If cash is King, then bank reconciliations are Queen. It’s essential to do bank reconciliations (bank recs), whether by your accounting services provider or yourself as a small business operator. If you’re struggling with cash flow you need to be on top of when cash hits and leaves the bank account on a daily to weekly basis. Just because the bills are showing ‘paid’ in your accounting software, doesn’t necessarily mean the money has left your bank account.
Keeping in mind if you are a retailer, your insurance policy might have a specific time window to report any cash losses. If you’re doing bank recs once a month, and the insurance loss reporting period is seven days you will have a problem. Only a bank reconciliation will let you know if the deposits are really there.
One significant challenge of cashflow modelling is where the bank reconciliations are not in alignment with your general ledger (i.e. financial statements). While there will always be a small balance variance between your bank account and your accounting software, a large variance will indicate a cash flow problem.
Why should you do daily bank reconciliations? At first look, it seems to be a lot of work. If you are a retailer, you want to know daily, did the money come in the bank account? Have the various suppliers been paid?. This is vital information. If you haven’t set up your system to do daily bank recs, then I suggest we have a chat.
Secondly, if your insurance policy in regard to cash handling and receipts has a cash loss reporting time limit, your bank rec cycle will need to be inside that. For example, if you do detect an anomaly, the clock’s ticking, and you need to be on it quite quickly. The trail can grow very cold, very fast.
I remember one client had a cash collection service who collected the week’s takings on Friday, we completed the bank rec on Monday, and reported missing money the same day. After 3 days this was confirmed by the cash collection company and they paid the money back. One of their guards of 10 years decided to get a bonus.
I remember when I was 12 years old, learning how to do the books for my Father’s bricklaying business. The first thing I learned how to do was a bank reconciliation. When I was 14, the first accounting software I wrote (on my Commodore 64!) was for bank recs. Back then, knowing if there was actual money in the bank account determined what we would eat for the week. For some, it’s not that different these days. Knowing that the money has been received and has gone out is vital for cash flow management.
Finally, if you’re not doing at least a weekly bank reconciliation, I suggest you change your philosophy or have a chat with your accounting service provider. At Eagle Shared Services, we endeavour to do them daily because we find that it works better for the client and is better for producing accurate management information.
Once again, I hope you found this valuable. Remember, if you can do your bank records daily, do it. Avoid doing it monthly; it’s just too risky in our current environment where cash flow is a very fluid thing.
Remember if cash is King, then bank reconciliations are Queen and if you need help with transforming your business from hard work to an investment that works for you don’t hesitate to contact us.