The subject of today’s tip is every entrepreneur’s favorite monthly chore – Reconciliation! Now, this is not about kissing and making up with your loved one after a disagreement….. We are talking about reconciling your bank accounts in an accounting system, such as QuickBooks Online. Oh dear, now I am sure your eyes are starting to glaze over, but please stay with me! This process is critical for keeping accurate financial records for your business.
For example, the account reconciliation process for your business checking account goes something like this:
1. Money is deposited when a customer pays you (via check, credit card, Paypal) for a product or service (sales), then you pay your expenses (withdrawals) using the money from these sales
2. Every month, your bank mails you a statement (or you can download an online PDF), detailing the deposits and withdrawals for the prior month. The statement also includes the balance at the Beginning of the month (Beginning or Opening Balance), and the amount remaining on the Statement Closing date (Ending or Closing Balance).
Wait: We need to interrupt this blog post to beg and plead that you KEEP these monthly statements, preferably electronically so they are easily accessible. Your bookkeeper and accountant will be ever so grateful! Now back to the reconciliation process….
3. The monthly activity (sales and expense) transactions on your bank statement are entered into your accounting system (QuickBooks Online) by your bookkeeper and then matched (reconciled) to the bank statement (by date and amount), ensuring your accounting system accurately reflects your financial position at all times.
You may now be wondering, “Why is bank account reconciliation so important?” Let’s say you would like to purchase a new computer, join a coaching program, or update your website, you will need to know how much cash is actually available for this expenditure. While you can certainly just look up your bank balance online, it does not reflect checks that were written but not yet cashed, so you may think you have more available funds than you actually do, possibly causing an overdraft situation. Reconciliation is especially important at year-end. If all income and expenses are not accurately recorded in your accounting system, your tax filing will be inaccurate. You could be paying too much tax, too little, or even run the risk of setting off an audit red flag. Now that would cause a lot of unnecessary stress!
OK, now that you understand the importance of account reconciliation, here are three simple steps to get you started:
1. Awareness – What is your current situation?: How many bank accounts and credit card accounts (yes, credit cards and Line of Credit accounts must be reconciled too) do you use in your business? When was the last time each account was reconciled?
2. Find your Statements: We told you they were important! If you cannot locate them (one for each month), most banks include online statement access, or you can request copies at your local branch.
3. Ask for Help: This is the most important step! Reconciliation can be complex and overwhelming, but you don’t have to go it alone. The Numbers Divas are here to help, 610-316-8553.
The Numbers Divas