A bank reconciliation is when you balance the numbers on your bank statement with your internal accounting number. And although it might not be the most exciting task for your finance teams, it's essential.
Without accurate financial records, you'll never truly understand how much money is in your business, which means you can't plan accurately for the future.
We’ll go over what bank reconciliation is for a small business, why you need to do one, and how it can be performed. Read on to find out more.
Table of content
- What is a bank reconciliation?
- Why might your bank statement differ from the cash book?
- Why is a bank reconciliation important for business?
- How to perform bank reconciliation for your company
What is a bank reconciliation?
Here’s a simple definition: bank reconciliation is a process that ensures the number on your bank statement lines up with the one in your cash book. In a perfect world, these two numbers would magically match without having to do a bank reconciliation, but sadly, that’s not always the case.
So, let’s make sure these two reports agree on what’s in the bank and your cash book, shall we?
Why might your bank statement differ from the cash book?
There are a few reasons why the numbers on your bank statement differ from the ones in your cash book.
Omissions include things like bank fees and bounced cheques. Unfortunately, you might not realise they've reached your account until you look at your bank statement — so these deductions won’t be recorded in your cash book.
Timing differences can happen when the cash you receive and record in your cash book isn’t with the bank yet. Things like deposits in transit and outstanding cheques won't show in your bank statements until the next month or sometimes later.
If you've paid a supplier, for example, but they're yet to cash the cheque, and it sits on someone's desk because they're on annual leave, this might not show on your bank statements for months. And your records need to reflect this delay.
Be aware that electronic transfers don't always show up straight away in your bank statements, either. That's why the bank reconciliation process is essential for small businesses — it helps you understand the actual cash balance of your business.
Where there's manual data entry, there are going to be some mistakes. For example, simply mistyping numbers can have a massive impact on your financial data. But there's good news — using automated payroll software can significantly reduce these errors.
Leave the software in charge of automatically calculating things like taxes, salaries, bonuses, and benefits, and leave manual data entry where it belongs — way, way in the past.
Why is a bank reconciliation important for business?
Your accounts should always be in good standing — without an accurate picture of your business’s financial health, you can’t make decisions that affect the company’s future.
Your accounts need to be accurate
Performing a bank reconciliation helps you keep your financial records accurate and up-to-date. And, without reliable records, you might end up paying the incorrect tax — which means fines and penalties could be on the horizon, and no one wants that.
By comparing the transactions on the bank statement to the company's records, you can identify and correct any discrepancies or errors, ensuring that the records are reliable.
Bank reconciliation helps prevent fraud
Bank reconciliation helps to prevent and detect fraud. By regularly checking the transactions on the bank statement against the company's records — you can identify and investigate suspicious-looking transactions before they slip under the radar.
Make informed decisions about spending
Cash flow is the lifeblood of business. That much we all know already. But without a clear understanding of your financials, you don’t know how healthy your cash flow actually is. This means you’re blindly steering your business, which then means you’re not well-informed enough to make strategic decisions about spending and investments.
How are you going to compete and grow your business without this knowledge?
How to perform bank reconciliation for your company
Here, we’ve condensed the process into five digestible steps. Ideally, you should perform these on a monthly basis.
1. Collect your records
You’ll need your unadjusted closing balances from your bank statement and your cash book for the same period (usually one month). Therefore, you’ll want to have both your bank statement and your cash book in front of you.
2. Tick all the transactions off
Have both side-by-side and go through each, checking off all transactions on the bank statements with your financial records. Tick off all the transactions that match up, so you don’t include them in the bank reconciliation.
3. Identify and investigate discrepancies
It’s time to figure out what’s causing discrepancies between the closing balances. Discrepancies might be due to outstanding cheques that need to deduct or deposits in transit showing in your ledger but have yet to reach the bank. Discrepancies can also come from missing receipts or bank fees not recorded in your cash book.
Errors in your cash book can cause discrepancies, too. (But errors are usually on the business’s end rather than the bank's!)
Reduce data errors with PayFit. Find out how.
4. Calculate the adjusted balances for the bank statement balance and the cash book
Now add all outstanding payments and remove deductions from your bank statement, and you’ll be left with a figure that gives you the true cash balance of your business.
After that, you’ll want to do the same on the other side in your cash book. Keep an eye out for missing receipts, interest received, bounced cheques, and bank fees that show up on your bank statement but haven’t yet been recorded in your cash book.
Once you’ve added them to your bank reconciliation, you might be left with an unreconciled amount. Now what?
5. Locating the unreconciled amount and final checks
It’s time to check your cash book for errors. Identifying the cause of the errors can help you reduce any sloppy mistakes in the future — it could just be a simple mistyped number.
Now you can check your new adjusted totals match each other. Congrats, you’ve completed your bank reconciliation!
Are you looking to minimise errors as a result of manual data entry? PayFit can ensure your data is kept error-free by automatically working out essential tax calculations so you don’t have to. Book a demo.