When entrepreneurs open the doors to their business for the first time says Edmonton bookkeeping. They often have a steep learning curve. Especially when it comes to the finances of their business.
They might find it very easy in the beginning to understand how much money they have to utilize in their business. By looking at their bank account.
Because they have few transactions coming into their business. As well as few transactions leaving their business. So that it makes it very easy to understand how much money they have to utilize.
However, as an entrepreneur grows their business. And the number as well as the amount of transactions increases. It becomes more and more difficult to be able to look at their bank account.
And to determine what checks are coming in or going out. In order to figure out how much money they have to utilize in their business.
And this is extremely important to know. Because business owners should verify this information. Any time they need to make a financial decision in their business. Which will happen several times through the course of a month.
For example, any time an entrepreneur is going to pay bills, run payroll, or purchase anything. They should be doing so after consulting their finances. To determine if they have the means to make that decision.
If they end up looking at their bank statement. They could make significant errors. That could cause them to run out of money in their business.
Since 29% of all failed entrepreneurs say they failed because they ran out of money in their business. If business owners can learn how to do a bank reconciliation correctly. They will be able to make more informed decisions that can help them avoid failing in business.
The first thing that business owners need to do, when they are learning how to do a correct bank reconciliation. Is take the previous bank reconciliation that was completed by their Edmonton bookkeeping company. And their most current bank account statement.
The next thing that they should do, is cross out all of the transactions that have cleared their bank account already. What they will be left with, is a list of all pending transactions.
However, business owners need to understand. That if there are any errors with the pending transactions. That could cause them to not have the correct amount of money that they have to use in their business.
So when they have the list of pending transactions. They also need to be able to look at those transactions. In order to determine which ones are most likely errors that they can then fix.
By looking at the date of how long these transactions have been pending. Should clue a business owner in. On if these are actual transactions. Or if they are mistakes that they need to fix.
A business owner should get into the habit of doing a bank reconciliation monthly says Edmonton bookkeeping. So that they will have a better idea of how much money they have in their business. Before making any financial decisions at all.
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It is very important that business owners learn early on in their business best financial practices says Edmonton bookkeeping. Because the failure rate for entrepreneurs is very high.
In fact, according to industry Canada. 15% of entrepreneurs fail within their first year of owning a business. While 30% fail in year two. Half of all entrepreneurs that open small businesses in this country. End up failing by five years of owning a business.
Not only is the failure rate extremely high. But also, the reasons why entrepreneurs fail are all completely avoidable with the right plan in place. For example, the second most common reason why businesses fail.
Is because they end up running out of money in their business. By learning how to do a bank reconciliation. Business owners can make financial decisions based on how much money they have to spend. And not how much money is showing on their bank balance that day.
The reason why says Edmonton bookkeeping. Is because while the bank balance might show exactly how much money an entrepreneur has in their bank account at that exact moment in time.
What the bank balance will not show an entrepreneur. Is how much money they have in transactions that are scheduled to come out of their bank account. That will make that amount in their bank account lower.
If entrepreneurs look at their bank statement. And see that they have ten thousand dollars in their bank account. They might decide to make an eight thousand dollar asset purchase. That they need in order to grow their business.
But they might not take into consideration. That they have a two thousand dollars check, and an eight thousand dollar payroll scheduled to come out of their bank account. Which would cause them to run out of money if they make that purchase.
Therefore, it is extremely important for business owners to learn how to do a bank reconciliation. But also how to do it properly and by fixing mistakes. So that a business owner can end up with the most accurate representation. Of how much money they have to use.
One of the first things that Edmonton bookkeeping suggests is when they start doing a bank reconciliation. Is that they ensure the starting bank balance matches the statement balance of the bank reconciliation.
The reason why, is because that ensures that they are starting their bank reconciliation with no errors currently in their accounting software. If the two amounts do not match.
The error that typically has occurred is that an entrepreneur has booked a future item as cleared in their accounting software. It is fine to book future items. But if they have already cleared, they should be booked on the day that they cleared and not for the future.
By going into their accounting software in fixing either the fact that it has not cleared, or the date that it cleared. Can ensure that the bank reconciliation is as accurate as possible at all times.