Time to Reconcile: Importance of Bank Reconciliation and How a Bookkeeper Can Help

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Are you reconciling your bank accounts once per year? This may get you ready for tax time, but annual bank reconciliation is just the beginning. In order to grow your business at a responsible rate, you need to get a clear picture of your cash flow, understand the types of fees you’re paying, and catch fraud before it goes too far to fix. 

When you’re doing catch-up bookkeeping instead of regularly reconciling your books, you may think you’re in better shape than you are. Imagine hiring a new full-time staff member only to learn you can’t afford them? Learn more about the importance of regular bank reconciliation and when to call in a bookkeeper. 

What is bank reconciliation?

Reconciling your bank records means comparing what the bank has on record with your own internal reports. If you have a bank feed with an accounting service, you still need to reconcile your bank feed with your official bank statement. 

A lot of transactions are included in a reconciliation. According to The Institute of Certified Bookkeepers in Australia, you should periodically reconcile your internal records against the records of:

  • Banks 
  • Credit Cards
  • Barter Cards
  • Bank Loans
  • Petty Cash
  • Cash Drawer
  • PayPal

Why do you need to reconcile your bank accounts?

Your accounting records are only as useful as they are accurate. Sounds obvious, right? You’d be surprised how much missed bank fees and other small discrepancies add up and how many business owners may wave them off as unimportant. In reality, bank reconciliation can save you thousands of dollars per year. Combined with double-entry bookkeeping, which creates two records of every transaction, regular reconciliation keeps your books tidy. 

Here are some of the reasons reconciling your bank statements is so important. 

A bookkeeper looks over a bank reconciliation statement.

Catching Discrepancies

Your internal ledger says you spent $10,000 last month, but your bank statement says you paid fees totalling $500. This difference may seem small in the grand scheme of things, but if you make the same mistake each month — you’ll be off by $6,000 by the end of the year! Discrepancies can result from honest human error or fraud. If someone is skimming money from one of your accounts, you’ll notice it faster with a monthly reconciliation process. 

Tracking Cash Flow

Reconciling accounts each month gives an accurate picture of the amount of cash flowing in and out of your accounts. You’ll see if you’re actually in the black — or just thought you were. You can also reconcile your credit card receivables as a part of this process to make sure that everything has cleared that was supposed to. 

Managing Accounts Receivable 

One major source of reconciliation discrepancies is a cheque that did not clear because the account had insufficient funds. Checking your accounts receivable as a matter of routine allows you to catch these problems so you can either rebill the vendor or customer or write off the discrepancy as a bad debt. 

Making Sure Payable Transactions Have Posted

Comparing your statement balance to your internal records often also lets you confirm that important transactions have posted to your account. It would be a shame to forget that you still have an outstanding cheque out in the world — you could easily overspend on an account when it finally posts. 

Finding Systemic Issues

If you notice a pattern of individual errors or discrepancies, you may also catch a structural issue within your accounting system. Perhaps you need to change payment services or use a different bookkeeper if the same issues arise time and again. 

How often should I reconcile my bank statements?

The Australian government only recommends that you reconcile accounts “regularly,” which is a bit vague. Ideally, you should reconcile your accounts each time you receive a bank statement. If your accounts bill on different schedules, an end-of-month reconciliation is a good habit to get into. 

How can a bookkeeping service help with bank reconciliation?

An outsourced bookkeeping service can provide reporting and insights that your current staff aren’t able to keep up with. Partners like Visory provide an outside set of eyes to give your company an objective view of your financial affairs while saving you time and internal resources. Your team gets to use the insights and reporting to make smart decisions without having to do any of the work to create them. We call an outsourced bookkeeping service a win-win. 

Good Cash Control – A Non-Negotiable for Business

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COVID-19 has presented a significant challenge to our health system and our economy and, in response, the Federal Governments of both Australia and New Zealand have implemented unprecedented support measures to assist businesses.

However, with these measures starting to be wound back over the second half of 2020, businesses will be left to manage a subdued and uncertain business environment. Many, otherwise viable, businesses could face financial distress, and some are likely to fail. In this environment, good cash control and effective cash flow management is increasingly important to a business’ sustainability.

In uncertain times, it’s common for business owners to focus on things other than cash flow such as sales, expenditure and profitability. They only pay attention to cash flow when something goes wrong.

The fact is, all businesses leak cash. Some from poor decision making or weak processes and some from fraud. During periods of uncertainty, the pressures on business processes and the incidence of fraud increase cash leakage, and this is particularly the case for small businesses.

To prepare for what is likely to be a prolonged recovery period from COVID-19, it is critical for businesses to understand their cash flow management and the effectiveness of their cash control. Here are some of the key areas businesses should be across.

Good Cash Controls

Good internal controls are important to minimise cash leakage and reduce the risk of fraud.

Cash management is the process of collecting and managing cash flows. It is a key component of a company’s financial stability. Cash is the primary asset companies use to pay their obligations on a regular basis. In business, companies have a multitude of cash inflows and outflows that must be carefully managed to meet payment obligations as they fall due, plan for future payments and maintain adequate business stability.

Given the importance of cash flow management in times like these, businesses should look to develop a plan for cash management as part of their business risk and continuity plans. Often businesses look to cut staff, delay paying suppliers or reduce dividends to generate cash, however these measures can have negative consequences for stakeholders and are not always sustainable. To maximise cash, business should understand all the triggers that impact cash flows in addition to the traditional working capital measures.

Cash Flow Forecasting

A cash flow forecast comprehensively projects a business’ cash flow and its future cash position. It includes:

  • Projected cash inflows from accounts receivable.
  • Cash outflows for accounts payable.
  • Cash outflows for investing.
  • Cash outflows for financing.

A cash flow forecast should report how much cash a company has readily available. Cash flow forecasting is often done on a monthly or quarterly basis, however during times such as these, businesses are turning to forecasting cash on a weekly or even daily basis.

Ratio Analysis

In addition to forecasting cash flow, good internal controls include regular monitoring and analysis of liquidity and solvency ratios within cash management. External stakeholders, including key customers and financiers are particularly interested in such ratios.

The two main liquidity ratios analysed in conjunction with cash management include the quick ratio and the current ratio. Solvency ratios look at a company’s ability to manage all its payables, both short-term and long-term. Some of the most popular solvency ratios include:

  • Debt to equity.
  • Debt to assets.
  • Cash flow to debt.
  • Interest coverage ratio.

Working Capital Management

A primary reason for small business failure is a lack of funding or working capital. In most instances a business owner is intimately aware of how much money is needed to keep operations running on a day-to-day basis, including:

  • Funding payroll.
  • Paying fixed and varied overhead expenses, such as rent and utilities.
  • Ensuring vendors are paid on time.

However, owners of failing companies are less in tune with how much revenue is generated by sales of products or services. This disconnect leads to funding shortfalls that can quickly put a business out of operation.

Sure-up your own financing

Business owners often look externally to banks, finance companies and other lenders to increase their access to additional cash. However, they may often overlook internal sources to increase cash flow – by freeing up working capital on the balance sheet of their business.

Variable and discretionary Costs

It is important to minimise discretionary spending and possibly try to convert fixed costs to variable costs.

Improve your cash to cash conversion cycle

There are several things you can do to improve both receivables and payables efficiency, ultimately leading to higher working capital and better operating cash flow.

You can reduce the days payable or offer discounts to your customers for quick payments. They may also choose to use technologies that facilitate faster and easier payments such as automated billing and electronic payments.

Advanced technology for payables management can also be helpful. Companies may choose to make automated bill payments or use direct payroll deposits to help improve payables cost efficiency.

Revisit your capital investment plans

Consider deferring capital investment or consider leasing or equipment hire options rather than payment in cash.

However, when considering this, businesses need to understand the risks associated with not pursuing investments where those investments might be critical to sustaining or growing future cash flow.

Inventory Management

Inventory can soak up cash. It is important for businesses to monitor order points and minimise order sizes whilst they focus on increasing inventory turnover. Well run businesses will understand and manage inventory turnover on a unit by unit basis.

If you would like assistance in understanding the effectiveness your cash controls and what actions you could take to improve cash flow and minimise leakage, contact the Visory Team. We have experienced staff throughout Australia and New Zealand who can help and guide you.