Month End Reconciliation: What You Need to Know

Business owners all ultimately work for one reason: to make money. However, this means a lot more than making cool stuff: you have to watch your cash flow and bank balance. Otherwise, you wouldn’t know if your business is profitable-and you’d have trouble paying your employees.

That’s no good for anyone. Employees don’t stay if they aren’t being paid.

Worse, not having good financial statements makes it hard for startups to secure funding, and no business can file taxes unless they can log their revenue and each expense incurred during the year. Ideally, every business should do an account reconciliation every month. 

What is Month End Reconciliation?

In general, reconciliation in accounting is the process of ensuring that all your posted transactions from financial statements match your business records. In other words, the reconciliation process will ensure there’s a match between accounts receivable, accounts payable, and other general ledger items. At the same time, you might find that everything matches between your financial statements and each GL account.

Practically speaking, account reconciliation is the way that businesses ensure they have the right cash balance in their bank, compared with what they should have. It also shows businesses what expense items exceed the budget, or if there’s a discrepancy.

Why Do You Need to Perform Balance Sheet Reconciliation?

Even the smallest businesses need to perform account reconciliation to ensure that there’s a balance between revenue and each expense. This is true whether you have a handful of employees or several hundred. Most experts recommend that businesses reconcile their general ledger every month, as soon as all the bank statements have arrived at the accounting office.

It’s easy to think that, as someone who runs a business you only need to ensure that you have enough money in your account to pay the bills every month, plus your designated profit margin. However, tracking your transactions to the penny is important. Let’s look at the reasons for balance sheet reconciliation more closely.

Your general ledger is important for tax preparation

Hardware-heavy startups often have a complex expense report. After all, you need to buy a lot of individual parts to make each product unit, and these add up fast. Plus, there are fulfillment, rent, and other business expenses that you need to deduct from your total revenue. And finally, you need to show the IRS what parts of your bank balance are from sales, and which are generated from other sources like investments.

By doing your account reconciliation every month, you’ll make the accounting job much easier at tax time. Essentially, your tax preparation professional will have staff look over the books one more time, and record last-minute GL account changes. Then, they can file your taxes much more easily. Best of all, if you get audited by the IRS, this will involve relatively little inconvenience for your staff. They’ll hand over your balance sheet account with each expense carefully noted. 

You can see where the cash is going

No matter how many transactions you have each month, it’s important to know what makes up your general ledger balance. For instance, every company spends some revenue on wages, along with other employment-related costs like withholding or payroll tax. Your accounting department needs to document how much cash this process consumes each month.

In other words, your bank balance is more than a set of credits and debits. Behind each debit is an expense, while credits represent revenue or transfers from other bank accounts. During the reconciliation process, accounting will establish that your business records match the bank. Once you know everything matches, your records will show where the cash has gone during the month, because there will be a record for everything.

It's easy to catch fraud or embezzlement

Discrepancies happen even for the most careful business. After all, it’s easy for accounting to post a transaction differently than they should, throwing off your balance. These are easy to document and even easier to fix. However, sometimes the account reconciliation process shows a larger problem like fraud or embezzlement.

These days, fraud is getting very common. Recent stories about people claiming government benefits, especially the ones that are COVID-related, abound. In addition, identity theft and credit card fraud are chronic problems that plague even the most careful businesses. Through reconciliation, you can find an unauthorized charge, check, or wire transfer. Then, you can address the issue with your bank. Once your bank balance is correct, you can rest easy.

Unfortunately, sometimes the fraud is an inside job. Especially in fast-growing businesses, it’s easy to hire the wrong person or fail to have sufficient accountability. Luckily, if you reconcile your accounts it’s easier to find the problem before it gets serious. And, you’ll retain the trust of investors and other stakeholders that your accounts receivable is accurate. This is important because general ledger errors and inaccurate financial statements are the best way to get yourself into financial trouble.

Your business can remain compliant with regulatory requirements and be trusted with banks

We’ve already mentioned the IRS, which makes most people nervous. However, as a company you have other concerns. In particular, if you sell securities you need to worry about the SEC. In addition, banks like to be sure your balance sheet account is accurate before they lend you money.

For both venture capital and securities funding, you need to meet strict financial statements requirements. While it’s assumed that an early stage startup isn’t going to make much money (if any), late-state startups that have started to grow quickly need to show significant accounts receivable. Investors at this stage like some assurance that they’ll get a return on their investment, or they wouldn’t give you any money.

Likewise, the SEC has very strict requirements for company financial statements. You’ll soon find that your accounting must be checked by an auditor, for instance. While accounting technology makes this easier, monthly reconciliation is critical to ensuring you can account for all your cash. Using sound accounting principles ensures that you can avoid the most common regulatory pitfalls.

Finally, to get a loan you’ll need to convince banks that you can make the payments. Having robust accounts receivable and a healthy bank balance at month’s end helps make this connection, especially in conjunction with SEC-compliant statements.

This accounting tool is great for planning

In a well-run company, the monthly general ledger reports help executives adjust their strategies and pricing mid-year. Studying the accounts receivable and expense items lets management see where they’re falling short on revenue or profitability estimates. Likewise, they can see what’s working well for the company, then double down on the successful strategies.

Especially in times where there are severe logistics issues, significant inflation, or economic uncertainty, it’s critical that you can pivot quickly to improve cash flow. This way, your business will have a solid bank balance when it really counts and, at the same time, realize investor value. By doing a month end reconciliation, you can get the numbers fast enough to make a difference.

What Is the Account Reconciliation Process?

Because account reconciliation involves ensuring that everything in your bank statement matches a general ledger entry, it’s easy to be intimidated by the process. And while it’s true that doing the work manually takes a ton of time, accounting software can ease the pain significantly. However, you need to understand the process because there’s still a manual component with software.

Verify all your transactions for each financial account

Every month, you need to reconcile every account in your general ledger. However, you still have to do each one separately. To that end, gather all your bank statements together. Open your first account. In the appropriate fields for your accounting technology choice, list the opening balance for your account, then the closing balance. List any expenses like finance charges and bank fees. Then, enter each transaction that your business records say should be there (or import from other software). Ideally, the software will show a difference between opening and closing balance of zero. If so, your records match the bank and you’ve reconciled the account. Repeat this process with every other account.

Correct any discrepancies

If there are differences, you need to go through every transaction on your ledger. In most cases, the issue is a clerical error, but it can also be a bank mistake or a fraudulent transaction. Either way, work through your cash records until you find out what caused the error. Depending on the situation, you might correct the faulty transaction or enter a pair of transactions that corrects the balance discrepancy.

Start at step one with the next account.

Check accounts payable (AP) and accounts receivable (AR)

Next, you need to check your AP and AR to ensure you have documentation for each entry. For instance, do you have a purchase order or approved exception for each vendor invoice? Do you have a sales receipt or PO for all your accounts receivable? In other words, can you justify all the cash you’re expecting to come in. You also need to ensure that these amounts match to the penny, or you’ll have to find out why there’s a difference. Otherwise, account reconciliation is impossible.

Verify payroll and related tax transactions

One of the biggest cash outflows for businesses is labor costs. Therefore, it’s critical that you have enough revenue to pay your employees, and that it arrives in time for the checks to go out. A lot of companies fail because they can’t make payroll. 

However, there’s more to making payroll than ensuring you have enough cash in your bank account. Instead, you need to make sure the timesheets or salary guarantees match what you’re paying out. In addition, you must check that there’s payroll withholding for employee income tax, and that payroll tax is accounted for.

Reconcile any other financial assets and liabilities

Finally, check to make sure all your other accounting items are accurate. For instance, you need to ensure there’s no missing inventory or components. Likewise, there may be depreciation, amortization, and other fancy aspects of your company’s tax preparation that needs to be tracked.

Once you have everything accounted for, you can create the financial statements for both internal and external use. Remember to be careful with these, because if you get audited by the SEC, IRS, or even investors you’ll be held accountable for their accuracy.

Automation Makes Account Reconciliation Easier

There’s no question that month end reconciliation is critical for your business. Especially for startups, where there are a lot of expenses relative to revenue, watching the general ledger balance can be the difference between growth and bankruptcy. 

Fortunately, it can be easy to do your monthly reconciliation with accounting software. For example, QuickBooks and other programs often let you electronically access your bank statements. This drastically reduces the manual processes, especially if your accounts reconcile on the first try.

In addition, you should consider a high-quality procurement solution like ControlHub. Not only does ControlHub track all your purchase orders and other purchasing data, but there are some integrations for accounting software. Even without the integrations, though, you have access to an easily-searchable database of transactions. This way, you can find discrepancies fast-and see your successes easily.

Reach out today for a demonstration.