Using financial reconciliation to keep your business on track
As a small business owner, you’re likely already aware of the importance of keeping your finances in order. Financial management goes deeper than paying your bills on time and collecting on invoices (although those are also important). It involves regularly checking up on your financial situation to make sure your accounts are in order, your records are up-to-date, and you’re spending within your budget.
Among those activities, financial reconciliation plays a vital role in keeping your finances–and your business–on track.
Here’s what you should know about financial reconciliation and how it can help your business.
What is financial reconciliation?
Financial reconciliation is a process of ensuring your financial records are consistent and accurate. Basically, when you conduct a financial reconciliation, you review financial statements and compare them with your bank statements, credit card statements, vendor statements, and other relevant financial records, such as invoices.
As you do this, you’ll look for any errors or discrepancies–for example if a payment appears on your bank statement but not your accounting records, or if the payments show as being for different amounts on different records. When you conduct a financial reconciliation, you want to make sure that the money in your bank account matches the money your financial documents show you should have.
Discrepancies need to be addressed or you’ll wind up with financial information that isn’t accurate, which affects your cash flow and your ability to make financial decisions. If the discrepancy involves an ongoing payment–to you or to a vendor–catching it early could save you a lot of money.
The goal of financial reconciliation is to ensure all financial transactions are recorded accurately and thoroughly in your accounting system. That way, you know exactly how much money you have and how much is moving into and out of your business, and you can make informed financial decisions.
Types of financial reconciliation
Every business has different reconciliation needs, depending on how big it is and how many and what types of transactions it has.
Bank reconciliation involves your business’s bank statement to your accounting records to ensure that all transactions have been recorded correctly. You’re looking here to make sure that the bottom line of your bank statement matches your bank account balance. If not, you’ll want to determine why. Is there an automatic withdrawal that hasn’t yet been posted to your account? If so, you need to be aware of it to prevent yourself from over-drawing on your account.
Credit card reconciliation involves reconciling your business’s credit card statements with your accounting records to ensure that all charges have been recorded accurately. This is similar to a bank reconciliation in that you need to know exactly how much you’ve spent on your credit card–including pending transactions–so you know how much you have available to you.
You can also conduct vendor statement reconciliation, where you examine your vendor statements against your accounting records to ensure all invoices have been paid and recorded accurately. This can prevent any errors in paying your vendors.
If you have two units of business or more–such as divisions, subsidiaries, or franchises, you’ll need to conduct intercompany reconciliation. This is where you compare financial records between two or more companies to ensure transactions are recorded accurately and consistently.
Why you need financial reconciliation
Financial reconciliation is a vital tool that helps you manage your business more effectively. It ensures your financial records are accurate, complete, and up-to-date. This prevents errors or discrepancies that could lead to financial losses, or legal or compliance issues.
It can also help identify any fraudulent activity or transactions you did not approve, protecting you against fraud and lessening the risk of financial losses. If you have numerous transactions that are difficult to keep track of, regular financial reconciliation prevents accidental overspending or missed payments that could ultimately affect your relationships with vendors.
As mentioned above, many businesses are required to comply with financial regulations and reporting requirements. Financial reconciliation helps ensure that your business is in compliance with these requirements. If you’re not compliant, you can take measures to address the issue quickly, before it gets out of control.
How to conduct financial reconciliation
If you’re looking to establish a solid, repeatable process, these are a few steps you can take:
Step 1: Identify what types of financial reconciliation you need to perform.
Step 2: Establish roles and responsibilities for each team member involved in the process. Make sure everyone knows and understands what they are responsible for and when.
Step 3: Create a schedule for conducting financial reconciliation on a regular basis. This may vary depending on the size of your business, and you may conduct different types of reconciliation on different schedules, depending on your unique business needs.
Step 4: Ensure all financial data is easily accessible to those who need it. Each time you conduct a financial reconciliation, make sure you have all relevant documentation and data needed. Cloud accounting software can help you manage your reconciliation.
Step 5: Conduct the reconciliation: Compare your financial statements to your accounting records to identify discrepancies or errors.
Step 6: Investigate and resolve discrepancies: If you find errors or inconsistencies, look into them and do what you can to resolve them. You may have to hunt down additional paperwork, contact vendors to discuss payments, or reach out to your bank or credit card issuer.
As a business owner, you’ll need to make vital decisions to move your business forward. Accurate financial records enable you to make those decisions based on your cash flow and current financial standing.