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Tips to improve bank reconciliation with cash management software

What you’ll learn

  • Get an overview on the steps of how to do a bank reconciliation.
  • Understand how cash management software can improve bank reconciliation.

What is bank reconciliation?

A bank statement tracks all the cash flows in the company’s account. In contrast, a general ledger tracks all cash transactions. These two statements should convey the same information and produce identical cash balances.

Bank reconciliation matches the balances in accounting records to the information on a bank statement.

How to do a bank reconciliation?

Finance and accounting departments go through the following steps to perform bank reconciliation:

steps to perform bank reconciliation
1. Gather bank and business records and transactions
To reconcile the records, you’ll need access to a transaction list. Then, access this data through online banking, bank statements. Or allow your bank to exchange data with your accounting software.
2. Choose a period for reconciliation
Find the last time the balance on your business books was the same as the balance in your bank account. Start the reconciliation from there.
3. Go through the bank deposits and withdrawals
Compare the deposits in the business records to the bank statements. Compare the amount of each deposit in the cashbook’s debit side with the credit side of the bank statement. Make a note of the things that occur in both records.
4. Review the income and expenses
Check the records against company bank statements to ensure that everything is properly accounted for. If there is an unmatched item, find out why that is. For instance, maybe a payment hasn’t cleared yet, or you forgot to pay cash for something.
5. Adjust bank statements and cash balance
Make the necessary adjustments to the bank statements’ balances to reflect the updated balance. To do so:

  • Add pending deposits
  • Subtract outstanding checks
  • Add/deduct bank errors

Deposits in transit are funds received and recorded by the business but not yet recorded by the bank. Include them in the bank statement.
6. Compare the cash balances
After matching the records and making the necessary changes, confirm that the end balances are the same. Complete the reconciliation process. If they’re still unequal, go through the overall process again to locate the problem.

Bank reconciliation example:

On March 2, XYZ Co. opened a bank account with a $10,000 deposit. In the same month, the company wrote four $5,000 checks and deposited $2,000 at the end of the day on March 31. As a result, the company’s books, or cash account, reflect a $7000 debit balance as of March 31. The bank statement for March 31 shows a balance of $5,975.

Different balances appear in the records and on the bank statement, treasury must reconcile them. They must compare the details of each document to accomplish this. Assume the following:

  • The bank did not process the $2,000 deposit made on March 31, so it is not shown on the bank statement.
  • The bank charged a $25 service fee, but it was not recorded in the company’s books.
  • The company has to cash one of the four $1,000 cheques written that month, and is absent from the bank statement.

The treasury team must fill in the missing transactions to reconcile the accounts so that the balances are equal. Follow these steps to achieve this:

  • Reduce the cash account amount by $25 to reflect the bank’s service fee. This results in a new balance of $6,975.
  • Increase the bank statement balance by $2,000 to reflect the deposit. Then decrease it by $1,000 to account for the unprocessed check. This leads to a balance on the bank statement of $6,975.

The bank statement and the company’s records now both show a $6,975 balance. Therefore, the bank statement has been reconciled.

What are the problems in bank reconciliations?

Matching general ledger and bank data

Analysts manually retrieve bank statements from banking systems. Then, they access the ERP system to analyze and compare the information to the cash balance. This can be time-intensive due to the high level of manual intervention required.

Possibilities of error-prone reconciliations

There is a risk of human errors with manual reconciling. This accomplishes nothing in enhancing transaction accuracy.

Lack of a centralized auditing system

After completing the reconciliation, it’s important to maintain the bank reconciliation statement for auditing purposes. If treasury analysts perform bank reconciliation on paper, keeping track of the audit chain can become difficult.

What is the importance of bank reconciliation in business?

Transaction errors lead to a difference between accounting records and bank statements. Bank reconciliation helps businesses identify those transaction errors.

Companies should do bank reconciliations regularly to detect discrepancies that create problems like:

  1. Bounced checks and failed electronic payments in the short term
  2. Financial overloading in the long term

What is the most important goal of a bank reconciliation?

The goal is to ensure that each transaction on the bank statement is the same as the company’s internal records. The following are the purposes of bank reconciliations:

  • It ensures that transactions and general ledger postings are accurate
  • It aids in detecting and preventing fraud before it’s too late
  • It spots potential check clearance delays

How could bank reconciliation optimize your cash flow management?

  • Improvement in command: Decision-makers make ideal decisions with all the necessary information. Having an up-to-date bank statement allows to:
    • Predict cash flows accurately
    • Make important buying decisions
    • Detect fraud and prevent errors
  • More credible reporting: Treasury can build reports only as good as the data. Understanding a company’s financial health is crucial for making critical decisions. This means decision-makers must have access to up-to-date data at all times. If treasury teams reconcile bank accounts frequently, they can run businesses less stressfully.
  • Improved fraud detection: Unfortunately, hackers and criminals are targeting companies. Some businesses have larger bank accounts that aren’t inspected as thoroughly as personal accounts. So detecting fraud can take a long time. Adopting a system to reconcile bank accounts improves the chances of detecting frauds. Automated reconciliation finds abnormalities in the company’s bank accounts and credit cards. This enables companies to prevent issues before they become a significant problem.

How does cash management software improve bank reconciliations?

The following are the ways cash management software helps perform accurate bank reconciliation:

  • Auto-reconciles transactions based on standard and user-defined tagging rules.
  • Gathers real-time cash positions across the organization. This helps to make better business decisions.
  • Automates reconciliation to cut down on time-consuming tasks and boost team output.
  • Integrates with many data sources, ensuring consistency in data requirements and quality.
  • Reduces the cost of processing and audit cost. It can also save money by keeping a closer eye on the company’s finances.
  • Allows for scalability and helps in the streamlining of the reconciliation process.
  • Auto reconciling reduces human errors, such as keying inaccuracies, and adds security.

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The HighRadius™ Treasury Management Applications consist of AI-powered Cash Forecasting Cloud and Cash Management Cloud designed to support treasury teams from companies of all sizes and industries. Delivered as SaaS, our solutions seamlessly integrate with multiple systems including ERPs, TMS, accounting systems, and banks using sFTP or API. They help treasuries around the world achieve end-to-end automation in their forecasting and cash management processes to deliver accurate and insightful results with lesser manual effort.