Many entrepreneurs lack financial understanding in their business when they first opened says Edmonton bookkeeping. And end up making errors on their finances as well as in their business.
This is because they are learning how to run their business. While running their business. But sometimes, these financial errors that they make. Can become critical, or cause entrepreneurs to fail.
The proof of this is through an industry Canada survey. That found that while half of small business owners in Canada failed within five years. The second most common reason why. Is because business owners were running out of money in their business.
However, this is actually a very avoidable problem. If entrepreneurs learn early on in their business. What they need to know about how to understand their business finances.
For example, many business owners may not know how to make the most informed financial decisions in their business. And end up spending more money than they have by accident.
They often do this says Edmonton bookkeeping because they are looking at their bank account balance in order to know how much money they have to use in their business. That would be a huge mistake.
The reason why this is a mistake. Is because while the bank account will show an entrepreneur exactly how much money they have at that moment in time.
What the bank balance will not show an entrepreneur. Is how much money to utilize in their business once pending transactions have cleared.
What a pending transaction is says Edmonton bookkeeping. Is a financial transaction that an entrepreneur has made. But it has not yet cleared their bank account yet.
One of the best examples of a uncleared or a pending transaction is a check. Many business owners write checks, and then mail them off. And so the time that it takes the check to get through the mail is counted towards the amount of time that the check is pending.
And then once that check makes it to its intended recipient. They have to open the mail, get the check, and of the check into their own accounting software. And then deposited into the bank. And even once that is happened. It can take two or three days to clear the bank once it is deposited.
Therefore, it is not unusual for a check to be pending for two or three weeks or even longer. Therefore, if an entrepreneur has written five thousand dollars worth of checks in a single week. It could be quite possible that all of them have not yet cleared their bank account.
And when an entrepreneur looks at their bank account balance. In order to understand how much money they have to utilize. They might think that they have five thousand dollars more to spend. Because they have assumed that the checks have been cashed. When this is not the case.
Other pending transactions can be electronic fund transfers, pending payroll, debit or credit transactions, deposits made into an ATM just to name a few.
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Many business owners do not know what information they need to learn first when they are running their business says Edmonton bookkeeping. And while the learning curve is steep, knowing what to learn early on is extremely important.
Many entrepreneurs make mistakes when they first start running their business. And while mistakes are common and expected. Knowing what to learn first. Can help business owners avoid making some critical errors.
While making some financial mistakes is something that business owners can recover from. Making too many of those financial mistakes. Can cause entrepreneurs to run out of money in their business. Just like 29% of all failed entrepreneurs in Canada.
The purpose of a bank reconciliation. Is to understand how much money an entrepreneur actually has to use in their business. Because if they look at their bank account balance. They will not have an accurate idea of how much money is in their business.
How to do a bank reconciliation is to first take their bank statement, as well as the statement of the last bank reconciliation. And ensure that the starting bank balance matches the ending of the previous bank reconciliation.
That will ensure that the last bank reconciliation had no errors. And that no errors have been made since then. That could cause the bank reconciliation to be wrong.
If these two numbers were not the same. Edmonton bookkeeping says the explanation for that. Would be an entrepreneur has accidentally made a transaction for future date. That has been marked as cleared already.
By fixing that mistake, an entrepreneur can bring their bank reconciliation and starting bank balance into alignment. So that they can proceed with the rest of the reconciliation accurately.
The next thing that they should do says Edmonton bookkeeping. Is look at what transactions have already cleared their bank account. All checks that have cleared, debit and credit transactions, electronic fund transfers. As well as transactions coming into their business from their debit and credit machine.
What they are left with, is a list of all of the uncleared transactions. That is the transactions that are scheduled to happen. But have not yet made it through the entrepreneurs bank account yet.
However, before an entrepreneur takes that information in order to see how much money they have in their business. The next thing that an entrepreneur should do is verify that these transactions that are pending are accurate.
For example, if an entrepreneur has made an entry by accident twice. When the first transaction clears, it will disappear from their bank reconciliation. And leave the second one pending indefinitely.
Therefore, business owners need to look at the transactions that have not cleared. And figure out if they are accurate or if they are an error. They can do this most quickly by looking at the date.
Transactions should only take a certain amount of time to clear. Such as debit and credit transactions, or credit card machine transactions. Should take one or two days, to a week at the most to clear.
If things are pending for longer than that. Business owners should look at their accounting software to see where the mistake has been made. In order to ensure that their bank reconciliation is accurate.
By looking at how much money they have in their business once they have completed the bank reconciliation. Can help entrepreneurs understand significantly how much money they have utilize in their business. So that they can avoid making mistakes financially.