Why accurate bank reconciliation is crucial in your credit control process

Bank reconciliation is a critical process that helps ensure the accuracy of financial records by matching accounting records with bank statements. Businesses that fail to conduct regular and accurate bank reconciliation risk inaccuracies and financial losses, which can negatively impact their credit control process. 

In this blog, we will discuss the importance of bank reconciliation and how it can prevent costly errors and fees, as well as the negative impacts of poor bank reconciliation on your business's credit control process. We will also provide a step-by-step guide on how to conduct accurate bank reconciliation, along with tips on how to avoid common errors. Whether you're a small business owner or a finance professional, understanding the importance of bank reconciliation is essential for maintaining financial health and supporting business success.

What is bank reconciliation?

Bank reconciliation ensures accurate financial records by matching accounting records with bank statements. While it may seem like a simple task, bank reconciliation can be complex and time-consuming, especially for businesses with multiple clients and a busy financial cycle.

The process involves comparing the incoming and outgoing amounts of money in an account to ensure that they match. This helps identify errors, discrepancies, and fraudulent activities that could undermine business goals if left unchecked for an extended period.

For small and medium-sized businesses, bank reconciliation in shorter intervals is important, as it can help identify and correct errors or discrepancies in real-time, preventing potential financial losses.

While there are apps and computer systems available to automate the bank reconciliation process, some managers may be hesitant to use them due to concerns about sensitive customer data and internal records. However, it is important to note that utilizing these systems can be beneficial as long as the appropriate security measures are taken to protect the business's interests.

To ensure accurate financial records, businesses must learn the basics of bank reconciliation and understand the importance of conducting the process correctly. Failing to do so could result in inaccurate financial reporting, which could ultimately damage the business's reputation and financial standing. Therefore, accurate bank reconciliation is crucial in the credit control process to maintain financial integrity and enable effective financial decision-making.

How to do bank reconciliation

To begin, the first step is to gather all relevant documents, including bank statements and records of transactions, such as receipts, invoices, and other documentation of expenses and income. It's essential to make sure that all records are complete, accurate, and up-to-date.

Next, you need to compare the records of transactions with the bank statement. In particular, you need to look for discrepancies between the two, such as missing or double entries and identify the reasons for the discrepancies. This could be due to timing differences, bank fees, or errors in recording transactions, among other reasons.

Once you've identified the discrepancies, you need to make adjustments to the records of transactions to match the bank statement. This involves reconciling the bank balance in the records with the bank statement balance, taking into account any outstanding checks, deposits, or other transactions that have not yet cleared. It's essential to document all adjustments made during the bank reconciliation process to ensure accuracy and transparency. This documentation can be used for audits and other financial reporting requirements.

Finally, after making the necessary adjustments, you need to update your records of transactions to reflect the reconciled bank balance. This will help ensure that your financial records are accurate and up-to-date, enabling you to make informed decisions about your business's finances.

Overall, bank reconciliation is a critical process that should be done regularly and accurately to ensure the financial health and stability of your business. With the right tools and knowledge, it's a process that can be made more manageable and efficient, saving you time and money in the long run.

Why bank reconciliation is important for your financial records

Bank reconciliation is important because it helps businesses note costly errors and bank fees. Even with the most reliable bank and vendor systems, mistakes can still happen. For instance, you may get charged twice for the same transaction, or you may be charged a fee that you were not aware of.

If left unchecked, these errors and fees can accumulate and negatively impact your business's finances. By conducting regular bank reconciliations, you can quickly spot and rectify any mistakes or discrepancies before they become bigger problems.

In addition to avoiding costly errors and fees, conducting regular bank reconciliations can also help you better understand your business's financial health. When you know exactly how much money is coming in and going out of your accounts, you can make more informed financial decisions that align with your business goals and objectives.

Furthermore, keeping accurate and up-to-date financial records through bank reconciliation can also make it easier to prepare financial statements and tax returns. This can save you time and money in the long run, as well as help you avoid any penalties or fines for inaccurate reporting.

In short, conducting regular bank reconciliations is crucial for maintaining accurate financial records, avoiding costly mistakes and fees, and making informed financial decisions that support your business's success.

How poor bank reconciliation can negatively impact your business's credit control process

Bank reconciliation plays an important role in the credit control process. Reconciling your bank accounts can prevent your business from making losses from fraud and even erratic filings when you’re unable to track your expenses. It‘s these negative impacts that usually push most businesses to evaluate how they handle their accounts during operations to avoid costly blunders.

Some common problems that can arise when bank reconciliation practices are not followed include the following:

If not done correctly, you can be chasing invoices that have already been paid

When doing bank reconciliations, we usually match cash balances on the balance sheet with the corresponding amounts on the bank statements. In the process, we determine the differences between the two elements to make changes to accounting records.

But when reconciliation is done poorly, you might find yourself chasing invoices that have already been paid, which might be a waste of resources and confusing for clients. An instance where you ask a client for payment, they've already sent the wrong signals, even suggesting that you’re trying to defraud them. It is important to do bank reconciliation correctly to match what you have in your balance sheets with the reality in your receipts. 

Payments misallocation leads to chasing the wrong invoices

Sometimes, you can find yourself chasing individual invoices that have been paid already, and in other cases, the wrong invoices show up in your accounts receivable. This is a common problem with the bank reconciliation process, where double entries can create discrepancies and confusion. When a payment or invoice is categorized incorrectly, it might become an overlooked amount that will affect your credit control process.

For example, failure to account for one invoice in a transaction can create another discrepancy that usually matches the overlooked entry. These costly mistakes make bank reconciliations an important step in realizing an accurate credit control process that is crucial for your business’ margins.

Misalignment in customer/supplier statements

When dealing with many customers or suppliers, following proper reconciliation guidelines can be time-consuming. In this instance, the reconciliation considers the intricate details of the invoices, discounts, payments made, and even advance payments. When done poorly, bank reconciliation can create misalignments in customer and supplier statements, often leading to you paying more or running into laborious disagreements.

Proper bank reconciliation can ensure that you’re able to not only confidently identify payments you made but also those that the supplier failed to note in their books. You can also accurately take note of any discounts and reduce overpayments to the supplier, which is good for your overall profit margins. By taking advantage of automated solutions, you can avoid all the hassles of processing individual accounts and making avoidable mistakes that affect your credit control process.

Bank reconciliation is crucial to your credit control process

If your business deals with many customers and suppliers, it is expected that you’ll find yourself handling a host of concerns, including monitoring credit limit status and creditworthiness and, sometimes, taking corrective action. To handle the realities of credit control, businesses adopt different approaches, including defining credit control policies, building relationships, and having a watchlist. If your business needs to streamline its credit control process, tapping into the many advantages of bank reconciliation is a great way to avoid hassles.

Chaser helps businesses by providing a reliable accounts receivable solution that can track and send automated payment reminders when invoices are overdue. Chaser's users, like LoveBrands for instance, use Chaser to automate their accounts receivable process, without losing the human touch. As a result, they now save 15+ hours per week on their credit control activity.

In our practice, we’ve learned that when the bank reconciliation in a business's accounting software is not done correctly, clients can end up chasing the wrong payments. When businesses do their bank reconciliation accurately, they can avoid unnecessary blunders and refine their processes to ensure that they always remain profitable.