Bank reconciliation - do you need it? Why it’s important
You’ve likely heard of it, but if you’ve worked with accountants and haven’t had as much of a hands-on approach to finances, bank reconciliation is the process of matching the transactions from your bank records with those in your business records. In other words, the incoming payments from customer match with the invoices you’ve created, and the outgoing payments match with your expenses.
Yes, it sounds a bit tedious, especially if you have to go through each payment one-by-one. But below we show you just how important it is as well as provide some tips for making bank reconciliation fast and simple.
Why should you do bank reconciliation?
Bank reconciliation is incredibly important for a number of reasons. There are two primary ones that come to mind. The first is preventing mistakes such as receipts recorded incorrectly, payments that weren’t entered and other events that could impact on your monthly finances.
The second is uncovering fraud. If your company credit card details have been stolen online, for example, and your provider doesn’t catch it, keeping up with your reconciliation gives you a strong chance of finding these cases sooner.
Not only is it a primary defense against fraud and avoiding potentially costly mistakes, it also can help with a few other things:
Saving money - that’s right. When you spend the time to go through both your incoming and outgoing payments each month, it’s much easier to catch those things you meant to cancel (but forgot to), or even find fees you’re being charged that can be disputed or negotiated down.
Preventing unexpected payments - you’ve had it happen to you. You suddenly notice an electronic payment that didn’t go through or maybe your supplier held on to your cheque a bit longer than expected. When reconciling your accounts, you catch these surprises in time.
Monitoring your cash flow - a given. As a small business, there usually isn’t a lot of extra capital to go around, so it’s crucial to stay on top of how what you have is being used and adjust as necessary. Growing a business with strong financial records can mean better interest from potential investors in the future.
These are just a few of the main reasons to be sure to take the time to conduct bank reconciliation for your business accounts, not to mention a better overview of the current financial health of your business.
How does bank reconciliation work?
Basically, it means matching the payments from your bank account with your records of the payments in your business accounting. Explained simply, the incoming payments might match up to invoices, and the outgoing to specific expenses you’ve recorded.
It probably sounds like a tedious task and it certainly can be if it comes down to matching each payment one-by-one. But thankfully, there are many solutions today that make this process a little less painful.
How often should you do bank reconciliation?
Most financial professionals will suggest taking time to sit down and get your bank reconciliation done on a regular basis. But how often should you be scheduling that time in your calendar?
A bit of quick research will provide you with the answer: once a month is a good timeframe to go by. This is often enough that you ensure your accounts are up-to-date and have time to investigate anything that isn’t quite matching up. But it’s not too often that you’re spending unnecessary time each week, for example.
It also helps that most banks issue statements once a month, so once you have your bank statement it becomes faster and easier to go through your payments.
Bank reconciliation and accounting software
If you’re looking for an easier solution than sitting down each month to manually match each payment in your bank statement to the corresponding invoices and expenses, it exists. With the right accounting & invoicing software, it can be done automatically.
What that means is all that is required from you is to upload a .csv file of your bank statement to your software and automatic bank reconciliation takes care of the rest so you can get this important task done quickly and efficiently.