When entrepreneurs first open their business for the first time says Edmonton bookkeeping. They may not have all of the knowledge about finances. That they need to make the most informed financial decisions.
And because of that gap in knowledge, many entrepreneurs make poor financial decisions. When that happens, they end up making mistakes that are difficult or impossible to recover from sometimes. Which is why there is such a high failure rate of businesses in Canada.
According to industry Canada, half of all entrepreneurs that open up small businesses in Canada will fail within five years. And the second most common reason why is because they ran out of money.
While there are many reasons why business owners might end up running out of money in their business. Making better and more informed financial decisions. Is one of the ways that they can avoid running out of money in their business.
However, Edmonton bookkeeping says business owners do not know what they do not know. And they do not know what they need to learn first. In order to make the best business decisions.
This is where learning how to do bank reconciliations is so important. The reason why is because many business owners tend to think that they will be able to look at their bank account balance. In order to make financial decisions.
They want to know if they have the money to run payroll, pay bills, or even purchase assets they need to grow. However, it is not the best way to see how much money they have to utilize in their business. By looking at their bank account.
The reason why is because while the bank account balance shows them exactly how much money they have in their business at that moment in time. What the bank account balance will not show a business owner.
Is how much money they have to utilize in their business. After all of the pending transactions have been completed. Such as checks that they have written, electronic fund transfers they have scheduled. As well as various debit and credit transactions and ATM deposits.
If a business owner looks at their bank account and sees that they have twenty thousand dollars. They may think that they have twenty thousand dollars to spend but this is not the case.
Instead, an entrepreneur might have ten thousand dollars of payroll expenses that are going to come out in the next week. As well as a five thousand dollars worth of checks that they have written that have not been cashed yet.
Therefore, they will look at their bank account balance. And see that they have twenty thousand dollars to spend. And spend all or most of it. And then make all of their checks and payroll bounce.
Therefore, the bank reconciliation is an important thing to do says Edmonton bookkeeping. Because it will allow an entrepreneur to see how much money they have in their business. Once all of the pending transactions have taken place.
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Many business owners do not know how important a bank reconciliation is when they first open their business according to Edmonton bookkeeping. However, a bank reconciliation is an extremely critical part of understanding their business finances.
What a bank reconciliation actually is. Is a process in which an entrepreneur takes their account statement. And matches it against all of the transactions that they have created in the past month.
When they look at all of the transactions that have cleared in their bank account. An entrepreneur will be left with a list of all of the transactions that have not cleared yet.
And subtracting that amount that has not cleared. From the amount of money they have left in their bank account. Will let them know how much money they actually have two utilize in their business.
Therefore, Edmonton bookkeeping says it is extremely important for business owners to learn how to do bank reconciliations. And learn how to do them early on in their business.
So that they do not accidentally spend more money than they have. And end up being forced to go out of business. This is a very real problem for many entrepreneurs who open small businesses.
How an entrepreneur should start a bank reconciliation says Edmonton bookkeeping. Is take their latest bank account statement. And their previous bank reconciliation statement balance.
The first step is ensuring that the starting bank balance matches the statement balance, which is the ending balance. For the bank reconciliation. This will ensure that there have been no errors made. And that an entrepreneur is starting their bank reconciliation from the correct spot.
The second thing that an entrepreneur is going to do. Is look at all of the transactions that they have created that have already cleared their bank account.
This includes checks they have written, debit and credit machine transactions. Deposits they have put into the bank account both in the bank and through an ATM.
By looking at all of the transactions that have cleared, they will be left with all of the transactions that have not cleared. However, they should also ensure that all pending transactions are valid as well.
If an entrepreneur has made a mistake in entering information into their accounting software. This may look like they have more money in their business to use. Or less money to use depending on what the error is.
If there are mistakes in money coming into the entrepreneurs business on their bank reconciliation. It will make it look like they have more money in their business than they actually do.
And if there are mistakes of transactions that are outgoing. It will make it look like there is less money in the entrepreneurs business to spend. Then they actually have, and can utilize.
By learning how to do a bank reconciliation properly. Can help entrepreneurs understand their business finances better. So that they can make more informed financial decisions. And help them grow their business significantly.