What is a Bank Reconciliation and Why is it Important?
Bank reconciliations are a critical accounting procedure that compares what’s in your accounting system versus what’s in your bank account. This comparison ensures that the balances of your accounts are accurate, the first step in accurate Cash Flow Management. Reconciliations also help to detect and prevent fraud, such as bank/clerical errors and employee theft. Even if you don’t have an accountant on staff, this procedure must be done monthly at a minimum. For companies with smaller cash resources, it helps to perform reconciliations daily.
Cash Flow Management
In the business world, cash is king. This saying cannot be truer for small businesses. In order to properly manage cash flow, you need to know how much cash you have on hand (account balances), how much cash you have coming in (accounts receivable), and how much cash needs to go out (accounts payable). Reconciliations ensure that cash you have on hand is an accurate number. Click here to see how to create a Cash Flow Management.
Ensuring your Accounting System is Accurate
It’s easy to forget to enter a payment when you’re focusing on running your business. So reconciling your bank accounts is an easy way to ensure that you’re capturing all the tax deductions you are entitled to.
Detecting Bank and Clerical Errors
You should always double-check that you’re being charged the correct amount by your vendors. Usually you can trust your vendors to charge you appropriately, but everyone makes mistakes including big banks and large vendors. The simplest way to make sure you are being charged correctly is by reconciling your bank statements. While you are reconciling your bank accounts, you will be double-checking that checks you wrote are being cashed for the amount you wrote the checks for. This also includes echecks and online payments. Reconciling also ensures that card purchases are correct, that you weren’t accidentally charged twice or for the wrong amount.
Detecting Employee Theft and Fraud
Running a small business involves a lot of trust in your employees. They are the backbone of your business. However, you can’t watch every move your employees make. You can match your company’s disbursed checks with the cleared checks on the bank statement by performing bank reconciliations, though. This careful review helps to reveal fraudulent activities. These could include payments to unauthorized vendors, payments for illegitimate purposes, and even unauthorized payments to employees or amended check amounts.