When it comes to your business finances, reconciling your accounts is an important aspect that you can never ignore. Essentially, bank reconciliation is the in-depth comparison of your business financial accounts with the monthly statements provided by your bank. Bank reconciliation offers a wide range of benefits for your business, and here are the 10 main reasons to make it mandatory:
1. Actively monitor cash flow
The best way to improve your bottom line is by actively monitoring your cash flow. Without knowing where your money is going, it becomes impossible to make better financial decisions or have a solid business plan. A team of certified accountants and finance experts like CFO Strategies LLC can help to monitor your cash flow and give you advice on how to navigate the modern business landscape.
2. Eliminate accounting errors
Errors happen in accounting, and you need to catch them before it is too late. Bank reconciliation is a great way to do this, as it allows you to compare two correlated financial statements. This will bring out the details of your accounts, allowing for a clearer picture of what your books of accounts look like in real-time. Attaining clarity of your cash flow and account status will also make it easier for you to write accurate financial statements critical when making business decisions.
3. Prevent fraud and in-house theft
If you are not concerned about your accounts, there will be room for fraud and in-house theft. These are serious concerns that you should never take lightly as they negatively impact your financial position by draining your finances. Such issues could arise from regular unauthorized payments, missing deposits, and unusual transactions from the company’s credit card number. It is therefore critical to prevent these problems as soon as possible. A smart practice is never to allow an employee/accountant who issues checks and deposits to reconcile your accounts.
4. Prevent administrative problems
Internal administrative problems such as the accounting processes used, record-keeping systems, and authorization of payments can be easily identified while reconciling your accounts. The realization that your business has several underlying problems such as; bounced checks, late deposits, or missing transactions in your accounting system means you need a bookkeeping clean-up process. This is the only way to avoid getting into deeper financial problems that could affect daily operations.
5. Avoid financial surprises
You do not need surprises in your business account, as this is the quickest way to fail. Being aware of how much money you have at any given moment and how well it suits your current and future plans is critical. It saves you from the frustrations of having accumulated company bills or lacking cash when you need it. Bank reconciliation acts as a tracker that shows you exactly where you have been, allowing you to retrace your steps and solve problems you might have.
6. Identify discrepancies
Discrepancies in accounting are a common occurrence, and bank reconciliation offers a quick way of identifying the source of a discrepancy. Common sources of discrepancies in accounting include:
- Making a mistake when entering a comma in a figure
- Transposition error by substituting two or more sequential digitals
- Making double entries
- Failing to account for a transaction
These errors can affect your books of accounts, and using a bank statement to check out the source of these discrepancies can save you a lot of time. This is because you do not have to go through each account item, making it easier to iron out these underlying accounting issues before they get out of hand.
7. Accurate tax reporting
You need accurate accounting records for your tax reporting. Bank reconciliation will help generate the correct tax returns. Bank reconciliations help you to avoid underpaying or overpaying your taxes. You can be certain that you reported the correct information if you have records to refer back to. Otherwise, you may end up resorting to guesswork and memory, which may result in inaccurate claims.
Keeping good records will also help you to know what tax payments you are supposed to make ahead of time. With bank reconciliations, you can’t miss deductible expenses when preparing your tax returns, even if you lose your receipts.
8. Monitor outstanding and bounced checks
You need to keep a tab on all checks that you receive or write out since they affect the company’s account depending on when they are cashed in. Returned checks are the biggest source of headache when looking at your accounts – banks always deduct the amount from the account balance when a check bounces.
You should also watch out for outstanding checks that are yet to be cleared by your bank as they do not reflect on your bank statement. Bank reconciliations help you to actively monitor your bounced and outstanding checks allowing you to adjust your internal books to maintain the right book balance.
9. Receivables tracking
Your accounts receivables need error-free monitoring as they affect your balance sheet and cash flow. Having unpaid invoices that are past their due date can mess with your financial capabilities and operations. Monthly bank reconciliation propels you to take charge of your receivables tracking as you get to see how fast and often customers pay their invoices. This allows you to spot problems with your current short-term credit program and come up with the right measures to improve your financial health.
10. Track bank account fees
Usually, most people ignore bank charges on their accounts, yet these deductions affect their account balances. Regular reconciling of your bank accounts will show all these charges including, credit card processing fees, overdraft fees, monthly fees, and returned check fees. This makes it easier to verify if these service charges are valid and inquire about any increments that you notice. Remember, banks also make mistakes, and you should be quick to raise concerns about any unusual fees or deductions on your account.
The financial well-being of your company is the backbone of its prosperity. Maintaining tight control of your business funds is a huge step to success, and bank reconciliations help you to keep your accounts in check.