The short answer – YES! While it may be painful for some, reconciling your bank account each month is an absolute must for every business. These may seem like a tedious task that we’d be more than happy to put off to another time, reconciling your business bank account each month gives you not only a powerful tool to run your business, it also helps you catch problems and keep you from bouncing a check.
What is a bank reconciliation?
A bank reconciliation involves comparing what happened in your bank account with what you have recorded in your books and records. Once they are completed, the balance in your books should reconcile to what cleared on your bank statement. Bank reconciliations can often be done within your bookkeeping software, on paper, or you may have a bookkeeping service prepare this for you each month.
How do you prepare a bank reconciliation?
To complete a bank reconciliation, you’ll perform the following steps:
- First, you’ll compare what has cleared on your bank statement against what you have recorded in your books. This step requires you to check off those items in your books that have cleared.
Your bank statement may have interest income or service fees that you will need to record on your books. You will then check off as well since they cleared your account.
- Next, you’ll review those items that you didn’t check off. If you made a deposit on the last day of the month, it may not have cleared until the next month. These are known as deposits in transit. When you reconcile your bank statement in the following month, you should expect to see these items clear your account.
Checks that were written in the month, but have not yet cleared are considered outstanding.
In this step, you’ll want to review deposits in transit and outstanding checks for anything that is old and hasn’t cleared. If it’s a deposit in transit, it could be a duplicate entry or perhaps the deposit was not made. Old outstanding checks could indicate that a check you mailed was lost or perhaps it should be voided.
So how does this all fit together?
• The last step involves comparing your reconciled bank statement balance with the cash balance on your books. A simple bank reconciliation may look something like this:
A bank reconciliation will typically start with the bank statement balance. Deposits that were made in the month that haven’t cleared will be added to the bank statement balance, whereas checks that were issued but haven’t cleared will be subtracted. This will yield the Reconciled Bank Balance.
The next step is to start with the cash balance on your books and add any income and deduct any charges that have not been recorded.
Once both steps have been completed.
A successful bank reconciliation will show no difference between your reconciled bank balance and your reconciled book balance.
If they aren’t the same, you have some additional work to do. A few suggestions to resolve the differences include reviewing what you’ve checked off as clearing the bank statement, verify that there aren’t any other charges or credits that have been reflected on your bank statement that are not on your books, and double check the items that are showing up as deposits in transit or outstanding checks. Continue this process until you find the difference.
Top 4 Reasons to Reconcile Your Bank Account Every Month
Reconciling your bank accounts each month can serve as a valuable tool for you to monitor your business.
By comparing your bank statement with your records, you can catch errors made. Missing transactions, transposition errors, or adding an extra number by accident can cause the cash balance on your books to be too high or too low. A big mistake can be a problem, especially since you may be issuing checks when you may not have as much money in your account as you think. This can prevent the embarrassment of receiving a phone call from a vendor because your check was returned due to insufficient funds.
There is something about looking at all of the fees that you pay in one place that tends to points our minds in the direction of – do we really need to pay for that each month? You may question the need for all of the monthly subscriptions coming out of your account. Perhaps you weren’t even aware that you were being charged. Reconciling your bank account each month is critical – if you allow too many months to go by, you may not be able to request a refund. It may also be an opportunity to speak with your banking representative to see if there are options for lowering bank service charges or transaction fees.
Checks Not Cleared
Typically, checks that are issued will clear within a few weeks. When a check hasn’t cleared on two of your bank statements, there may be something wrong. Perhaps it was lost in the mail or the vendor just forgot to deposit it. Either way, this could spell trouble for your business, especially if you purchase goods on credit. This gives you the opportunity to check in with your vendor. You may find that they changed their mailing address or very behind in their own bookkeeping. Being proactive in this front can save you a lot of headache as you may be on credit-hold and not even know it.
Reconciling your bank account can help you to catch transactions that you didn’t authorize or have been altered. Your bank account may have been used to pay someone else’s bills online or perhaps a check amount was changed by an employee or vendor. Fraudulent transactions can add up over time and cost you a lot of money if they aren’t caught early.
If you have an in-house bookkeeper handle deposits, paying bills, and recording transactions, a best practice would be to have someone else reconcile your bank account if possible. In a small business, an owner may reconcile the accounts or you may choose to engage a bookkeeping service. While this may cost you a little money each month, it can potentially save you thousands of dollars if errors or fraudulent transactions are taking place.
What Should You Do?
Reconcile your bank account every month. If you don’t have the time or if you’d just like the comfort of another set of eyes looking at your records each month, consider hiring a bookkeeping firm to take on this function. For almost 20 years, the team at Valley Business Centre has delivered high-quality bookkeeping and payroll services. Serving clients in Whistler, Squamish, the Sea to the Sky corridor, BC, and beyond, our bookkeeping specialists have consistently delivered accurate and reliable bookkeeping and payroll services that can give you peace of mind.
Your financial statements look great – they show that you are making a healthy profit. But, you’re scratching your head, wondering why you are struggling to pay the bills. Cash flow is a critical element that every company needs to operate. When cash flow is tight, it can impact your ability to pay your employees and bills, meet your obligations, purchase inventory, and invest further in your company. It may be possible that your cash flow is tied up on your balance sheet under an account known as “Accounts Receivable.”
Accounts receivable represent sales that have been granted based on credit. Selling goods and services on credit is a fairly standard practice for a business. Without the ability to extend credit, a company can put itself at a competitive disadvantage. After all, if your competitors grant credit but you don’t – you could lose sales. On the flip side, if customers take a long time to pay, that can impact the operations of your company. When your customers become collection problems, you may not have enough cash on hand to be able to pay your employees or vendors. You may struggle to pay your monthly bills, such as rent and insurance. This may force you to borrow money or pay your bills late, which can impact your ability to receive credit from your vendors. And if the problem is severe enough, a small business may not be able to survive.
Maintaining a healthy balance between extending credit and collecting receivables can be the difference between thriving and struggling. Valley Business Centre suggests the following ways to improve collecting your accounts receivable:
Managing collections starts with deciding what your policies are. Here, you will consider such things as;
- What is your approval process? Many companies have an application process for their vendors. They may ask for credit references, copies of current financial statements or tax returns, and may even run a credit check. You may apply these policies across the board, or you may tailor them to specific situations. As an example, a new customer that is placing a large order may require a more extensive approval process, as opposed to a new customer placing a small order.
- Be responsive – When you do receive a credit application, establish a timeline to complete your process. If the application process takes too long, it can result in lost sales.
- External factors – Keep an eye out for issues that may impact collectability. Changes in the economy or a customer in an industry that is growing quickly may impact your readiness to extend credit.
- Limits – Who will set credit limits within your company? Can these be overridden?
Maintaining current information on your customers will help to ensure that you have the correct contact information when you are sending out invoices. It is a good practice to determine if the billing contact is the same person that placed the order.
Here, you will also include information about each customer’s credit terms. This will help to ensure that credit is being granted based on what has been approved. In addition, changes to a customer’s credit should be included here as well.
Bookkeeping software packages, such as QuickBooks and Xero, allow you to invoice your customers through the bookkeeping system. By using a software package to generate bills, you maintain control over you invoices. Your sales are automatically entered into your system, saving you time and giving you the ability to stay on top of those customers who may not have paid you yet.
Customers can only pay if they have an invoice. Make it a point to bill your customers quickly and correctly. Delays in billing or errors on invoices will hold up the payment process. Take all steps to ensure that your bills have the correct information. Verify quantities, unit prices, and, if you aren’t using a bookkeeping program, check the math on the totals. Errors can result in delays in payment or you may be paid the wrong amount.
Post Payments Timely
When payments are received by your customers, they should be posted against the bills that they are paying. Payments should be posted as soon as possible to keep your accounts receivable balance current and your accounts receivable aging report reflects the amount that is still due to you. Another good practice is to deposit payments should be deposited into your bank account on a regular basis to ensure that they aren’t lost and that the customer’s funds are available.
Use a Bookkeeping Service
Small business owners can have considerable demands upon their time. If you are unable to keep your books and records up-to-date, consider outsourcing this function to a reputable bookkeeping service. They can assist you with managing your accounts receivable and incoming payments.
Your Collection Process
Accounts receivable aging – Reviewing your accounts receivable aging will help you to make sure that you are being paid timely. An accounts receivable aging lists open invoices and how long they have been outstanding. This report should be reviewed in connection with your credit policies. If you extend credit with the understanding that invoices will be paid within a specified number of days, review the aging report to verify that customers are meeting this expectation.
Statements – send statements to customers on a monthly basis. Statements list all invoices that you are currently showing as open. Many times, if there is a problem with an invoice or a payment has been sent, a customer may contact you.
Stay in contact with your customers – Emails and phone calls are great reminders that an open balance exists. This also provides a company with the opportunity to discuss delays or challenges that a customer may have with paying their bill. Perhaps the customer can make payments over time. Even though this may not help your current cash flow, it will help you to get paid.
Collection agencies – When you have exhausted all other measures, sending the balance due to a collection agency may be a last resort. It is recommended that all your attempts be made to resolve this directly with the customer before this step is taken.
Cash flow is critical to the operations of a company. Taking steps to better manage your accounts receivable will improve your company’s performance, as well as help to ensure a profitable future. If you are a small business owner that is struggling with managing your cash flow, the specialists at Valley Business Centre can help you to find ways to better manage your accounts receivable process.