Small businesses are always strapped for cash and are looking for ways to manage it better. Cash is vital for operating as well as growing a business.
What if I told you that there is a simple way to track cash flows. You can do this by preparing a monthly bank reconciliation statement.
What Is Bank Reconciliation?
Bank reconciliation is the process of comparing the transactions in accounting ledgers and the entries in the bank statement. Here we verify every entry to ensure that the amounts match. If there are any discrepancies, they are highlighted and investigated further.
A BRS shows all deposits, withdrawals, and other charges in a business’ bank account in a particular period. It summarizes whether these activities have corresponding entries in the financial records.
A monthly BRS is used to prevent fraud, track cash flows, and make adjustments for any differences.
Having said this, here are five reasons why a small business should undertake bank reconciliation.
Reasons for Bank Reconciliation:
1. Identify Errors:
Missed entries, wrongly entered amounts, duplicate entries are errors that we can catch with bank reconciliation. Small mistakes can collectively lead to a difference of hundreds and thousands of dollars between the bank records and internal financial statements.
Businesses can end up with bad credit ratings or significant cash crunches and heavy overdrafts as a result.
2. Being Prepared:
Businesses commonly issue checks for payments. Through a monthly bank reconciliation, you can see if the payment was made or not. It is possible for a check to get lost and payment not made to a vendor. In such cases, a business can make the payment and avoid penalty or late fees.
Clients also make payments using checks, and you can monitor the deposits through a BRS. Also you know what balance is available.
3. Prevents Frauds:
Sometimes credit cards go missing, and a BRS catches any unauthorized charges on a card. This incident can be reported to the bank and the card canceled. Any payments using the card can be stopped. You can also catch the person responsible for these fraudulent charges.
4. Monitoring Cash Flows:
Cash is the lifeline of any business. Monthly reconciliation prevents bottlenecks in the smooth flow of cash within a business. An enterprise can also plan and forecast the cash position and make provisions for the out-of-the-ordinary requirements of funds. Also, you can track unnecessary expenses and control them.
5. Canceling Unnecessary Subscriptions:
Many times we sign up for free trials and subscriptions. Money automatically starts getting deducted once the trial period ends. It is common to forget about this and continue paying without even being aware of this. Reconciliation will help identify all such payments and cancel such subscriptions saving money.
Undertaking a monthly reconciliation offers great benefits to a business owner. It gives a correct picture of the cash flow position and also areas that need improvement.
If you need any bookkeeping or accounting-related services for your business, you can contact us at FinAccurate.
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