As a small business owner, you're likely already aware of the importance of keeping your finances in order. Financial management goes deeper than paying your bills on time and collecting invoices (although those are also important). It involves regularly checking your financial situation to ensure your accounts are in order, your records are up-to-date, and you're spending within your budget.
Among those activities, financial reconciliation is vital in keeping your finances and business on track. Force reconciliations can cause your net income to be over or understated, which means you pay too much in taxes now or too little now and the rest later with penalties and interest because the IRS can ask for a copy of your bookkeeping record.
Here's what you should know about financial reconciliation and how it can help your construction business.
What is financial reconciliation?
Financial reconciliation is a process of ensuring your financial records are consistent and accurate. When you conduct a financial reconciliation, you review financial statements and compare them with your bank statements, credit card statements, vendor statements, and other relevant financial records, such as invoices.
As you do this, you'll look for errors or discrepancies–for example, if a payment appears on your bank statement but not your accounting records or the costs are for different amounts on different records. When you conduct a financial reconciliation, you want to ensure that the money in your bank account matches the money your financial documents show you should have.
Discrepancies need to be addressed, or you'll wind up with financial information that isn't accurate, which affects your cash flow and your ability to make financial decisions. If the discrepancy involves an ongoing payment to you or a vendor, catching it early could save you much money.
Financial reconciliation ensures that all financial transactions are recorded accurately and thoroughly in your accounting system. That way, you know exactly how much money you have and how much is moving into and out of your business, and you can make informed financial decisions.
Types of financial reconciliation
Every business has different reconciliation needs, depending on how big, how many, and what types of transactions it has.
Bank reconciliation involves your business's bank statement to your accounting records to ensure that all transactions have been recorded correctly. You're looking to safeguard your bank statement's bottom line matches your bank account balance. If not, you'll want to determine why. Is there an automatic withdrawal not yet posted to your account? If so, you need to be aware of it to prevent yourself from overdrawing on your account.
Credit card reconciliation involves reconciling your business's credit card statements with your accounting records to ensure that all charges have been recorded accurately. This is similar to a bank reconciliation in that you need to know exactly how much you've spent on your credit card–including pending transactions–to understand how much you have available.
You can also conduct vendor statement reconciliation, examining your vendor statements against your accounting records to ensure all invoices have been paid and recorded accurately. This can prevent any errors in paying your vendors.
You'll need to conduct intercompany reconciliation if you have two units of business or more–such as divisions, subsidiaries, or franchises. This is where you compare financial records between two or more companies to ensure transactions are recorded accurately and consistently.
Why you need financial reconciliation
Financial reconciliation is a vital tool that helps you manage your business more effectively. It ensures your financial records are accurate, complete, and up-to-date. This prevents errors or discrepancies that could lead to financial losses or legal or compliance issues.
It can also help identify any fraudulent activity or transactions you disapprove of, protecting you against fraud and lessening the risk of financial losses. If you have numerous transactions that are difficult to track, regular financial reconciliation prevents accidental overspending or missed payments that could ultimately affect your relationships with vendors.
As mentioned above, many businesses must comply with financial regulations and reporting requirements. Financial reconciliation helps ensure that your business complies with these requirements. If you're not compliant, you can take measures to address the issue quickly before it gets out of control.
How to conduct financial reconciliation
If you're looking to establish a solid, repeatable process, these are a few steps you can take:
Step 1: Identity what types of financial reconciliation you need to perform.
Step 2: Establish roles and responsibilities for each team member involved. Make sure everyone knows and understands what they are responsible for and when.
Step 3: Create a schedule for conducting financial reconciliation regularly. This may vary depending on the size of your business, and you may perform different types of reconciliation on various programs depending on your unique business needs.
Step 4: Ensure all financial data is easily accessible to those who need it. Each time you conduct a financial reconciliation, ensure you have all the necessary documentation and data. Cloud accounting software can help you manage your reconciliation.
Step 5: Conduct the reconciliation: Compare your financial statements to your accounting records to identify discrepancies or errors.
Step 6: Investigate and resolve discrepancies: If you find errors or inconsistencies, look into them and do what you can to fix them. You may have to hunt down additional paperwork, contact vendors to discuss payments, or contact your bank or credit card issuer.
Final thoughts
As a construction business owner, you must make vital decisions to move your company forward. Accurate financial records enable you to make those decisions based on your cash flow and current financial standing.
Bank and credit card accounts are the hubs of all your construction accounting and bookkeeping, meaning all transactions must be coded and input properly to have meaningful, reliable reports.
If you have questions about financial reconciliation or other important financial aspects of your business, don't hesitate to contact us. We're always happy to answer questions and show you how we can simplify business management.
About The Author:
Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com
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