I can already “hear’ the range of reactions. The business owners are cheering about all of the savings they reap from not having to pay their accountants and bookkeepers for hundreds and maybe thousands of hours during the year. Of course, the financial people are “yelling’ at the same time that you cannot possibly eliminate reconciliations.
New advancements in modern online accounting software such as Xero raise a good argument about the cost v. benefit of doing something that has been traditionally required for thousands of years. Let’s take a look at why this concept may be possible for your business.
First we need to understand why reconciliations have always been necessary. In the days bookkeeping was all done by hand before computers, transactions were recorded in the books of the company and then compared or ‘reconciled’ to bank statements to make sure everything matched. Some items that would not match include:
- outstanding checks (checks that you wrote but did not clear the bank)
- deposits in transit ( deposits that you made that did not clear the bank)
- debit card charges on the bank statement that you did not record on your books
- bank service fees
Many businesses today write their checks online. Online banking also will reflect deposits made but not posted to your account (often called “pending”), debit card charges and bank fees same day. So there is no longer the need to wait for the end of the month to receive your bank statement to make sure your books and the banks agree.
Using online banking and online accounting software means that what we are talking about is actually reconciling between your books and the bank DAILY and not MONTHLY. Having all of this information daily is critical to small businesses that run a near zero bank balance.
Now the only stumbling block is making sure your books are up to date daily. If you are like most small businesses, the person doing your books is also the same person answering your phone, scheduling jobs, taking care of customers and handling anything administrative in your office. The real life problem is that all of these tasks always seem to be urgent and emergencies, and the most likely task to take a back seat is the bookkeeping.
Luckily, there are tools in online accounting systems that can reduce the amount of time devoted to bookkeeping substantially. We are currently working with clients to use technology to train their bookkeeping systems to recognize and code transactions.
This reduces the amount of time on a daily basis that someone needs to spend with the books dramatically. All they need to do is to compare amounts shown by the bank to amounts shown in their accounting software (these two are shown side by side on their screen). If everything matches, all they have to do is approve the transaction. In Xero Accounting Software for example, all they have to do is click an OK button. Any unapproved transactions become the exception and take only minutes to record.
The bottom line is that it takes minutes and not hours each day to do the books. It also increases accuracy and makes the information available to the business owner up to date each day.
Is it perfect? Of course not. There are always exceptions that need o be addressed and new transactions to be trained. But it gets better and better as the software learns about your business. Also, accounting professionals might argue that the balance as of a certain date may not be accurate due to timing differences. For example, if you mailed a manual check on the 31st of the month that did not clear the bank until the next month. The proper accounting treatment would be to show this as an outstanding check. This would mostly affect businesses that have audited financial statements. For most small business owners, the value of having real-time information on a daily basis far outweighs possible small-timing differences.
It is the beginning of the year and now is a GREAT time to contact us to help you save thousands of dollars by reducing your bookkeeping time and eliminating bank reconciliations forever!