Suppose you want to start your business in the modern generation. In that case, you will have to develop in-depth knowledge about bank reconciliation as it plays a pivotal role in a modern business. Bank reconciliation plays a huge role in helping businesses manage finances, but for most businesses, it is a tedious task that they have to come across every day. Moreover, banks and financial institutions have to also deal with multiple bank reconciliation challenges, which can make the well-functioning of the business difficult.
In this blog, we will discuss the advantages of online reconciliation and provide challenges arising during bank reconciliation and how you should deal with it effectively. We will start from scratch to ensure that people who don’t have knowledge or minimum knowledge about bank reconciliation can learn its importance and how to overcome the online reconciliation challenge.
Table of Contents
What is bank reconciliation?
The straightforward definition for bank reconciliation is matching transactions coming from the bank statement with the internal company records. The prominent aim of bank reconciliation is to compare every transaction coming from the bank statement with the internal company transaction records.
So, what do most organizations face a problem, and why is bank reconciliation becoming a tedious task for most business owners out there? Below we have mentioned all the challenges faced by businesses during bank reconciliation.
1: Having “n” number of bank accounts, currencies, and transactions:
According to recent research, only 7% of corporate companies across the world operate with only bank accounts. Most of the companies have different bank accounts for national and international transactions. At the same time, a few companies might also have different bank accounts in the same bank, which can lead to reconciliation errors.
In the digital age, e-commerce and online sales have caught the interest of almost every small startup; hence companies have to also deal in different currencies, which is also one of the prominent causes of bank reconciliation errors. Organizations that have to deal with multi-national currencies get numerous bank transactions; hence their accountants have to face various problems when they match transactions.
2: Not following the right format:
As mentioned above, we live in a digital age; hence, we have different systems for different processes. Every business loves to follow a customized system to match transactions, making bank reconciliation challenges. The output on transaction data is available in a different format; hence cross-checking becomes daunting, leading to an increase in errors. The common financial data communication standard followed across the globe is SWIFT in MT or MX messages. Financial data communication can also be different based on the industry as banks also provide information in ACH, BAI, and FIRDS formats.
3: Time differences and fees:
The most common challenge faced by the majority of accountants is a time difference when they match the entry of transactions from the bank statement with the internal documents from the company. As both documents have time differences, cross-matching transaction entries become daunting, providing room for various errors.
Apart from the time differences, the charges applied by the bank or the intermediate company can also be automatically debited from your account when completing the transaction. The automatic deduction of the charges can also make it difficult to crossmatch entries.
4: Differences in currencies:
As mentioned above, the differences in currencies can also lead to bank reconciliation errors. You will receive money in your account in your national currency, while your bank statement will have a different currency which can make matching transactions from the bank with the internal documents difficult. Cross-matching different figures is not everyone’s cup of tea.
By now, you have an idea about the reasons that lead to bank reconciliation errors, but overcoming these errors is one of the biggest challenges for various organizations. Here are a few ways how you can escape from bank reconciliation challenges.
How to overcome bank reconciliation challenges?
As a business owner, you will have to accurately track all the records from ordering stock to making payments and from paying salaries to employees and taxes to the government. Moreover, the global pandemic has also made it difficult for an organization to track bank reconciliation errors as it has limited working hours, and most employees prefer to work from home.
Moreover, the global pandemic has also increased the usage of digital payment mode; hence you will have to upgrade your accounting team to ensure that they can provide the right support by using the right tools to solve bank reconciliation errors quickly.
All in all, bank reconciliation is not a challenge if you know how to manage your business and transactions and how to use the right tools smartly. There are various business tools available in the market that can help you manage invoices to send payment follow-ups.
