There are many reasons why entrepreneurs are going to want to do a bank reconciliation before they spend any money in their business according to Edmonton bookkeeping. Any major financial decisions need accurate financial information. If business owners are not getting the proper information before they make these decisions, they could end up spending more money than they actually have and running out of business. Since 50% of all entrepreneurs in Canada are out of business in five years, 29% of those failed entrepreneurs say that the reason why they failed is that they ran out of cash. If business owners get into the habit early on in their entrepreneurship to look at their bank reconciliation prior to spending money, they could potentially completely avoid the situation in their business and be more successful.
The purpose of a bank reconciliation is to show a business owner how much money is actually in their business. If they look only at their bank account, they are not taking into consideration the pending transactions that are yet to clear. Transactions such as checks that are waiting to be cashed from their vendors, or credit card purchases that have not shown up on their statement yet could misrepresent how much money an entrepreneur actually has in their business to spend. For example, if an entrepreneur has sent out five thousand dollars in checks, and they have not cleared yet if he looks in his bank account and sees that he has seven thousand dollars, he might spend all seven thousand, not realizing that is going to cause the checks he previously wrote to bounce. This is why it is extremely important that entrepreneurs do a bank reconciliation according to Edmonton bookkeeping.
In order to do accurate bank reconciliation, it is recommended that business owners start with checking their balance. The reason why, is because if their bank balance does not match the statement, the bank reconciliation will not work no matter how diligent they are. Once they start working on the bank reconciliation, they are going to enter all of the information into their accounting software and end up with what is called registered balance and statement balance. The difference between the two according to Edmonton bookkeeping is that the registered balance is going to indicate to the business owner how much money they actually have to use.
Getting into the habit of doing bank reconciliations prior to any financial decision, no matter how small the transaction is, will help entrepreneurs always know exactly how much money they have to work with so that they do not run into financial difficulties. Once they get into this habit, they can be very confident that all financial decisions they make will be based on but the money they actually have to use, and not how much is in the bank which may put them into financial distress. Learning how to do this is an extremely important step for entrepreneurs to take in order to grow their business successfully.
Edmonton Bookkeeping | Why Bank Reconciliations Are Important
If entrepreneurs are making financial decisions without checking their bank reconciliation, Edmonton bookkeeping says that they are potentially going to be making decisions that could cause irreparable damage to their business. The reason why is because bank reconciliations are going to show entrepreneurs exactly how much money they have to work within their business, after taking into consideration all of the pending transactions such as checks clear. If they look at their bank balance instead, they may not understand exactly how much money they have in their business, and overspend, or even not pay their staff on time, because their bank statement might not show all of the money that they actually have.
When entrepreneurs are ready to do bank reconciliation, not only do they have to do it regularly says Edmonton bookkeeping, but they also have to do it accurately as well. If they failed to clear any transactions that are inaccurate, they will end up with incorrect information, which puts they are decisions at risk. Bank reconciliations with mistakes in them are just as dangerous as an entrepreneur making a decision financially in their business without a bank reconciliation at all.
What might cause mistakes on bank reconciliation, or if there are uncleared transactions that mistake. For example, if it shows that there is a check that is waiting to clear, as in waiting for the vendor to deposit the check and habit cashed if it is a mistake, it will end up showing that an entrepreneur has less money to spend than they actually do. Reasons, why an error in an uncleared transaction might happen, is if an incorrect date was used in entering the transaction, or if an entrepreneur entered the check twice by mistake. When entrepreneurs see uncleared transactions on their bank reconciliation, they should always double-check all of them to ensure the accuracy of the numbers, so they do not end up with mistakes on their bank reconciliation.
In order to help understand if the bank reconciliation has mistakes on uncleared transactions, entrepreneurs should understand how much time it would take to clear certain transactions. Checks are typically the longest according to Edmonton bookkeeping, simply because entrepreneurs have to wait until the person who received the check puts it in the bank to cash. This might take several weeks or a couple of months depending on who has the check. Electronic transactions, however, clear immediately, so if entrepreneurs see an electronic transaction as uncleared on their reconciliation, they should automatically know that that is an error that needs to get fixed.
Bank reconciliations take time to learn how to do properly and accurately, and if entrepreneurs are not able to clearly understand this, they should instead contact their Edmonton bookkeeping company in order to help them get accurate bank reconciliations so that they can make accurate financial decisions in their business. Learning how to do this is extremely important to helping entrepreneurs grow their business and be successful.