(disclaimer: this is not legal advice consult with a licensed professional)n

Why is it Important to Reconcile Your Bank Statements?

Does a bank reconciliation really need to be prepared? This is the question that many business owners are stuck wondering. The importance of a bank reconciliation goes beyond simply making sure everything is recorded. In fact, regular reconciliations lead to startling benefits, such as business growth and fraud prevention.

The preparation of bank reconciliations is vital to the long-term success of your business, making it imperative that you block time each month or hire an in-house bookkeeper to maintain the books.

However, many small business owners don’t have the funds or time needed to properly perform bank reconciliations and understand the results, which is where SynkBooks comes in. Our team can take this burden off your plate, giving you freed up time in your busy schedule all while realizing the benefits bank reconciliations have to offer.

What is the Purpose of a Bank Reconciliation?

The purpose of a bank reconciliation is to compare your accounting records to what actually cleared the bank. Each transaction on the bank statement must be present in your accounting records to ensure completeness and accuracy within your financial reports.

To fully understand the purpose of a bank reconciliation, you must first understand how your business records transactions. All businesses have a general ledger system, which is a list of income, expense, asset, liability, and equity accounts. When your business purchases an item or receives funds from a customer, the amount will flow through to accounts in your general ledger.

These items are recorded when the transaction occurs and not when it actually clears the bank, creating potential differences. For example, let’s say you cut a check to a vendor and record it in your accounting system, but the check never clears. Without bank reconciliations, you would assume the amount cleared and have an understated cash balance.

Why are Bank Reconciliations Important?

You may be wondering “why should a bank reconciliation be prepared?” There are numerous advantages that all businesses, regardless of size, can take advantage of. Let’s dive into a few of the top benefits.

Detect Fraud

The risk of fraud and asset misappropriation is an issue that plagues business owners. Writing checks to fictitious vendors and stealing cash can go undetected without the proper controls in place. According to the National Whistleblower Center, when employees have the motivation, opportunity, and rationalization, they will commit fraud.

A lack of monitoring and detection controls in place surrounding the cash account gives employees the access needed to commit fraud and cover it up. Taking $50 or $100 a week begins to add up over time and puts your business’s financial health at risk.

Bank reconciliations are one of the easiest and most cost-effective controls business owners can put in place to minimize the risk of fraud. However, be sure that there are multiple levels of review for the bank reconciliation. One person should not have access to every area. Otherwise, consider outsourcing your bookkeeping and bank reconciliations.

Confirm Transactions

Bank reconciliations also help you confirm the transactions that took place. As precise as banks are, they make errors too. Finding an additional charge or a check that was cashed twice is done by comparing records in the reconciliation process. Without reconciliations, these mistakes could go undetected for months, costing your business money.

Transactions in your general ledger are also gone through with bank reconciliations. If you have checks or deposits in transit outstanding, you can follow up with vendors and take appropriate action. Stronger controls over your cash lead to long-term success.

Prepare Accurate Financial Statements

Good data in equals go data out. If mistakes and transactions are missed, you won’t have accurate financial statements. Third parties, such as banks and investors, rely on the financial statements you provide to make investing decisions. When these parties uncover inaccuracies in your financials, they may refrain from investing or drop you as a client.

Accurate financial statements also promote business growth. The more insight you have into your operations, the better. Uncovering which customers still owe you money or which months revenue is higher is critical to making more informed business decisions.

Submit Correct Tax Returns

Your financial statements directly flow into your tax return. Bank reconciliations ensure every transaction that cleared the bank is accounted for. Missing out on a large expense or even a group of smaller expenses, results in a higher taxable income.

Going back and amending returns is costly and can come with fines and penalties from the IRS and other state agencies. You want to submit correct tax returns the first time around to avoid the hassle.

Manage Cash Flow 

Cash flow management is one of the top causes of business failure. Bank reconciliations are a crucial control of maintaining a strong cash balance. You can derive insight into when cash clears, the average amount of time customers take to pay you, and your current balance to tailor your decisions around a favorable cash balance.

Advanced cash flow management strategies can be deployed with regular bank reconciliations, such as timing vendor payments, implementing automatic reminders for customer payments, and sticking to a budget. If your goal is to grow your business, bank reconciliations are a great starting point.

How Often Do Bank Reconciliations Need to be Completed?

Bank reconciliations are completed on a monthly basis when the statements are received from the bank. Small business bookkeeping best practices suggest that each bank account should be reconciled within the first few weeks after the month has closed.

For example, for the month of June, all reconciliations should be completed by July 15th. Keep in mind that credit card accounts should also be reconciled for each active card. This means you could have multiple reconciliations that need to be completed in any given month.

What are the Challenges of Preparing a Bank Reconciliation?

The top challenge business owners face when it comes to preparing bank reconciliations is time. Between making important business decisions and managing employees, business owners find minimal time to sit down and complete reconciliations. In these cases, you should consider outsourcing your bookkeeping, which includes reconciliations.

Another challenge business owners face is experience. It takes time to understand how to use accounting software and which methods of reconciling are best. Not to mention that when errors come up, you must figure out how to solve them properly instead of just plugging in a number.

Can You Automate the Bank Reconciliation Process?

Although you can’t automate completing the actual reconciliation, there are ways to automate other steps in the process using services like SynkBooks. The first item on the list of automated bookkeeping tools and best practices is to integrate your bank and credit card accounts with your software program.

You will need to sign in to each account through your accounting software to connect the programs. After that, all transactions that the bank records will flow directly into your accounting software. Of course, you will need to review these transactions for accurate classifications, but this takes a majority of the data entry burden off your plate.

Another way to utilize automation in your bank reconciliation process is to create transaction rules that automatically categorize certain expenses. For example, your system will automatically categorize payments to your accountant as legal and professional fees. This ensures consistency throughout your books and saves you time.

How to Prepare a Bank Reconciliation

Follow the these steps to complete a bank reconciliation:

  1. Gather your bank transaction records.
  2. Gather your business records.
  3. Pick your start date.
  4. Compare your business records to your bank transactions.
  5. Investigate any missing transactions or transactions that don’t match.
  6. Adjust your bank balance accordingly.
  7. Adjust your cash balance accordingly.
  8. Compare both end balances. If they are equal, your accounts are reconciled. If not, find the error.

It is easier to do this with the aid of simplified bookkeeping services that Synkbooks offers. You stand to save time and increase accuracy, which in turn saves more time and money.

SynkBooks Bookkeeping Software

Are There Experts That Can Do Bank Reconciliations for Me?

From implementing effective cash flow management policies that promote business growth to detecting fraud early on to minimize your financial loss, the importance of reconciliations is critical to understand as a business owner. Bank reconciliations must be completed on a regular basis to see these benefits. But do you have the time?

Many business owners struggle to set aside the necessary time to prepare these reconciliations, especially when there are multiple accounts to reconcile. In these cases, outsourcing your reconciliations might be the right move.

SynkBooks offers full-service bookkeeping, which includes monthly reconciliations and report creation to help you understand where your business stands to make the most informed decisions. Whether you are looking to scale your business or simply be prepared going into tax season, the team at SynkBooks is your trusted expert. Reach out to a team member today for more information. 


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