When entrepreneurs are new in their business, Edmonton bookkeeping says they typically look at their bank balance. In order to determine if they have money to be able to make financial decisions.
And while this might work when they are very small. The larger business gets. And more transactions they have coming into and out of their account on a regular basis.
Means that this method of looking at their bank statement is going to quickly become problematic. The reason why, is because a bank statement might show exactly how much money in entrepreneur has in their bank account at that given moment.
But what a balance will not show an entrepreneur, is how much money they have once all pending transactions have cleared. And if they are using the information to decide if they have money to spend.
Such as if they are able to run payroll, pay bills. Or if they have enough money to make an asset purchase. If they are looking at their bank statement only.
Chances are they will spend more money than they actually have available to use. Which can calls all sorts of problems like bounced checks for example.
In fact, industry Canada says running out of money in business. Is the second most common reason why Canadian entrepreneurs are failing. Affecting 29% of all entrepreneurs who fail in business.
Therefore, it is imperative that entrepreneurs learn how to make more informed financial decisions. By doing bank reconciliations. In using that information instead of looking at their bank statement alone.
What a reconciliation is says Edmonton bookkeeping. Is a statement showing an entrepreneur how much money they have once all pending transactions clear their bank account.
This is extremely important. Because there is wide variety of transactions that could be pending at any given time in an entrepreneurs business. This includes checks that they have written, and mailed out to vendors and suppliers. But are still waiting to be cashed. As well as things like electronic fund transfers that they have scheduled. And credit card and debit transactions that they have made, but have not cleared on their bank statement yet.
The most important thing for entrepreneurs to realize. Is all of these things take a different amount of time to clear the bank account. Which is why it is important to look at the bank reconciliation.
While electronic transactions typically take the least amount of time. And checks will take the longest amount of time. By looking at the bank reconciliation, entrepreneurs do not have to remember how many payments they have made, and how long ago they made them.
They can simply look at their bank reconciliation, in order to see how much money is available for entrepreneurs to use. So that by looking at this statement before making any financial decision says Edmonton bookkeeping.
Can help entrepreneurs spend that money more wisely. Or they may need to bring more money into their business to make that decision. And by looking at their bank reconciliation.
They can decide they need to engage in more revenue-generating activities. Or even start doing some collection calls. To bring the money that they are owed into their business faster.
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Business owners may not understand what a bank reconciliation is when they are new in business says Edmonton bookkeeping. Which is why it is very important that they learn quickly. Especially because 15% of all entrepreneurs fail with the first year of opening their business.
The bank reconciliation will show business owners how much money they have in their business. Once all of the transactions that are pending have cleared. So that they know how much money they have to utilize.
For example, if an entrepreneur looks at their bank statement to see that they have fifty thousand dollars in their bank account. They might make a decision that spends some or most of that money.
However, by looking at their bank reconciliation. Edmonton bookkeeping says they might realize that they fought thirty thousand dollars of pending transactions. And so they can spend more than twenty thousand dollars. Or else they will cause some of their payments to bounce.
By understanding how important a bank reconciliation is. Entrepreneurs then need to understand how to do a bank reconciliation properly. So that they can end up with an accurate amount represented.
The first step is to take their bank balance, to ensure that the starting balance matches the ending balance of their last bank reconciliation. The reason why, is because doing this will verify that there are no errors that they are starting with.
One mistake that could be the reason why the bank statement and bank reconciliation does not match. Is if a future transaction has been marked as cleared.
For example, if an entrepreneur is doing their bank reconciliation on February 28. But there has been a transaction for March 5 that has been marked clear. This is going to make the bank balance and the previous reconciliation not match.
By fixing this error right away. Entrepreneurs can ensure that when they finish their bank reconciliation. The amounts should balance, because there are no errors from the beginning.
The next thing that entrepreneurs need to do is look at all of the uncleared charges that are in their accounting software. Uncleared charges can include checks that have been written but have not cleared the entrepreneurs bank account. Electronic fund transfers, and debit and credit transactions for example.
By first verifying that the transactions have cleared are all represented. An entrepreneur can then spend time looking at all of the transactions that have not cleared yet. The first thing that Edmonton bookkeeping recommends entrepreneurs ask themselves, are if they are legitimate uncleared transactions. That is that they actually exist, and an entrepreneurs actually waiting for those transactions to clear their bank account.
Or, they should ask themselves if these are mistakes that need to be fixed. Such as transactions that were entered twice. Or transactions that were entered with the wrong date. That make them look like they are still pending.
By looking at all of the transactions that are uncleared. Entrepreneurs can fix the ones that are duplicate, or their by mistake.
So that at the end, their bank reconciliation will show them how much money they have in their business. Once all the transactions cleared. So that they can make financial decisions regarding that amount of money.