The Importance of a Bank Reconciliation

A bank reconciliation compares your record of transactions and balances to your monthly bank statement.  I've encountered many small business owners who do not perform a monthly bank reconciliation and instead operate their business based on the funds available in their bank account.  This is a mistake as the bank balance rarely represents the actual funds available due to timing.  For example, you might write a check to a vendor which reduces your cash available, but your bank will show a higher balance until your vendor deposits the check in their bank account.  

The timely preparation of a bank reconciliation can significantly reduce the likelihood of errors through the following:

#1 Fraud Detection

The reconciliation process will uncover fraudulent transactions.  By reviewing all of the transactions in your bank statement, you will uncover checks that may have been written without your authorization, unauthorized transfers or withdrawals out of your bank account, or fraudulent debit card transactions.  

#2 Problem Prevention

An accurate balance in your accounting software will help your business avoid costly mistakes in the future.  Your business will know exactly how much money is available to avoid bouncing checks and incurring bank fees for insufficient funds.  In addition, a proper reconciliation will identify customer payments that have failed or bounced which will require your attention.

The reconciliation process should be performed on a monthly basis at a minimum.  I recommend reconciling on a weekly basis if your business is running low on cash in order to avoid costly overdraft fees for issuing checks with insufficient funds.  Most accounting software includes a reconciliation function to assist business owners.  Alternatively, business owners could keep a listing of transactions in a check register or excel.  

Proper reconciliations will ensure that you are getting paid and paying vendors promptly which will make cash flow management easier.  Blundell Accounting Solutions provides reconciliation services to clients at a fixed monthly fee.  Please contact me if you are interested in using these services to free up valuable time for more important tasks in your business.