Taking bank reconciliation for granted

Bank reconciliation is a perennial process and for most, a monthly affair and for some yearly while others, probably done when it is absolutely needed to be performed.

Most SME owners will relegate bank reconciliation as just an accounting task and at best, administrative one at month-end, leaving it entirely to whoever is doing it. And in most SME owners’ mind, it is more of a chore of gathering bank statements, perhaps answer a few questions by the book keeper and get that file into the cabinet. For the hardworking ones, it may be done daily or weekly if not monthly, the most usual frequency. However, there is a surprisingly group of SME owners that would only perform bank reconciliation on an absolute need basis.

So, what exactly is bank reconciliation and do we really need to do this? Bank reconciliation is process to confirm the amount of cash at bank that a company has in its financial records to what is actually in the bank account. Its simplest form is where the amount of cash shown per bank statement is the same as what is in the financial records. Any other scenarios that is not in this simplest form would indicate a timing mismatch of either receipts (eg deposits, cheques or received) or payments (eg payment cheques issued out) between the financial records and what is in the bank. The benefit of knowing this timing mismatch is this provides a perspective on the business cashflow.  The cheques or cash that is received is not real spendable cash until it actually clears the bank. Likewise, the cash in the bank relating to the payment cheques issued and mailed out to suppliers is actually spendable until the other party banks in and monetise it. Therefore, by performing bank reconciliation and understanding its outcome, provides a way to squeeze out additional financing by managing this timing mismatches for the SME owners during tight cash days. In addition, it will highlight any recording errors in its financial records either relating to missing receipts or payments, erroneous amount or timing.

For a business for which the cash collection or payment function is not performed by the SME owners themselves, the overlooked benefit of bank reconciliation is the control function over the cash handler. In a recent case of an SME owner who happens to belong to the group of not performing bank reconciliation, got a surprise when he has to deal with it due to an imminent mandatory audit that could not be deferred any further. A performance of bank reconciliation over past 3 years shown a cash mismatch of several hundred thousand, an amount missing from the bank statement, which happened to be the amount that the cash handler has taken over the years from the company. Despite the controlled cash handling process of his business whereby cash or cheques collection at retail points are recorded and taken to HQ, supposedly the safest place, it was indeed the most unlikely place where the fraud has perpetuated from. It was a pleasant surprise as the business was very tight on cash at that point and almost to the brink of bankruptcy. This revelation provided an additional liquidity almost akin to forced saving over the years to tie the company over this crucial period. It is also very fortunate that the company is able to get full restitution from the employee concerned and on hindsight it is probably glad that without this hidden forced saving, the company would be in a dire situation. However, not everyone is as blessed as in this case and the least we could do is not to take bank reconciliation as granted.