Manage your business finances with Wave—it's free.

Send invoices, get paid, track expenses, pay your team, and balance your books with our free financial management software.

Get started

What is bank reconciliation?

Sep 23, 2019 | 5 minutes read | Accounting & taxes

Though it might be tedious, bookkeeping is a critical part of every business.

If you’re uncomfortable with the accounting part of running a business, you’re not alone. Only 14% of small business owners feel “extremely knowledgeable” about finance.

But inaccurate bookkeeping could mean the difference between owing thousands and tens of thousands in taxes. Some critical errors can even affect the profit your business makes, leading to even bigger problems.

Luckily, a close eye on your accounts can mitigate most of those risks. That’s where account reconciliation (also known as bank reconciliation) comes in.

What is bank reconciliation?

Account reconciliation, or bank reconciliation, is when you compare your accounting records to the bank-provided financial statements. Essentially, you’re looking to make sure the information, transactions, and dollar amounts match. It’s one of the simplest and most straightforward ways to identify errors or detect fraud.

“Often, there are transactions in your accounting records that haven't yet been recorded by the bank,” explains Rob Stephens, founder of CFO Perspective. “These differences are called reconciling items. The most common reconciling items are checks that you wrote that haven’t yet been deposited by the person or company you gave them to.”

Why you need bank reconciliation

Money is a constant challenge for small businesses. Three-quarters of entrepreneurs feel they need more cash, and the second-biggest reason they fail is because they run out of it; 20% of small businesses inevitably fold in their first year.

Detect errors

While fraud typically involves malintent, accidental errors are also a possibility. Errors can happen both on your end and with the bank, so it’s important to notice discrepancies and find out which entry is accurate, and which needs to be addressed.

Stephens spent time bookkeeping for a non-profit when he was in college. “I had entered a deposit amount from a fundraising event incorrectly in our records,” he says. “It looked like the event had made more money than it really did.”

When he did an account reconciliation, he discovered the mistake — and had to explain to the executive director why they didn’t raise as much as they had thought. “It was embarrassing, but it taught me that reconciliations are very effective for catching mistakes,” he says.

This is just the tipping point of errors which may arise without the usage of account reconciliation. Other common bookkeeping mistakes include:

  • The duplication of expenses
  • Bank feeds missing a transaction
  • Bad data entry

In any of these scenarios, account reconciliation will help you catch any errors and keep your finances in order.

Identify fraud

Fraud is the top payment-related challenge businesses face. Bank reconciliations can help you identify fraud before it gets out of control, saving you money and further complications down the line.

“I’ve found fraudulent charges and caught them, which allowed me to alert my bank and shut down that account quickly, before too many fraudulent charges accrued,” says Darien Wilson, VP of Volare Systems, Inc. Her credit card number was stolen, and she noticed unauthorized transactions before it bled out her accounts.

Stephens has his own experience catching fraud thanks to account reconciliation. “One day, the wife of a small business owner I know asked why he was writing checks to an employee. She had seen the checks on the bank statement and thought it was odd,” he explains. “He wasn't writing these checks. The employee was committing fraud, and it was caught by reviewing the bank statement.”

If there are transactions that don’t look familiar to you, investigate. You never know what you’ll uncover.

Improve business operations

If you notice errors are becoming a regular thing, there’s likely opportunity to improve the operations of your business. Improving efficiency means saving time—time saved is money saved and potentially earned.

“It can also help point out if you need to change how cash flow or record keeping are handled, especially if you are experiencing issues with bounced checks or using lines of credit when you don't actually need to,” says Chane Steiner, CEO of Crediful. “You’ll find discrepancies before anything gets out of hand.”

Stay in control

Being on top of your financials gives you more control over them. “As an entrepreneur, reconciling my accounts is important because it helps me ensure that I have enough money in my accounts,” says Wilson.

She also credits bank reconciliation with avoiding unnecessary fees. “Very often, I find that there are unexpected charges on my accounts that I wouldn’t know about if I didn't reconcile,” she says. “For example, sometimes my bank charges a fee that I was not expecting.”

She also mentions that it helps her stay on top of auto-drafts and employee spend. “It's important for me to track those so I don't overdraw my account,” she says. “And because multiple people have cards on our bank and credit card accounts, it gives me a chance to keep an eye on the charges.”

Gain peace of mind

According to the Gallup Wellbeing Index, 45% of entrepreneurs feel stressed, and 34% feel worried. Compared to 42% and 30% for other professionals, these numbers are higher than average. Money is one of the biggest stressors in our life. In fact, nearly three-quarters of Americans stress about it at least once a month.

By knowing what’s in your accounts, validating the data is accurate, and avoiding erroneous fees, you can turn money from a high-stress topic to a more-than-manageable part of your business.

How to do a bank reconciliation

Steiner likens bank reconciliation to balancing your checkbook. “If you know how to do that, you already know how to do [an account reconciliation],” he says.

To start, look at your accounting system. It’s a lot easier to use accounting software like Wave instead of manually updating a spreadsheet.

If you’re taking the old school approach, go through the spreadsheet line by line, comparing to your bank statements. Make sure balances match and dates coincide (the date won’t always be the same. For example, paper checks and credit card transactions might take a few days to post).

Reconciliations are very easy with accounting software like Wave,” says Stephens. “You can create a link from the software to your bank account. The software downloads the transactions and balances from the bank. It shows the balance at the bank and in your accounting records, and notes if there’s a difference.”

If something from your bank statement isn’t reflected in your own records, look into it. Is it just a matter of not entering it yourself or a delay in posting? Or is there a bigger issue at play here?

How often should you do an account reconciliation?

Steiner recommends reconciling your accounts at least monthly.

Wilson does a full reconciliation monthly, but she also checks in on a daily basis. “Because I keep up with transactions online throughout the month, the monthly statement reconciliation doesn’t take long,” she says. “If I waited until the end of the month to reconcile, I might miss unexpected or fraudulent expenses and find my account overdrawn. This is why I reconcile with online downloads at least every few days, if not daily.”

Whatever your cadence, make it a regular business practice. This will help you maintain the cash flow you’ve worked so hard to build.

Moving forward with bank reconciliation

Wave makes it easy to do a full account reconciliation, protecting your business and ensuring you get the money you worked so hard to earn. Once you’re comfortable with account reconciliation, there are a few more things you could change to help manage your money more effectively, and give yourself time back to run your business.

Award-winning financial software designed for entrepreneurs

Read next