What is Cash Reconciliation and its Benefits for a Business?

Picture of Gary Jain
Gary Jain

Founder, Ledger Labs

What is Cash Reconciliation

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Are you the one who always faces some donuts related to cash reconciliation and its advantages? We think that this blog will help you remove all the confusion and get all the required answers.

When it comes to the financial soundness of any business, the managers and senior-level executives have to take care of a lot of factors. One such factor is cash reconciliation. Different businesses and managers have different sayings about the subject. Some say that financial management is complete with an efficient and effective reconciliation of cash however, the rest believe that the process is just unnecessary and businesses can make do without executing it. P. S. the former ones are right. 

Cash reconciliation has the utmost importance for any type of business involved in any form of industry. However, just saying that reconciliation is crucial is not enough to justify its importance. So, to justify the same, we have put together this article. Here, you will find various advantages of the concept along with the cash reconciliation definition. So, let’s proceed to the same, right away. 

What is Cash Reconciliation? 

Reconciliation means the process of comparing and matching anything with others. Reconciliation of cash is quite similar to this as well. Under this process, the businesses match the daily, weekly, monthly, or yearly cash incoming and outgoing within the accounts with the bank statements. If there are any cash discrepancies between the two, the business can rectify the same. 

Additionally, with the help of the procedure, any business can figure out the sources of current cash outflow and inflow. Why businesses use this procedure; because they can also project future cash incomings and outgoings with the help of this simple procedure. 

So, now that the cash reconciliation definition is clear, let’s learn about its importance. 

Benefits of Undertaking Cash Reconciliation in a Business 

Below are some of the major benefits of using and practicing the procedure of cash reconciliation in any business. These benefits will help you understand the cruciality of reconciliation and how businesses can promote business growth by undertaking this simple procedure. 

Skip Omissions and Human Errors 

One of the major benefits that you can avail of using the reconciliation of cash is reduced omissions. The accountant or the bookkeeper is only human and humans tend to make mistakes. Sometimes such mistakes may not affect the business in any way, however, the severity of the omission can also be dire. 

So, with the help of reconciliation, any business or its executives can ensure that there are no omissions or mismatches in the transactions of the business. This ensures the business that it gets the true cash position within the organization. Additionally, when the same transactions are used to create further books of accounts and statements, the business and its investors can rely on the documents because the data is presented after extensive reconciliation. 

Always Keep In Check Fraudulent Activities 

At times, the reason for the doom of any business is its own employees and executives. When the scale and number of transactions in a business are huge, the chances of fraud increase. The accountant or the bookkeeper can easily omit any transaction from the books of accounts and gain the advantage of the amount. This may not affect the business instantly, but can be very dire in the long run. 

So, a smart businessman will always be in favor of conducting a thorough cash reconciliation. You can figure out if there is any cash theft and also hold the person who is indulged in the fraud, accountable. If you tend to ask questions like are the payments processed with or without consent, if any payment omitted from the books, etc. then you should indulge the business in a regular reconciliation process.

You can figure out if there is any cash theft and also hold the person who is indulged in the fraud, accountable. 

Accuracy of Data in Accounts 

Another added benefit of reconciliation is that you get accurate data in the books of accounts. Cash account errors are one of the most common ones faced by any business. Cash reconciliation allows you to reduce the same to a minimum, that too, very easily. Additionally, the procedure helps in ensuring that the data provided and recorded in the sheets and accounts are current and reliable across all periods. 

It may not be as common, but even the banks can make some mistakes in recording and sharing the transactions with the business accounts. So, it’s best to be prepared and ahead of such errors and present the same as required for rectification. All this is possible only with the help of cash reconciliation. 

Precise Tax Recording and Filing

Cash is a crucial element for any business. Cash explains the soundness of the business as well as its performance. Additionally, while filing tax returns as well, cash plays an important role. So, when the accountant or the senior-level executives are figuring out the tax liabilities of the business, they can do everything right if the cash has been reconciled. 

This is because the data present in the accounts is accurate and reliable and the business and its executives can proceed to use the same for various requirements. Additionally, when the tax is filed right, you can keep problems like the IRS audit at bay. Moreover, sometimes the business levies some tax from the client for their products and services. In such cases, the business can get the accurate amount from the parties after calculating and reconciling. 

Maintain Sanctity of the Financial Statements

Every transaction related to the business is very important. This is because every transaction, in one way or another, gets involved during the creation of financial statements. If a fraudulent transaction is recorded in the books of accounts during the early stages, it can affect the performance and reliability of the financial statements. 

So, with the help of cash reconciliation, businesses can ensure that the data, right from the initial process, is accurate and reliable. This, in turn, also retains and maintains the sanctity of the financial statements driven afterward using the initial data. 

Better Cash Forecasting and Prediction 

Cash forecasting is known as the process of predicting the future position of cash with any business. If the business conducts a thorough cash reconciliation, then it can have an idea about the repetitive and common sources of cash inflows and outflows. With the help of this data, the business can easily predict the cash incoming and outgoing during a specific period and make amends in the business accordingly. 

When the business does not involve itself in cash reconciliation, it may not get accurate data related to the cash sources. Afterward, when the business forecast the cash requirements, it will get the wrong details, concealing the true position of cash within the business. This wrong recording and prediction of cash can have dire consequences for the business in the long run. Incorrect cash forecasting can be very troublesome for a business and may cause damages that can never be undone. Hence, the simple solution for such problems is cash reconciliation. 

How to Do Cash Reconciliation in a Business? 

Generally, there are two major ways of conducting cash reconciliation in any business. One is called Documentation Review while the other one is Analytics Review. Although both of these techniques allow the business to ensure the accuracy of cash receipts and expenditures, they differ on some levels. 

Analytics Review

Under this method of reconciliation of cash, the business compares the cash usage and inflow with the previous period. This method may not be as reliable in the reconciliation of short-term cash transactions as it compares the data of the present period to a previous one. 

For example, let’s assume that a business used to incur a cash charge of $4 million per year for labor. But during the present year, it amounted to $40 million. The executive then cross-checked the amount in the books and found out that the accountant had added an extra zero at the end of the transaction. 

Such discrepancies can be easily pinned out using the Analytics Review technique of reconciliation. 

Documentation Review 

Under this method of reconciliation of cash, the business compares the cash usage and inflow in real-time. This method is quite reliable in the reconciliation of short-term cash transactions. This method allows the businesses to cross-check the amount of the transaction at the end of the day, week or month as suited. Within this method, every single transaction is compared with the bank account(s) and recorded afterward. 

For example, let’s assume that a business used to incur a cash charge of $40. But the accountant has no idea about where it was spent. He/she may assume that the transaction was for some stationery products or something. Being of a small value, the accountant skips it for later. But during the reconciliation, it is found that no such transaction amounting to $40 was incurred in the business at any time. Later, when contacting the authorities, it was found that the data of the account was maliciously used by a criminal for personal use. The business can easily get it rectified from the bank. 

What If I Don’t Undergo Cash Reconciliation in My Business? 

If there is any discrepancy between the statements and the sums, they must be clarified. Reconciling your statements helps you to see errors before they become major issues.

Most significantly, balancing your statements aids in the detection of fraud before anything. It’s crucial to remember that even under the federal law, consumers have stronger safeguards for bank statements than companies. As a result, it is critical for companies to discover any fraud or suspicious conduct as soon as possible. They cannot always rely on the respective bank(s) to compensate for theft or inaccuracies in their accounts.

Get Your Cash Reconciliation Done with The Ledger Labs

So, after having a look at the data presented in the above sections. The importance of the reconciliation of the cash must be clear. It’s very crucial for the business to ensure financial soundness and reliability. For the same, the first thing that you can do is conduct a thorough and regular reconciliation. 

If you think that the executives at your business need some help with the process. Then you can hire the Startup Accounting Services at the Ledger Labs. These executives have extensive knowledge and experience with reconciliation. They can easily conduct the procedure as per the requirements of the clients. They will also suggest how to do cash reconciliation that benefits your business the most. For further information, contact Ledger Labs for a free consultation.

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