Cashflow is king in business.  Anyone who has ever been at the helm of their own commercial venture or any person who is even remotely related to an accountant will tell you the same thing; in order to survive when running a business, one must have an absolute understanding of the cash position of the company.

There are many facets to this fiscal discipline ranging from cost control, management of budgets and keeping a watchful eye over debtors.  This article, however, covers the Bank ReconciliationCredit: Dreamstime_15267465bookkeeping exercise that is the cornerstone of effective cash management; the humble bank reconciliation.  A less discussed area of cash flow, yet one that is a vital daily or at least weekly task for anyone involved in running the finances of a business.

Take It To The Bank

The principal aim of performing a bank reconciliation is to ensure that the differences between the balance in the cash book and the balance on the bank statement are accounted for.  The reason being is that an accurately reconciled bank account removes any doubt as to the status of all cash payments and receipts.  Those things that you said that you paid for can be proven to have been paid.  Also, any cash deposits or expected receipts can be confirmed as being cleared as available funds, removing the need to send any person or persons still owing you money a gentle reminder to pay up.

The basic steps for preparing a bank reconciliation are as follows:

1. Obtain the latest balance on your bank account.

There are a couple of ways that this can be obtained.  The old fashioned way is to wait for the paper bank statement to drop through the mail.  However in this day and age of online banking and tree conservation, you can access your account via the net and download the last few weeks transactions. Online access provides you with the ability to balance your account more frequently.

2. Bring the cash book up to date and establish your cash book balance.

All cheques that have been written to pay for goods and services should be entered into the cash book.  Any any cash deposits from customers or clients or that collection of small change that has been growing in the empty whisky bottle for the last year or so should also be recorded.

3. Compare the statement with the cash book entries.

The traditional method is to 'tick off' items that appear on both the statements and the cash book.  Take a highlighter pen and mark each entry on the bank statement that has a corresponding entry in the cash book.

This is where attention to detail is important and a methodical approach is required, especially if you are dealing with a large number of transactions.

The end result of this exercise will be two lists:

  1. Items that have cleared at the bank but have not been recorded in the books of account.  These could be direct debits, unexpected receipts or unrecorded bank charges.
  2. Cash book entries that have not cleared at the bank.  The most common items are cheques that have been written out to creditors that may have not yet been presented to the bank for payment.

4. Reconciling the two balances.

Once the reasons for the difference have been established then action is required to reconcile the two balances.

Items not appearing in the cash book
Update the cash book with these entries by posting any bank charges or receipts that may have been missed.  Also look out for any entries that may have been mis-posted with an incorrect value.  These will have to be corrected and a slap on the wrist given to the clerk who input them.

Items not yet cleared on the bank statement
These items will have to be listed on the bank reconciliation as outstanding items as they are recorded in the cash book, but your bank manager does not know about them yet.

Unpresented cash book payments will be deducted from the Bank Statement Balance.  Outstanding receipts from the cash book will be added to the Bank Statement Balance.

A Fine Balancing Act

Keeping the status of the firm's cash position firmly in the financial cross-hairs is for me, as the person in charge of the finances where I work, job one each morning.  We have a number of accounts open with multiple transactions in each,so perfoming daily bank recs is the only way I can keep on top of things.