Many entrepreneurs may not realize that if they are looking at their bank account to make financial decisions says Edmonton bookkeeping. They are putting their business at risk.
In fact, it may be how they are running their business when they are very new, and are doing few transactions.
However, as they grow, and have more transactions both into and out of their business. As well as the amount within each transaction becoming larger and larger.
It becomes even more important for entrepreneurs to stop using their bank account in order to understand how much money they have in their business.
The reason why, is because the bank statement that they have shows how much money they have in their bank at that moment. But not how much of that money is usable.
If entrepreneurs have scheduled payments and written checks, the amount of money that they have will be spoken for by how much they have pending.
For example, an entrepreneur might have ten thousand dollars in their bank account. But have arranged eight thousand dollars in checks and electronic fund transfers.
If a business owner is in the habit of looking at their bank account in order to make financial decisions. They might think that they have enough money to purchase a ten thousand dollar asset that they need to grow their business.
But what that would do, is because all of the checks and electronic fund transfers that they have scheduled to bounce, and cause them to run out of money in their business.
This might not cause them to have to close the doors to their business. But the more often they make these mistakes. The closer they are to running themselves into problems that could cause them to have to close the doors to their business.
Therefore, learning how to do a bank reconciliation is not only important. But absolutely necessary, in order to help an entrepreneur make more informed financial decisions says Edmonton bookkeeping. That will allow them to stay in business longer.
The first thing that a business owner needs to do in order to learn how to do a bank reconciliation. Is to take their most recent bank statement, and take the statement balance of their last bank reconciliation.
They should verify that the two totals are the same. To ensure that the last bank reconciliation is accurate. And that no errors have been made since then, that would cause the totals to be incorrect.
The most typical reason why this air would occur. Is if an entrepreneur has accidentally entered transaction with the future date on it says Edmonton bookkeeping.
By finding that transaction and fixing the dates. Can ensure that the starting bank balance matches the final amount of the last reconciliation that they did.
The next thing that an entrepreneur needs to do, is go through all of the transactions that have actually cleared the bank. So that they are left with the amount of transactions that are still pending. Which will allow them to see how much money they have to use, once those transactions occur.
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Learning how to do a bank reconciliation can help entrepreneurs make more informed financial decisions in their business says Edmonton bookkeeping.
And since running out of money is the second most common reason why entrepreneurs fail. Being a bank reconciliation can help entrepreneurs avoid this fate.
When they are doing the bank reconciliation. They need to understand that they should not automatically assume that all pending transactions are accurate.
There are many different reasons why a transaction might show up on a bank reconciliation as pending even though it is not.
Although the two most common reasons. Is that an entrepreneur has entered the incorrect amount in their accounting software. Or entered that transaction twice.
Therefore, business owners need to look at the dates of the pending transactions. Because the longer they have been outstanding. The higher likelihood of them not being accurate.
However, the different transactions that they have, will have different lengths of time that is normal for them to be outstanding.
For example, deposits that entrepreneurs nor is made into a bank machine can take anywhere between 1 to 7 days to clear. While checks on the other hand, may take several weeks or even months to clear.
And if an entrepreneur sees any electronic transactions as pending. Edmonton bookkeeping says that is in an automatic giveaway that it is an error. Since by their nature. Electronic transactions should never be pending. Because they automatically show up in an entrepreneurs bank account.
It is very important that an entrepreneur understands that if they have uncleared payments coming into their bank account that are fictitious. Will make their bank reconciliation appear like they have more money than they actually do.
Which is why it is very important for entrepreneurs to fix those mistakes. So that they do not think that they have more money in their business to utilize than they do.
However, if an entrepreneur also has fictitious payments coming out of their bank account. It will make it look like they have less money to spend than they do. Which would potentially cause them to hold off on making important payments, which could be detrimental to their business.
Therefore, business owners need to understand that not only is it important that they do the bank reconciliation. But that they fix any pending transactions that are errors. So that they end up with a a more accurate amount of how much money they have in their business.
Business owners also need to realize that even if they have checked for fictitious uncleared items. These are so common, that Edmonton bookkeeping says they see it about 50% of the time that businesses have some inaccurate uncleared balances. Causing their bank reconciliation to be inaccurate.
By fixing those errors every single time they do a bank reconciliation. Can ensure that they end up with the most accurate report. So that they know how much money they have to utilize in their business every time they run the reports.