What is bank reconciliation?

 In General

When first starting out, one the most important skills you will learn in managing your small business’ finance is bank reconciliation. But what does that actually mean?

Despite being a somewhat unfriendly phrase, the concept is actually quite easy to grasp. At the most basic level, bank reconciliation is the process of ensuring that the transactions recorded in your accounts system match the flow of cash into and out of your bank account.

Bank reconciliation provides a way to ensure that you are accurately recording payments and expenditure, and helps you identify transactions that you know about, but which have not yet been received. In some cases this means sitting down with a copy of your bank statement and trying to pair up transactions with those recorded in your accounts system.

Some modern accounting software packages, like Xero, will connect directly to your online bank account and download transaction data each day. The software also tries to match transactions in both systems automatically, cutting down on your accounting admin.

Bank reconciliation is a crucial exercise in tracking your business’s cashflow and helping you to identify missing, or incorrect payments for follow-up. Reconciliation also helps you to see where you have missed payments to suppliers, giving you an opportunity to resolve issues before they attract statutory late payment fees and interest.

Ultimately, bank reconciliation is the first step to ensuring that your outgoings are no larger than your incomings. And if they are, you will have advance warning that you need to change operations to boost revenue.

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