As a business owner who does a fair amount of her own accounting, I come up against reconciliation frequently. And, as a business and workplace adviser to others, I recognize its importance. Reconciliation is part of the ongoing accounting mix that leverages two or more financial records to make sure numbers match.
In other words, it helps owners and accountants demonstrate that the money going out of an account is equal to the amount spent, and that the amount coming in is equal to the amount earned. Account reconciliation provides a mechanism for accurate balancing at the end of each recording period. If you don't do it properly, you will move forward with compounding inaccuracies and will risk your business' overall integrity.
When I started my business in 2004, the new Sarbanes Oxley Act had greatly tightened the reins on reporting reliability. Although the law had the biggest impact on large corporations, it encouraged me to establish strong accounting practices. I'll admit that I struggled with account reconciliation. An ongoing problem involved client payments that arrived significantly after I declared the income. But fortunately, I never experienced strange inconsistencies I couldn't explain.
Over the last 14 years, I've witnessed and personally experienced the following reconciliation pitfalls I hope other business owners can avoid.
There's no substitute for a second set of eyes, especially when it comes to financial data. If you're doing reconciliations yourself, review them with your internal accountant or employ an outside CPA.
Reconciliation Pitfall #1: The Dreaded Spreadsheet
As someone who studies and applies future of work technology, I'm embarrassed to admit that I left my spreadsheets kicking and screaming. I was comfortable with them and grossly underestimated the manual processes involved with reconciliation. I regularly spent hours trying to get to the heart of a single discrepancy and even then, sometimes couldn't overcome the danger of human error. Today, we have the advantage of much more accurate cloud-based solutions to access real-time financial data from any device at any time and track the flow/monitor the status of each reconciliation. Just make sure you certify and secure your chosen system.
Reconciliation Pitfall #2: Non-Standard Processes
I can't tell you how many times I fell prey to this one. I'd do reconciliation one way, my business manager would have another approach, and then our accountant would come in and use a third technique. As you can imagine, this lack of standardization was problematic. To avoid this pitfall, sit down with all relevant parties and draft your organization's reconciliation policies. Store them in an online system connected to your financial data, make sure anyone new coming into the organization understands them and knows where to find them and emphasize their importance.
Reconciliation Pitfall #3: Information Stored in Different Formats
This one relates to the prior two. Account reconciliation is impossible when recording documents differ drastically from one another. Consistency is your top priority here. Create the templates that make the most sense for your business (potentially including a General Ledger Reconciliation Template, a Monthly Bank Reconciliation Template, a Petty Cash Reconciliation Template and a Credit Card Reconciliation Template). As with reconciliation policies, communicate to your stakeholders to use these religiously and complete them in a timely manner.
Reconciliation Pitfall #4: Incomplete Documentation
As busy business owners, it's tempting to skimp on reporting when you “know" your balances are correct. However, when it comes time for review (see the next pitfall), you don't want to leave anything open to interpretation. So, in addition to leveraging standard policies and templates, every account reconciliation should include a title, date, description, appropriate checks and balances, and links to supporting information such as signed contracts and other accounts. Adding detail now is bound to save you heartache later.
Reconciliation Pitfall #5: Lack of Review and Understanding
There's no substitute for a second set of eyes, especially when it comes to financial data. If you're doing reconciliations yourself, review them with your internal accountant or employ an outside CPA. This should happen as early as possible in the close cycle so that you can make corrections and adjustments before the end of the reporting period.
Along with the specifics we've just covered, I have one final piece of advice. Remember the logic behind your reconciliations. Don't get so bogged down in matching numbers that you lose sight of whether or not they make sense. I've had the tendency to say “that looks close enough," when, if I had delved deeper, I would have realized the business reason why the transaction wasn't exactly correct.
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