Business owners are often looking for ways to make their lives easier, especially when it comes to the financial management side of their business. As everything continues to become digital and increasingly more tasks become automated, there are several opportunities for business owners to take control of their finances. However, the one area of financial management that continues to fall short and deserves more attention from small business owners is bank reconciliations.
Bank reconciliations are critical to the financial stability of every business, yet they are often put off, inconsistent, or incomplete. This can present many challenges — especially for a small business owner — when it comes to protecting their financial footing. The beginning of a new year is a good time to examine why bank reconciliations should be a top priority for small businesses, issues that may arise in your bank reconciliations, and how to resolve these issues.
Why you need to prioritize bank reconciliations
Reconciling your business’s bank accounts is crucial to its financial stability, ensures compliance with obligations, and allows you to plan ahead. Consistent bank reconciliations allow you to:
- Identify, correct, and avoid clerical issues: It’s easy to conduct and record a transaction and then forget about it. Bank reconciliations allow you to view your business’s cash flow in its entirety and detect issues with transactions entered, identify bounced checks to your vendors or from your customers, and avoid unnecessary bank fees.
- Monitor fraudulent activity: Small businesses are especially susceptible to various types of fraud for a myriad of reasons. However, regular and consistent reconciliations can help you catch, report, and remedy suspected fraud immediately. You can easily see if checks have been manipulated or duplicated, if there have been unauthorized transactions, and identify missing deposits.
- Provide accurate information to avoid penalties: Missing transactions can often lead to misrepresentation of your financial position and incorrect reporting of your sales and personal tax obligations. Simple misreporting errors in your tax obligations can lead to expensive penalties and exhausting audits from both the Washington State Department of Revenue and the IRS. Timely and detailed reconciliations can help ensure you are providing accurate information to all reporting agencies.
All of these issues can quickly add up and cause devastating circumstances for you, your family, and your business. Thorough and consistent bank reconciliations are your best line of defense against any potential fraud, tax disputes, and financial chaos.
How to face your bank reconciliation issues head-on
When you’re dealing with a significant number of transactions, hefty discrepancies or old unreconciled items, all potentially across several years, cleaning up these issues can take significant time and energy. While it may be tempting to make a one-time correction to balance your accounts and clear outdated items, this can create dangerous avenues for unresolved discrepancies to snowball into large issues and bleed into other areas of your finances. Because of these adjustments, we often see small business owners unaware of their true financial position and facing numerous tax issues.
The financial and tax consequences at stake prove that bank reconciliations should be a high priority for any business owner, and they should not be left to chance. There is already an abundance of uncertainty in our everyday lives.
Mekea Neslin is a senior accountant with Cordell, Neher & Company PLLC, a Wenatchee public accounting firm. She can be reached at 663-1661.