The pressure is on for corporate treasurers to do more with less. Straight-through reconciliation is something which can help to free up time for treasury teams whilst simultaneously bringing about vast improvements in the efficiency of the working capital cycle. But before we can begin to think of ways to improve a process, it might be helpful to first reacquaint ourselves with the basics. In this article, we look at what the reconciliation process is, why it is important to treasurers, and what companies can do to optimise the exercise.

It’s no secret that corporate treasury teams today are feeling ever more squeezed, both in terms of their time and resources. It’s something that industry experts are calling the ‘T-bar’ effect. Not only have treasurers been taking on an increasingly strategic role within their organisations in recent years, but they are also having to juggle those new responsibilities with a more extensive operational role too.

Streamlining the account reconciliation not only frees up time that treasurers can then re-deploy to strategic matters, it could also – by enhancing the working capital cycle – make a tangible impact on the bottom line. But what exactly is reconciliation and what does it mean for your business?

The term reconciliation refers to the process of ensuring that two independent sets of records – typically the balances of two accounts – are in agreement. At a fundamental level, it is an activity individuals often perform every day or so, when we check our bank account balance to make sure that each transaction is valid. The reasons are similar in the business context. It is performed for the purpose of internal control; to check for fraud and to prevent errors and ensure financial statements contain accurate information. This is vital because for publicly traded companies in particular, the occurrence of such errors can have very serious implications.

Bank reconciliations

A general ledger – colloquially known as ‘the books’ – is a collection of all balance sheet and income statements, thereby offering a complete record of every transaction over the life of a company. Supporting the general ledger are sub-ledgers, containing details of transactions within a specific account, like the detail for all issued invoices and cash receipts held in accounts receivable, for example. Sub-ledgers are typically summarised before being posted to the general ledger at the end of each business day.

Streamlining the account reconciliation not only frees up time that treasurers can then re-deploy to strategic matters, it could also – by enhancing the working capital cycle – make a tangible impact on the bottom line.

There is always the possibility of errors, however. To check all accounts are accurate, it is necessary to reconcile the balances of the general ledger with the balances of the sub-ledger on a periodic basis in order to identify any inaccuracies in the data. The process begins by analysing the general ledger and the sub-ledger balances to identify any differences, paying close attention to items such as non-recurring transactions where the potential for error is highest.

Naturally, this is quite a complex process when performed in a corporate environment where hundreds of thousands of transactions may be flowing in and out on a daily basis. This means it is imperative to have technology, an ERP or specialist payments software that can provide a degree of automation to various stages of the process.

When a company receives a bank statement, it is also necessary to verify that the amounts detailed on the statement are consistent with the amounts in the company’s general ledger, a process called bank reconciliation. Again, this can be a cumbersome process, not least because amounts which appear in the company’s cash account one month might not appear on a bank statement until later. There are a number of circumstances that could lead to such outcomes. A cheque might, for example, be written at the end of February, which would not clear the bank account until early March – even though the amount would, in all likelihood, have been deducted immediately. An alternative example would be a bank service charge deducted at the end of the month, but not seen on a bank statement until early the next. Obviously, given the two examples provided above, there are often differences found between the balances on a bank statement and the balances of cash accounts. In order to report a true and accurate cash position, some degree of adjustment may be required.

Step-by-step

If there is one golden rule of the bank reconciliation process it is to add the values present on one set of records but absent on the others. The details of the process can be summed up in a few key steps. Here we provide a brief overview of each step, including the key things that the individual or team performing the reconciliations should look out for:

1. Adjust the balance per bank

Adjusting the balance on the bank statement to the true balance should be the very first step. To achieve this, one will need to add deposits that are in transit, deduct any outstanding cheques and account for any bank errors that are identified.

In the case of deposits in transit, that is amounts which have been received and recorded but do not appear yet on the bank statement, there is no need to adjust the company’s records. They must, however, be listed on the bank reconciliation as an “increase in the balance per bank”, in order that the true cash position be reported.

Similarly outstanding cheques that have been written and recorded in the company’s cash account, but have not yet cleared do not mean that the company’s records have to be adjusted. A “decrease in the balance per bank” should, however, be listed on the bank reconciliation.

Finally, the bank should be notified of any errors it has made on a transaction, whether that be an incorrect amount or omission of an amount. The adjustment made might be an increase or decrease in the balance shown on the bank statement, depending on the nature of the error. Once again, the company’s own records are left unchanged.

If bank reconciliation is not performed on a timely basis, the company would consequently be exposing itself to enormous risks. These risks manifest themselves in a number of forms. The company might, for example, have individuals stealing from its accounts. Equally, the company’s banks might be making fee mistakes and charging the company too much.

2. Adjust the balance per books

Once the balance per bank has been adjusted it is necessary to look at what might need to be amended on the company’s own books. This entails making deductions for items such as bank service charges, unpaid cheques, and cheque printing charges. Interest earnings and notes receivable collected by the bank must be added, while errors in the company’s cash account may need to added or deducted depending on the nature of the error.

First on the list of things to be deducted are bank service charges, the fees deducted from the bank statement charged for the bank’s services on the checking account. The banks might deduct such charges without prior notification. Indeed, the company usually only learns such amounts have been deducted after receiving its statement from the bank. Since the charges have already been deducted from the bank statement, the only adjustment needed to be made is to a decrease of the relevant amount in the company’s cash account.

Once these and any unpaid cheques and cheque printing fees have been deducted, the final step is to add values which increase the balances on the company’s chequing accounts but have not yet been listed on the books. Notes receivable, documents such as promissory notes issued as evidence of debt, fall into this category, as do interest earned on account balances. Again, these figures will be automatically added to the bank statement, so to reconcile one must simply add what is on the bank statement to the books.

3. Compare adjusted balances

Now that adjustments have been made to the balance per bank and the balance per books, the respective amounts should be of equal value. If that is not the case an error has evidently been made, and the process must be repeated again – checking carefully for anything overlooked on the first occasion – until the values shown on each are identical. To complete the process, adjustments made to the balance of books must be recorded through journal entries, whilst any adjustments to the cash balance will need to be addressed by crediting one account from another.

Considering both the scale and importance of bank reconciliation, corporates will naturally want to optimise the way the process is performed as much as possible.

Why is bank reconciliation important?

As we can see from the above, the bank reconciliation process might end up being a very lengthy, protracted procedure, especially in large organisations. Without the right technology in place, it may mean trawling through dozens of general and sub-ledgers and bank statements from a multitude of accounts covering, in some cases, hundreds of thousands of transactions. And even when there is an ERP or TMS that is able to perform some of the heavy lifting, some degree of manual intervention is almost always required. So why do companies go to all the trouble of performing this exercise on a regular basis?

The answer is relatively straightforward: risk. If bank reconciliation is not performed on a timely basis, the company would consequently be exposing itself to enormous risks. These risks manifest themselves in a number of forms. The company might, for example, have individuals stealing from its accounts. Equally, the company’s banks might be making fee mistakes and charging the company too much. Without banking reconciliation procedures in place to ensure the accuracy of the books and accounts, there is a possibility that neither issue would come to the attention of the company.

If the balances at the company’s various banks can be confirmed to be correct, by comparing them with the accounting records, however, it can provide an added level of confidence to the treasurer that what he sees in the books is an accurate representation of the company’s cash position. Such information is vital, not only to help the treasurer make important decisions about investments and financing requirements, but also to certify that everything is in check for the auditors. Bank reconciliation, then, should be seen as a critical control to ensure a company’s financial integrity.

Best practices in bank reconciliation

Considering both the scale and importance of bank reconciliation, corporates will naturally want to optimise the way the process is performed as much as possible. Thankfully, there are a number of well-established guidelines companies can follow to improve the effectiveness and efficiency of their reconciliation practices and avoid some of the common, yet preventable, problems that can occur.

Here’s a list of things companies can do:

• Rationalise the number of bank accounts.

  As a business grows and new processes are introduced, bank accounts quickly begin to accumulate. Quite often companies will find themselves with a large number of bank accounts that are effectively redundant. Of course, the greater the number of accounts one has, the greater the workload when it comes to performing bank reconciliations. If the treasury is able to perform a regular account reconciliation exercise, therefore, they might find the number of account reconciliations required can be dramatically reduced.

• Automate (as much as possible).

  Manual reconciliations will always be prone to error, no matter how meticulously the process is performed. In companies with high transaction volumes, the need for a high level of manual input can also be very time consuming, costly and, not to mention, open to fraud. Therefore using tailored reconciliation software which can be deployed quickly, flexibly and cost effectively can be extremely beneficial.

• Reconcile daily.

  Performing account reconciliations on a daily basis can provide the treasurer with greater assurance over the general ledger balances. It can also help the team to keep on top of the work. After all, reconciling a handful of transactions at the end of each day should be much less demanding than tackling a whole multitude at the end of the month. Don’t let them build up.

A special thanks to Bill Blythe, Global Business Development Director at Gresham Computing for providing input to this article.