As a business owner, it is easy to get caught up in building a minimum viable product or pitching your product to clients. Weeks fly by in what feels like days, and expenses begin to mount. All the while, simple things, such as reconciliation of cash inflows and outflows, become a cumbersome task. More importantly, it usually takes a back seat to other more valuable work because it is an administrative task.
However, business owners need to reconcile their financial accounts and bank statements regularly for many reasons. For one, it ensures that someone is tracking the cash flow of the business and making sure that the lights can stay on for another six months. Secondly, reconciling the business expenses will ensure that no fraudulent activities are happening. Building a habit of reconciling your finances will bring you closer to understanding how money moves through your business. Even more importantly, regular reconciliation works as a preventative measure for fraud.
What is Reconciliation in Business?
In business, to reconcile means to compare two documents and make sure they are in agreement. The most common use of reconciliation is in accounting. As organizations grow, financial record keeping becomes more complex. In addition to internal views of the finances, businesses may also have to present an alternative view for the purpose of reporting to external governing bodies. This complexity can make it difficult to understand the true financial position of your company. Making sure you reconcile your financial statements is one way to build confidence in your financial reporting.
Why you should Reconcile your Accounts
There are three main reasons why you should reconcile your accounts. For one, going through to reconcile your statements can help uncover fraud. Two, reconciliation forces a review of your financial expenses, which offers an opportunity to rationalize whether these expenses make sense. Finally, reconciling your financial statements can help you gain an understanding of your business’ cash flow. This is key, especially early on in a business where profitability is unclear.
Check for Fraudulent Transactions
Reconciling your business’ financial statements can uncover fraudulent activities. For example, if you are conducing a bank reconciliation and you notice checks being made to an unauthorized individual, you can start an investigation to see when, where, and why such payments are being made.
Reconcile and Manage Expenses
In addition to uncovering fraud, reconciling your financial statements will force you to review your business expenses. This will encourage you to rationalize when and where money is being spent. Many financial accounts now have tools that categorize spending. If you notice you are trending higher in certain areas, think about introducing policies that can help curb spending.
Cashflow and cash management are among the most important financial factors that every business needs to watch over. Having the proper cashflow can be the difference between staying afloat and bankruptcy. By reconciling your transactions, you can gain a deep understanding of how cash moves in and out of the business. From here, you can work with suppliers and or vendors to negotiate payment terms that can help support your cashflow.
How to Reconcile your Financial Accounts
While there is no single standard for reconciling your financial statements, there are different methods and approaches that you can adopt to assist with reconciliation. For example, the Generally Accepted Accounting Principles (also known as GAAP) requires double-entry accounting. This ensures that every transaction is posted in two places – once as a debit and once as a credit.
Another good practice is to set a regular cadence for reconciling your financial statements. Anything from monthly and quarterly will allow you to catch errors early. Leveraging online tools, such as Quickbooks, can help businesses stay organized and offer a range of reports. For more advanced finance and accounting software, there are tools that can automate the reconciliation process.
- In business, to reconcile something means to compare two statements to ensure they are in agreement.
- Reconciliation is most common in the accounting and finance departments.
- Reconciling your financial statements can help uncover fraud, rationalize expenses, and manage cashflow.
Professional Leadership Institute (PLI) is an educational website providing professionals from all types of businesses with practical education in entrepreneurial leadership. To keep evolving your leadership toolkit, additional PLI resources below will be useful: