The whole bank reconciliation process can be simply summed up as a process of understanding and bringing together two activities done at two different times into one framework. These two activities take place at the office and the bank but both are very closely related to each other.
In fact, not making an effort to reconcile bank statement at periodic intervals can lead to pressure on regular credit requirements, affect operational efficiencies and leave a huge gap between actual financial position and perceived financial position. This is why bank reconciliation is such a vital cog in the wheel of the accounting system and is a part of MIS submitted to executives to check the financial standing of the company at any given point of time.
Studying the implications of not updating bank reconciliation statements will prove this point. You receive a check from one of your customers but do not deposit in the bank. However you have reduced account receivable in your books of accounts and while it is not yet cash in the bank, your office records show an inflated amount available with you. Based on this you issue a check to your vendor who wants to cash it immediately. Is there money in the bank to cover it? NO obviously.
This is just a micro example of what can happen in a given situation though in reality it is not simplified to this extent and constant turnover of debits and credits in the bank thwarts this serious possibility. Apart from the monetary implications, just think of what it will do to your business reputation if an attempt is not made to regularly update and reconcile bank statement. The other scenarios that might negatively impact your business is checks that have been drawn by you but not presented to the bank, bank charges that have been debited to your account but not reflected in your books thereby giving you excess balance than what there is in the bank and interest credited in your account but not shown in your books.
A bank reconciliation statement is prepared once a month and the primary reason for this is that banks generally issue a statement of accounts for the same period too. This process especially for large corporate entities consume a lot of time and man power and by the time it is over another cycle comes up. Hence it is always advisable to outsource bank statement reconciliation and concentrate on other core issues of the accounting system. The question then is how can outsourcing of reconciliation help you attain peak operating proficiency and keep financial records updated.
Outsourcing agencies that reconcile bank statement do so on a regular basis, ensuring that records are updated as close to real time basis as possible. The benefits that accrue to you are –
- Optimization of books of accounts – You quickly get a true picture of the financials which will permit your records to be consistently updated. Since all outward and inward remittances will be accounted for it will enable you to better plan out your daily operations. It will also give you an accurate insight into other head of accounts namely accounts payable and receivable.
- Any discrepancies will be quickly rectified – By constantly keeping a check on entries made in cash book and bank statements outsourcing agencies can spot any discrepancies quickly and have them easily rectified. Many companies that do the reconciling work in-house leave it till too late by which time any shortcomings becomes a major issue.
- Leaves more time to focus on core issues – Even though reconciliation of bank statements is a major task, there is no room to use any discretionary powers as everything is cut and dried just needing to be matched. Hence if you allot key accounts personnel to this task it will only be a waste of precious man power resources that can be better utilized to formulate key accounting policies and future financial plans. Outsourcing therefore is the best option.
- Less paperwork to deal with – Outsourcing agencies will go into details of related transactions and match it with all outward and inward invoices. Hence your accounts department officials will have much less of paperwork to deal with, this being the single most tedious process in the accounting system.
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While it is true that outsourcing account reconciliation is advantageous for almost all businesses and companies regardless of size it is the large companies with hundreds of transactions every day that stand to gain the most.