There are several reasons an accountant will tell you to reconcile your bank statements regularly, but a lot of small businesses do not make this a priority task, and do not do a month end reconciliation once their bank statements arrive. Why? Well not everyone sees the importance of doing this, especially when cash flow is good and you don’t need to be keeping a close eye on going overdrawn.
The truth of the matter is that bank reconciliation should be prepared each month once you receive your bank statements by mail or through e-mail. The process of performing reconciliation verifies the actual amount of cash available in your bank account.
It would be nice to think you can trust everyone that works for you, but even officers and partners have been known to loot the bank account, and you may not necessarily find out about this until it is too late. Lot’s of companies have signature stamps these days so not all business owners get to sign and/or see each and every check. Also bear in mind that you may have issued some company debit cards to select employees, officers, or partners, so this expenditure needs to be reconciled each month and verified through receipts.
Cash Flow Forecasting
We all know the state of the economy right now, and even in a good economy a lot of businesses struggle with tight cash flow. If you planned correctly you should have created annual cash flow forecasts for your business, so you can determine your upfront investment, as well as seasonal peaks and troughs in your sales that may require you to inject more capital during leaner periods. If you do not conduct regular monthly bank account reconciliation, you will not be able to accurately compare your projected cash flow forecasts with your actual cash on hand.
Higher Interest Bearing Accounts
Most people have a personal checking and savings account, and they usually leave enough money in their checking account to cover monthly bills and expenses. Any money in excess of normal monthly expenses, inclusive of a buffer, usually gets transferred in to a savings account so you can earn a higher rate of interest on your money. Some families’ budget a year in advance and even split their paycheck so part of it goes in to their checking account, and the other part goes directly in to their savings account. This is smart planning, and depending on how much money you are able to put away in to savings, it can result in a few hundred extra dollars per year, or even a few thousand. This of course depends on interest rates as well.
Why not do the same with your business? Many banks offer higher interest bearing accounts for your business. If you regularly reconcile your business checking account and know roughly on average how much you need in your checking account at any given time to cover your monthly costs, the rest of the excess funds can be transferred to a higher interest bearing account which will ultimately put more money towards your bottom line.
If you are someone who is not reconciling your bank accounts on a monthly basis, seriously considering doing so right away to protect and safeguard your business, and maybe even put a few extra dollars in your pocket!