use technology and online tools to streamline processes and create efficiency for our customers.

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