If there is one thing you need to be able to do to work out exactly where you stand with your finances, it is reconcile your bank account.
There are lots of complicated definitions of reconciliation (and if you are an accountant, they all have their place), but for most of us it simply means matching the balance in the bank account with what we see in our accounting software. This means working out which payments and credits have passed through the bank account, which are still floating around in the system somewhere and making sure everything has been entered into the accounting software correctly.
Fail to do it in a timely or correct fashion and you could find yourself misjudging your cash position.
Why is bank reconciliation important?
If you look at your bank account and it says you are £1,000 in credit, this might not be what you have available to spend. If you’ve issued a payment for £700 to one of your regular suppliers, but they haven’t processed it yet then, in reality, you only have £300 available.
Fortunately, nowadays, with direct debiting and bank transfers, the delay between payments being made and them being processed through the bank account is much smaller than it was when cheques where the norm, but there is still a timing difference that can catch you out. Transactions on company cards can also be easily missed.
There are other reasons why reconciling your bank account is important too.
- It can help you spot errors or omissions in your own book-keeping.
- If a payment has gone out of or come into the bank account and you haven’t entered it into your accounting software, the figures won’t balance, nor will they if you have entered the wrong amount. You can quickly spot and correct these errors. (Warning: if you don’t reconcile regularly, multiple errors will compound making it much harder to spot where the individual mistakes are).
- It can help you spot fraud.
- If payments are going through the bank account that you don’t recognise because they’re not in your accounting system, it should encourage you to investigate them further. Hopefully, there will be an innocent explanation.
- It keeps you on top of your income and expenditure.
- All those small direct debits can quickly add up and make your bank account resemble a leaky bucket. Reconciling regularly will help you see these payments going out and let you decide if they are still needed.
How it’s done
So, we’ve established that reconciling your bank account is important, but we know what you’re thinking: it sounds fiddly.
Unfortunately, it is and the longer you leave it, the fiddlier it gets.
In practical terms, it means checking each item that goes through the bank account and making sure it is entered into your accounting software. You then need to identify any items that have been entered into your accounting software that haven’t hit the bank account yet and calculate the adjusted balance. If you’ve got it right, the two figures will balance!
Making life easier
When we built CaFE, we wanted to help our users reconcile every day, but we knew that we had to make it as easy and intuitive as possible.
CaFE shows you the previous day’s transactions and closing balances, alongside the number of items that need reconciling, from midnight meaning the reconciliation is available to you in the palm of your hand before you start your daily tasks. This is designed to help you get into the habit of reconciling every morning, keeping the number of transactions small.
The previous day’s result shows you the effect of actual bank transactions on the opening balance and calculates a closing bank balance that is compared with your accounting software. If all the transactions are as planned, you can quickly mark them as reconciled in your software.
If you go a few days without reconciling, the number of unreconciled transactions will be shown in a link button that goes straight to your cloud accounting software (remember, the higher you let that number get, the more complicated your reconciliation will become). If the number of unreconciled transactions exceeds more than 20, or a total currency value that you specify, you will receive a separate notification.
Reconciliation will make your accountant love you again – but that’s not all
If you don’t ever reconcile your accounts, your accountants will have to do it for you to verify your year-end accounts and that means ticking back through every transaction. Don’t worry, they will get their revenge in the bill!
Much more important, though, is you need to be able to reconcile regularly to know when cash shortfalls could be looming. Leaving it can lead to you making the wrong decisions about your cash flow and that can be fatal.
Make reconciling a daily task and you’ll soon find it’s nowhere near as intimidating as you might have first thought, particularly if you use CaFE. We’ll even go as far as to say that you’ll get a faint glow of satisfaction every time you get that tick confirming everything is reconciled for the day!
Still not convinced? Then ask your accountant or bookkeeper to manage CaFE for you. They will quickly be able to see how many items are unreconciled and either reconcile them straightaway or raise queries with you before they get out of hand.
If you want to know more about reconciling the bank account, there is an excellent and more detailed blog on the Tide website. We recommend giving it a read. https://www.tide.co/blog/business-tips/reconciliation/#what-is-reconciliation.