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The essence of financial statement reconciliation lies in its execution. Properly implemented, it not only prepares you for an audit but also provides an accurate outlook you can use to guide your business toward a more secure financial future. We recommend a systematic, multi-layered approach for effective reconciliation that will enhance your financial operations.
1. Understanding Key Statements: Before diving into reconciliation, it's crucial to fully understand the three major financial statements: the Income Statement, the Cash Flow Statement, and the Balance Sheet. Each serves a distinct purpose and will need a different set of knowledge and tools for reconciliation.
Example: A retail business needs to understand how inventory costs flow through the Income Statement, affect cash in the Cash Flow Statement, and appear as an asset on the Balance Sheet.
2. Select the Right Tools: While manual reconciliation is possible, it's far more efficient and accurate to use automated tools. Software like QuickBooks, Oracle, or even specialized reconciliation tools like BlackLine or Floqast can be very effective. While automation can help tie the numbers, there are more checks that need to be done that seasoned accountants can do.
Example: An eCommerce startup opts for cloud-based accounting software that links with their sales website, with automated reconciliation features to manage its rapidly growing number of transactions.
3. Team Training: Make sure that your financial team understands the reconciliation process thoroughly. If you're a smaller business, consider consulting with an external accounting firm like Starkmont for initial training, ongoing support, and best practices.
Example: A manufacturing firm with an in-house accounting department conducts quarterly training sessions on reconciliation procedures and updates on accounting standards.
1. Start with Sub-ledgers: Reconciliation often starts at the bank level, with bank reconciliations. Next, the sub-ledger level, such as accounts payable or receivable, before moving up to the general ledger. Verify each transaction against its original source document. Bank reconciliations must be done early to ensure that sub-ledgers are accurate.
Example: A hotel chain starts by reconciling its accounts receivable sub-ledger, ensuring that all room bookings and payments go to the correct ledger.
2. Cross-Check Statements: After sub-ledgers, move to the financial statements. Cross-reference elements of the Income Statement with the Cash Flow Statement and the Balance Sheet. For instance, your net income from the Income Statement should align with cash flows from operations. There are nuances to this, such as if you made income from an asset sale. Consult your accountant or Starkmont to learn more.
Example: A non-profit organization cross-references the net income from fundraising events on its Income Statement with the cash received from operations in its Cash Flow Statement.
3. Identify and Investigate Discrepancies: Discrepancies aren't just errors; they're opportunities for improving financial controls. Each discrepancy should be thoroughly investigated, and its root cause identified for process improvement.
Example: A healthcare provider notices an unusually high amount in its pharmaceuticals expense account. Upon investigation, they discovered a large purchase of medical gloves was also coded to pharmaceuticals, overinflating the expense. The healthcare provider decides that purchases over a certain threshold need to be reviewed, and coding assigned by a senior accountant.
4. Documentation: Maintain meticulous records of the reconciliation process, including the discrepancies identified, adjustments made, and the personnel involved. This not only aids in future reconciliations but also prepares you for any auditing activities. Documentation does not have to be a separate document that takes up precious time. Notes can be added to any of your financial statements.
Example: An agriculture business meticulously documents its reconciliation process, including variations in commodity prices, within the financial statement workbook. Various comments and callouts are notated so that senior management can review all circumstances at a quick glance.
1. Internal Review: Once the reconciliation is complete, it should be reviewed by a separate team or individual not involved in the initial reconciliation. This adds an additional layer of scrutiny. Larger companies should have a controller or CFO in place to review. If you are a smaller business, the business owner or CPA can review.
Example: In a construction company, once the initial reconciliation is complete, a senior accountant reviews before the controller reviews and prepares finalized statements.
2. Ongoing Monitoring: Implement key performance indicators (KPIs) to measure the effectiveness of your reconciliation efforts. Metrics could include the time taken for reconciliation, discrepancies identified, or adjustments made. Close cycles can be long and tedious, so identifying ways to improve efficiency and time spent will be a godsend for your accounting team.
Example: A logistics company sets KPIs to track the time efficiency and accuracy of its reconciliation processes, to track which processes need improvements.
1. Data-Driven Decisions: Use the reconciled data for analytics. A reconciled statement gives a more accurate picture of your financial health, enabling better decision-making.
Example: A digital marketing agency uses its reconciled financial statements to assess the profitability of various client projects, leading to more targeted sales strategies.
2. Forecasting and Planning: Utilize the data for cash flow forecasting, budget planning, and assessing liquidity. This allows businesses to plan spending and savings cycles to optimize their liquidity.
Example: An energy company uses reconciled statements for accurate cash flow forecasting, aiding in decisions about future investments in renewable energy sources.
3. Stakeholder Communication: Accurate financial statements are also crucial for transparent communication with stakeholders, be it investors, creditors, or your own management team.
Example: A public university uses its accurate and reconciled financial statements to transparently communicate its financial health to the board of trustees and government bodies
Phase 5:Consult and Iterate
It's a good idea to regularly consult with financial experts to ensure your reconciliation methods remain up-to-date and effective. Regulatory requirements can change, and as your business grows, so will the complexity of your financial statements.
Example: A food and beverage company conducts an annual review with external financial consultants to ensure its reconciliation process is aligned with industry best practices and regulatory changes.
By investing time and resources into the financial statement reconciliation process, you're not merely adhering to compliance but setting your business on a path towards a more secure financial future.
If you are interested in learning more about financial statements, or how you can implement reconciliations in your business, contact us.
