What is bank reconciliation?
As defined by the RAE, La Real Academia Española, bank reconciliation is the process that identifies the cause of the differences between the balance of the bank movements and the accounting records. To explain it in a simpler way, bank reconciliation consists of a process in which the accounting records of the company are compared with the actual bank movements that have taken place in the bank, in the same period of time.
Reconciliation is a term which means the action of making one view or belief compatible with another, so bank reconciliation is literally where what has been documented to happen, with respect to invoicing, and the transactions that have actually taken place, are made compatible.
This process aims to have all the company's bank movements under control and should be done periodically. The ideal period of time is every 15 days, or at the end of each month.
How bank reconciliation is done
The standard bank reconciliation, as it has been done up to now, is a somewhat tedious process if it is not kept up to date. The first step that must be done thoroughly is to record all accounting movements, i.e., transactions, both income and expenses of the company. Now, if you use an accounts receivable software, this process can be done automatically.
The second step is to check these transactions against the bank statement. Each month, the bank sends a document to customers detailing all transactions carried out in the company.
On numerous occasions, when you do bank reconciliation, the figures do not match and there is a cash imbalance. This can happen for many reasons, but what is really important is to find them and correct them if possible. An example of these causes can be errors when recording a transaction, either because it has not been entered, because it has been posted twice or because it has been posted with errors; another example can be that the bank has not posted a transaction because the money has not arrived to the account yet, or because of the banks rules or policies when it comes to bank transactions.
Types of bank reconciliation
There are different types of bank reconciliation depending on the way in which they are done
Manual bank reconciliations
This is where bank reconciliations is not done automatically, so excel or paper is used instead. Although it sounds prehistoric, there are many companies that still do their company's accounting processes with these tools. It is necessary to check if the amount of the previous period coincides and then again if the final amount coincides. If there is a cash flow imbalance, all the transactions must be checked one by one. Although this process is not complicated, it is very tedious.
Automatic bank reconciliation
Nowadays, there are many payment management software that automates processes to save companies a great deal of time when it comes to bank reconciliation. Examples of this type of software are, Holded or Uelz. Read this post to the end to see how Uelz can help you have an accurate bank reconciliation.
Individual bank reconciliation
This is the most common way to perform bank reconciliation. This method consists of reviewing the transactions and comparing them with the bank statement chronologically.
Joint bank reconciliation
This type of bank reconciliation methodology focuses on the cash imbalances and unifies them to create "correction policies", i.e., to reissue these invoices correctly to balance the company's income statement.
Is bank reconciliation mandatory?
Doing bank reconciliation regularly for your company is not mandatory for tax purposes, but it is advisable as it has many advantages. All the advantages that we will talk about in the next section of this post, are summarized in a single objective: to have a real perception of what is happening in your business.
Benefits of bank reconciliation
There are many benefits for your company if you perform bank reconciliation:
Financial control of your company
Thanks to bank reconciliation you can have a clear insight of the financial health of your company. If you are clear about the balance of your business you can make predictions, know if it is time to invest in certain things, or understand how much money you have to bill on a monthly basis to improve the bottom line at the end of each financial period.
Detect payment errors
If you do your businesses bank reconciliation it will be easier for you to detect if you have issued a receipt that has not been charged, so you can reissue the charge and balance the cash of your business. The opposite can also happen, i.e., you have issued a receipt but it is not reflected in the company's accounting books. These errors are more common if you issue and account for payments manually.
Verify the company's income and expenses
A business with a lot of invoices often loses control, not only of the money it receives, but also of the money it pays to its suppliers. With bank reconciliation it is very easy to keep track of all the receipts that providers depend on you for and make sure they're up to date.
Prevent economic losses
With bank reconciliation, besides checking if there has been a service that has not been charged correctly, you will also be able to see which parts of your business are not working, or are causing losses at all levels (at product level, human resources, investment in new technologies, any service you are providing that does not provide benefits because there is no demand etc.).
Helps you to understand company performance and make decisions
As you learn more about your company's financial information with the above benefits, you will have a clear idea of how your company is performing, which will help you make better decisions for your company's growth.
Automatic bank reconciliation with Uelz
As we have mentioned in the previous sections, bank reconciliation is not mandatory, but it is very beneficial for the financial control of your company. However it is also a process that, if done manually, can mean a great waste of time and money in personnel that can be avoided with an online payment management tool.
Uelz helps companies to keep the company's accounting up to date by automating the entry of money and the clarity with which the information is displayed. Uelz functionalities that help automate bank reconciliation are:
- Dashboard: The incoming money is automatically posted to your Uelz dashboard where you can clearly see which payments have been successful and any errors that may have occurred. In addition, the program specifies why there has been a payment error.
- Automatic debt collection: When a payment has been unsuccessful, Uelz processes the payment again every 24 hours, at no additional cost, until it is effective. This reduces the cash flow imbalance by a high percentage, which facilitates a correct bank reconciliation.
- Variety in payment methods: Being able to offer customers different methods to pay you helps bank reconciliation, since you give them flexibility in choosing the payment method that suits them best, and it reduces the rate of non-payment.