If you want to know the true financial state of your business, there is nothing like a balance sheet to reveal all, from which investments are paying off to where you are falling short in your operations. But, despite keeping tabs on their bank and operating accounts, many businesses are inconsistent when it comes to keeping and reconciling balance sheets—and some don’t do them at all.
What is balance sheet reconciliation exactly, and why is it important? Simply put, balance sheet reconciliation means taking a periodic look at your key accounts and ledgers to verify the beginning and ending numbers and to ensure all transactions are accounted for and properly detailed. Ideally, this should be done on a monthly basis. Your balance sheet should include assets, such as inventory, cash and fixed assets, as well as liabilities, including payments due to vendors, staff, customers, taxes and payroll.
Not only does this provide an accurate snapshot of where your business stands at any given time, but it also helps protect your company from bookkeeping errors and oversights as well as fraud by employees or scammers.
“It’s important because it allows you to trust your financials and rely on them to make business decisions,” says Brad Shaver, director of outsourced accounting for XMI. “Without it, you could be making decisions based on invalid data.”
Having an extra set of eyes on every account once a month also makes it easier to spot any suspicious or unusual activity in your books, Shaver notes.
“If you do balance sheet reconciliation right, it can give you peace of mind,” Shaver says.
Business owners often underestimate the value of this practice or don’t know how to efficiently incorporate it into their accounting operations. Here are three common mistakes businesses make when doing balance sheet reconciliation—and how to avoid them.
Not doing it often enough. Balance sheet reconciliations are often the first to go when bookkeepers are stretched for time and resources. Many make the mistake of thinking that they can always come back to it later, but that’s easier said than done. Waiting several months to catch up on balance sheet reconciliations can leave you strapped for cash and your books in even greater disarray. Reconciling your cash accounts weekly and balance sheet monthly helps ensure that your transactions and deposits are posting promptly and correctly and enables you to catch any issues early.
“If there is any variance in your accounts, it allows you to identify and investigate them while they’re still fresh so you can fix them in the same month they occur,” Shaver says.
And don’t just stop at cash and accounts receivable. Be sure to reconcile loans and other debts you owe to vendors, banks, other businesses and creditors. Unless you write these off as liabilities on your balance sheet, you can expect discrepancies to appear.
Spreadsheet errors. It’s easy to transpose a number or overlook an entry when reconciling balance sheets. And making corrections to financial spreadsheets can also be tricky, especially when multiple people have access to them. It’s difficult to accurately track any edits or changes that are made, and the smallest error can throw all your estimates off. Automating your bank reconciliation process can help you minimize the inevitable human errors from manual data entry, maintain consistency in your spreadsheets and keep better track of your documentation and records in case of an audit.
Lack of detailed records. Hope to sell your business or buy out a partner one day? If so, you must be able to vouch for all the figures on your balance sheet. It can be tempting to skimp on reporting if your balances look correct, but detailing your records now can save you headaches later. Document each account reconciliation with a title, date, description, appropriate checks and balances and links to supporting documents, such as signed contracts and other accounts. Properly reconciled balance sheets also help validate the accuracy of other important business documents, such as your income statement, and ultimately gives investors greater confidence in your financial credibility.
One more tip: When doing balance sheet reconciliations, it’s a good idea to get more than one set of eyes on your accounts to authenticate the totals. If you lack the time or resources to get your balance sheet reconciliation on track, outsourcing these services to an experienced accounting provider like XMI can be a worthwhile investment.