What Is A Bank Reconciliation?
Bank reconciliation is a comparison of a business’ internal cash flow records with those obtained from its bankers. It involves the matching of each transaction recorded by the company with those of its bankers. For security and prudent financial management purposes, it is highly recommended that a reconciliation of each bank account with the company’s records be undertaken at least once per month.
Why Are Accurate Reconciliations Vital for Your Business?
Some of the main reasons why it is important to conduct timely and accurate reconciliations include:
- It Ensures Financial Accuracy: Regular reconciliations help maintain correct financial records, reducing the risk of inaccuracies.
- Promotes Good Cash Flow Management: Understanding your financial position avoids surprises and helps to optimize cash flow.
- Facilitates Financial Planning: It provides the necessary data for budgeting and forecasting, leading to more informed business decisions.
- Security: The reconciliation exercise helps to identify errors and omissions in both the company’s and bank records that require correction as quickly as possible.
Manual versus Automated Bank Reconciliations
Manual reconciliation exercises involve tracing each transaction recorded in a company’s internal records to those shown on bank statements in order to identify:
- Transactions which were accurately recorded and processed by both the company and the bank.
- Deposit and payment transactions that were not presented to the bank at the reconciliation date.
- Transactions processed by the bank that were not recorded in the company’s books. These may include: bank interest and service charges, fraudulent transactions, etc.
- Transactions that either party incorrectly recorded.
The time required to complete a reconciliation exercise depends on factors such as:
- The volume of transaction activity recorded on each account. An account containing hundreds of transactions in any given month will involve several hours of painstaking work since each transaction must be traced. This can delay both month-end and year-end closing.
- The cleanliness of the available data. Often, the transaction details shown in bank statements and company records differ and this makes it difficult to make ready comparisons.
- Transaction batching sometimes involves grouping several transactions into one transaction in banking records. This makes comparison difficult.
- Manual reconciliation exercises are error-prone and may require making several passes over data to accomplish a reconciliation. This can result in wasted time and increased stress levels.
Automated bank reconciliations involve using existing data management tools to develop templates which may be used over and over again with great accuracy. These templates can be developed and customised to suit your needs, and once they are perfected, they can be reused indefinitely. This will save hours of work and undue stress.
To find out more about developing templates for your business, click on the link below to book a free consultation.