Learn the basic steps of small business bank reconciliation, and why it’s more important than ever right now.
The bank reconciliation process may sound both boring and intimidating, but in times of disruption, it’s more important than ever. In reality, reconciliation consists of two fairly simple steps: comparing your business’s accounting and bank records, and making any necessary adjustments to align the two.
In big companies, full-time bookkeepers usually do the bank reconciliations. For small businesses, however, the task often falls on you, the owner, who already has a packed to-do list. To make your life easier, we’ve put together the basic steps you can follow to reconcile your bank account. But first, let’s go over the benefits of bank reconciliation.
Why Bank Reconciliation Is Important
Reconciling your bank accounts on a regular basis has a lot of benefits that go beyond keeping your books in order, identifying fraud, and being on top of accounts payable. Properly reconciled bank accounts are also important for your cash flow management.
The longer you put off reconciling your bank accounts, the more likely are you to have the wrong picture of your cash balance. Not understanding your cash flow can result in bounced checks, overdraft fees, and even a cash flow projection that’s based on the wrong assumptions.
Keeping an eye on your cash flow should already be a priority, but it’s especially important in times of crisis. COVID-19 has changed the business landscape drastically. While you may have many other concerns right now, reconciling your bank accounts on a regular basis can bring you peace of mind, and provide clarity that’s crucial in times of disruption.
Reconciling your bank accounts can help you detect things like missing and double payments, as well as any calculation mistakes. It can also help you see what customers are consistently paying late, and address that issue. Ultimately, bank reconciliation lets you see when and how money enters your business (and your bank account), and plan accordingly for the future.
How to Reconcile Your Bank Account
Here is the step-by-step process of how to reconcile your bank account.
Step 1: Gather Your Bank Statement and Accounting Statement
This one is pretty straightforward. Get the statements for your bank account and your accounting for the time period that you want to reconcile. The norm is to reconcile each time you receive a new statement, but if you have a lot of transactions or you want to keep a closer eye on your cash flow, you can do it as often as you like.
You can print out both statements and reconcile with pen and paper, or use Excel. The latter will make the process easier and faster, but it’s really up to you.
Step 2: Compare the Statements
Start the process by comparing the ending balances of both statements. Doing that first will give you an idea of how many discrepancies there are between your books and your bank account.
If the balances are the same, congratulations! You don’t need to do reconciliation for that period. Chances are, however, the balances will be different, if only by a little. In that case, you have to methodically go through both the bank statement and the accounting statement and make sure all items appear in both records.
Depending on what type of accounting software you use, this step will look different for you. Some accounting platforms make bank reconciliation easier by connecting your bank and credit card accounts, which reduces manual data entry and can provide an archive of all financial transactions including receipts and pending checks. Without the help of financial software, bank reconciliation will probably be more of a manual task for you.
Step 3: Address Any Discrepancies
After you’ve gone through both statements, you will inevitably end up with some transactions that don’t have a match. Don’t be alarmed. Sometimes you will record a payment in your accounting software but the check for that transaction will take some time to clear. Other times, you may have recorded an expense twice by accident.
You may also identify bank errors, such as an incorrect account (category) recorded for an invoice or an omitted transaction. Or, you may discover fraudulent transactions. Catching and addressing these errors is the whole reason for reconciling your accounts.
After identifying all discrepancies, record the missing bank transactions in your accounting software and contact your bank to correct any errors.
Step 4: Compare the Statements Again
You may be able to skip this step. It simply involves double-checking that any adjustments you made to your books are correct. If the ending balance is the same on both statements, you are done!
Bank Reconciliation Doesn’t Have to Be Difficult
If you still find that bank reconciliation is more stressful than helpful, you can either invest in accounting software that makes reconciliation easier, hire a bookkeeper to help you out — or both.
FINSYNC offers an all-in-one platform that connects your bank and credit card accounts. Yes, they need to be reconciled, too, but FINSYNC also eliminates the need for manual entries. Click here to learn how to reconcile a bank account in FINSYNC. Additionally, you can take advantage of our network of vetted professionals and get matched with a bookkeeper that fits your situation.