Have you ever left a restaurant or the local supermarket without first checking the bill before paying it? No, right? You tend to carefully review all the items listed on the bill and their prices – especially for any applicable taxes or discounts- and perform a mental calculation for any discrepancies. But do you, as a small business owner, give the same attention to your business ledgers and books of accounts? How do you know you haven’t missed anything there? That’s where the ‘bank reconciliation’ process comes in. Bank reconciliation is where you cross-check all your ledgers and other financial records against your business’s bank statements to ensure every transaction is correctly accounted for.

It’s quite a slow, tedious job, to be honest; one that requires undivided attention and a keen eye. But why put in so much effort just for cross-checking numbers when you regularly update your books of accounts? Surely, every transaction must be accounted for, isn’t it?

The Importance of Bank Reconciliation

To err is human, but when it comes to your business numbers, to err is to create chaos on many levels. The slightest mistake in recording business figures can snowball into significant business losses, negative cash flows, and even a CRA audit. Suppose you received a dividend on shares your company had invested in. That may be visible in your bank account, and you may have forgotten to record it in your books. If left unreported, you may miss out on reporting it in your tax returns, leading to unreported income, potential CRA scrutiny, and penalties. Hence, it’s better to put in a little effort and reconcile your bank statements rather than lose money and peace of mind, only to invite stress later.

How Can Bank Reconciliation Protect Your Small Business?

Bank reconciliation ensures every single digit in your books of accounts matches the bank statement. This is why doing this exercise every month is advisable. Imagine having to painstakingly analyze a whole year’s worth of numbers in a couple of days or a week during tax season – that would be a nightmare! Apart from the sheer mental exhaustion you would have to experience, there are quite a few reasons to reconcile your financial records regularly:

1. Controlling Cash Flow: A smooth and uninterrupted cash flow is the lifeline of a growing business. For a small business, it is all the more important as your daily operations could be affected by any bumps in the cash flow, such as late payments or overdrafts. Reconciling your bank statements provides an accurate picture of the opening and closing cash and bank balances for a particular month. This helps you plan and allocate money more effectively for your business needs.
2. Checking Business Financial Health: The bank reconciliation process acts as a thermometer for your small business’s health. Good financial health enables a company to make optimum use of its resources, which in turn boosts business and growth. If employees are misusing business credit cards or there was an unapproved debit transaction that could affect your business’s financial health, you will come to know during monthly reconciliation.  
3. Filling in the Gaps: Checking your books of accounts against your bank statement can shed light on any transactions that might not have been recorded accidentally. While it may sound improbable, such oversight is indeed possible, especially in businesses with high transaction volumes. If any transactions have been missed, reconciliation provides an opportunity to rectify the error immediately. Sometimes, even the bank can make mistakes. If so, monthly reconciliation offers you with sufficient time to notify the bank, have the issue corrected, and document it for the record. If not identified and addressed in a timely manner, such errors can result in the CRA knocking on your door for an audit.
4. Checking Accounts Receivable: This is especially important for small businesses that use accrual accounting, where an expected client payment is recorded as revenue in the company’s accounting records. But what if the client further delays the payment? It is challenging to keep track of all such payments in real-time. A thorough check of your bank accounts can immediately make you realize that the payment did not come through in the stipulated time, and you can adjust your books of accounts accordingly.
5. Spotting Hidden Charges: Any hidden charges or increased costs levied by the bank can be spotted during the reconciliation process. If you haven’t already been notified of these changes, chances are your books of accounts won’t balance, leaving you wondering what is wrong. Reconciliation provides the opportunity to consider such changes and make the necessary adjustments.
6. Identifying Potential Fraud: Involuntary errors are one thing, but what about purposefully done frauds? Surreptitious withdrawals from your business account or irregularities in vendor payments are red flags and could very well be indications of foul play. By cross-checking your bank statements monthly, it’s easier to keep an eye on suspicious activity and take prompt action against perpetrators.

To put it in a nutshell, bank statement reconciliation is a process that essentially performs three functions in one – basic auditing, financial health monitoring, and fraud identification. With all the figures in front of you, it becomes much easier to plan and make informed decisions for the future of your business.

Reconciling statements every month makes the process regular enough to keep it manageable, but not too frequent to consume all your time. There is special software and applications that make this process even quicker.

Contact Ford Keast LLP in London to Help You with Bank Reconciliation and Other Accounting Requirements

An expert accountant and bookkeeper can help you create the most effective reconciliation schedule for your business. At Ford Keast LLP, our accountants and bookkeepers can help you record business transactions and maintain books of accounts. To learn more about how Ford Keast LLP can provide you with the best accounting and bookkeeping expertise, contact us online or call us at 519-679-9330.