United StatesChange Country

Understanding Financial Statement Reconciliation, in Three Parts

By Kristina Russo

It’s a very harsh world out there for small or midsize enterprises (SMEs), so they need every possible advantage. Although reconciliation of financial statements may sound like an abstract professional financial process better left till an SME grows larger, the fact is it can be one of the most effective ways for an SME to avoid mistakes that may lead to significant problems.

Reconciliation of financial statements is simply an accounting process that compares two sets of records, one internal the other external, to ensure figures are correct and in agreement. Using it to catch financial mistakes early may be key to helping an SME avoid the fate of most: one half of all newly started companies are out of business by the end of their fifth year, and 70 percent never make it to 10, according to U.S. Bureau of Labor Statistics’ data.1 That BLS’ data is very consistent for the last 24 years, although it dipped noticeably in the aftermath of the Great Recession: 45.4 percent of 5-year-old startups were gone in 2011. For 2018, though, that stat stood at 50.7 percent.

 

This three-part series focusing on reconciliation of financial statements can help SMEs avoid becoming yet another such statistic.

 

Financial Statement Reconciliation Overview for SMEs

 

Part one in the series provides an overview explaining why reconciliation of financial statements is generally regarded as one of the most cost-effective business controls a firm can use. Read more about why reconciliation of financial statements, especially cash reconciliations, are an effective control to ensure accuracy for better-informed decision making and for mitigating fraud.

 

The Importance of Financial Statement Reconciliation for SME Assets

 

Even profitable SMEs can become insolvent and fail if cash flow is badly synchronized with operational needs, so part two of the series explores how SME owners can benefit from close management of cash flows and cash balances necessary to meet short- and long-term obligations. It focuses on account reconciliation of the assets experts identify as the most important to reconcile: cash, accounts receivable, inventory, and prepaid assets. Learn more about reconciliation of financial statements for key assets, and why it is an important and effective finance control for SMEs.

 

The Importance of Financial Statement Reconciliation for SME Liabilities

 

This third and final installment in the financial statement reconciliation series delves into the liability accounts experts identify as most important to reconcile: accounts payable, accrued expenses, payroll, and debt. Surprisingly, more than 74 percent of all companies are affected by payment fraud, according to the Association for Financial Professionals’ 2017 Payments Fraud and Control Survey.2 Read how reconciliation of financial statements works for key liabilities, and how it can be an effective fraud detection tool for SMEs.

 

Kristina Russo

The Author

Kristina Russo

Kristina Russo is a CPA and MBA with over 20 years of business experience in firms of all sizes and across several industries, including media and publishing, entertainment, retail and manufacturing.

Sources

1. “Table 7. Survival of private sector establishments by opening year,” Bureau of Labor Statistics; https://www.bls.gov/bdm/us_age_naics_00_table7.txt
2. 2017 Payments Fraud and Control Survey, Association for Financial Professionals; https://www.afponline.org/docs/default-source/default-document-library/pub/2017paymentsfraud-final-ion.pdf?sfvrsn=2