Differences between bank reconciliation and cash flow?

Differences between bank reconciliation and cash flow?

Bank reconciliation and cash flow are two financial terms that are often confused and raise questions, especially for entrepreneurs who are starting their businesses now.

Some people tend to think that both terms mean the same thing, or can be replaced, one by the other, as if they were a choice of process to be used in the company.

The truth is that bank reconciliation  and cash flow are different terms that complement each other for the best performance of a company’s financial process.

Want to know more about the difference between the two?

What is bank reconciliation?

Bank reconciliation is the activity of verifying the company’s financial inflows and outflows in relation to its bank account, as a form of security and maintenance of the financial health of the business.

In general, bank reconciliation  checks the company’s financial records of payments and receipts and compares them with the bank statement in order to identify errors, ensure balance control, prioritize budget planning and forecast the cash flow,

What is cash flow?

The cash flow  acts as a record of the company’s financial inflows and outflows. It is a documentation where the responsible team enters everything that was paid and received during that defined period of time.

It can be done through an Excel spreadsheet , a cloud document, or even an automated platform — which will then facilitate the bank reconciliation process.

Cash Flow vs Bank Reconciliation

You can understand why these terms are often confused, right? After all, we are talking about financial inflows and outflows of a business and the control of this activity.

To put it simply, cash flow is nothing more than a record of the company’s inflows and outflows. Bank reconciliation, on the other hand, is the activity carried out to verify the cash flow, that is, the comparison between this record and the bank statement.

How to perform bank reconciliation

Although it seems simple, bank reconciliation is a verification that needs extreme attention to detail, as well as organization and deadline management. After all, this confirmation of financial data  is important to keep the company’s budget planning up to date and provide real forecasts for the coming months.

See below how to perform bank reconciliation!

Set the period

First, it is necessary to define the period that will be analyzed, after all, the register of cash flow inflows and outflows is updated with different frequencies for each company, according to the movement and size of the business.

Therefore, define the bank reconciliation interval to be made and consider that the shorter the time interval, the lesser the chances of errors and inconsistencies accumulating or even getting lost in the flow.

Choose a tool

As we said, it is necessary to choose a tool to maintain the cash flow, which can be an Excel spreadsheet or even a specific digital platform for this activity.

Whatever the choice, remember to consider not only the activity of registering inputs and outputs that make up the cash flow, but also the comparison with the bank statement. That way the work can gain agility and practicality!

Organize financial records

Now that we’ve defined the period and selected the tool, it’s time to organize the financial records, that is, keep the cash flow within the standards you want, thinking about facilitating the bank reconciliation process.

Define what information should be in the cash flow, which people can edit these amounts and add new ones, and who has access to the document or tool.

Analyze the bank statement

Then, the next step is to analyze the bank statement, verifying the amounts indicated in the cash flow, as well as additional information in case it is necessary to confirm any transaction carried out.

Look for and fix inconsistencies

After analyzing the previous step, the responsible accountant must compare both documents, cash flow, bank statement and look for any inconsistencies or errors and understand how to solve them.

create reports

Last but not least, it is through this bank reconciliation activity and cash flow analysis  that the accountant can prepare financial reports, allowing a general view of the movement for certain time intervals and comparing them with each other.

Main process errors

As reported, although it seems simple, bank reconciliation requires a lot of attention to detail and good organization of cash flow, as well as periodic and secure documentation of the company’s inflows and outflows.

Therefore, it is common for errors to occur and the responsible accountant to find inconsistencies between both documents. The important thing is to identify and correct these differences as soon as possible so as not to interfere with the overall financial view  of the business.

Lack of releases

A company’s financial system makes forecasts  based on entries made during the month. Therefore, if any department forgot to enter a revenue entry , this difference will appear on the bank statement. As the entry was not made, it will not be possible to compare with the cash flow, as the information was not entered.

Casualties error

In the same way that revenue entry errors occur, it is also possible that some sector forgets to write off an expense  that has already been paid previously. If it is entered as an expense that will be paid in the future, you must go back and write it off, otherwise this difference will also appear in the bank reconciliation process, appearing in the cash flow and not in the bank statement.

How to reduce errors in the process?

It is essential to have a specialized accounting team that is looking at the company’s bank reconciliation process, aligned with a good organization of cash flow records and documentation.

In this way, you can ensure that bank fees are being monitored and will not be a surprise addition to the final statement. In addition, it is a good combination to ensure that the process is done correctly, with accuracy and attention to detail.

With a bank reconciliation of excellence, it is possible to make good predictions for the business, as well as make better decisions.

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