Reconciliation is the cheapest insurance your business will buy

Ask an owner whether their books are reconciled and the answer is usually a confident yes. Ask when the corporate card last tied to a statement and the answer becomes less certain. The distance between those two responses is where most expensive accounting problems begin.

What reconciliation actually means

Reconciliation is proving that what your accounting system claims happened matches what independently did happen somewhere else. The bank statement is the evidence. The ledger is the claim. Reconciling means agreeing the two and explaining every difference.

That final clause carries most of the weight. A reconciliation with an unexplained variance is not a reconciliation. It records that a difference exists without resolving it, and those differences accumulate.

Done properly it covers considerably more than the chequing account:

• Every bank account, including dormant ones
• Every credit card, where personal and business spending tend to blur
• Loans and credit lines, agreed to the lender statement including accrued interest
• Payroll liabilities, agreed to the CRA statement of account rather than to the payroll software
• HST and GST control accounts, agreed to what was actually filed
• Intercompany and shareholder loan balances, agreed in both directions

The final two are the accounts we most often find have never been reconciled at all, including in businesses that are otherwise well run.

Closed is not the same as reconciled

Accounting software will produce a clean looking profit and loss from data that has never been verified against anything. The report generates and the columns add. Nothing on screen indicates that the bank balance in the system has not matched the actual account for eighteen months.

This is the most common misunderstanding we encounter, and a reasonable one. A closed month means entries were made and the period locked. A reconciled month means those entries were proven against independent evidence. Only the second produces a figure that can be defended.

What it costs you in the meantime

The cost is invisible at the time, which is why the discipline slips. It arrives later in four fairly predictable forms.

Tax on money you never made

Duplicate revenue inflates reported income and is taxed accordingly. Expenses without support are disallowed. Input tax credits sitting in an unreconciled HST account are never claimed. We have opened files where the recoverable amount exceeded the full cost of the cleanup.

Borrowing that quietly costs more

Lenders price uncertainty rather than refusing it. When statements cannot be tied to source, the usual outcome is not rejection but a higher rate, a tighter covenant, or a personal guarantee that would not otherwise have been required. That premium is paid monthly for the life of the facility.

Decisions made on fiction

The largest cost and the hardest to observe. Pricing set against an overstated margin. A hire approved against cash already committed. A product line retained because its true landed cost was never allocated. The figures were wrong, so the decision was wrong, and the two are rarely connected afterwards.

Reassessment risk

When records cannot substantiate a filing, the burden of proof sits with you. The CRA is entitled to assess on the information available to it. Reconstructing support years afterwards, from banking records and vendors who have since changed systems, costs several times what maintaining it would have.

A five minute test on your own books

You do not need an accountant for an initial read. Open your file and work through the following.

1. What is the date of the last completed reconciliation on your main operating account? More than forty five days indicates you are behind.
2. Does your balance sheet contain Ask My Accountant, Uncategorised Expense, Suspense or Opening Balance Equity with a balance in it? Each one is unresolved work sitting in plain sight.
3. Does your HST control account agree with the last return filed? If the answer is not immediately available, it generally does not.
4. If you have more than one company, do the intercompany balances agree in both sets of books? A difference here is always an error. It is never a timing quirk.
5. Could you produce supporting documentation for a transaction from eight months ago within ten minutes? That is approximately the standard a review applies.

Two or more unsatisfactory answers generally indicates the file needs a diagnostic rather than a catch up. Those are different engagements with substantially different costs.

Making it routine

Reconciliation is inexpensive as a routine and costly as a reconstruction. Businesses that avoid this problem tend to do the same few things.

• Reconcile every account monthly, on a fixed date, treated as non negotiable
• Capture documents when the transaction happens rather than at year end
• Never carry an unexplained variance forward, however small it appears
• Reconcile payroll and HST to the CRA account, not to the software that produced the filing
• Have someone other than the person entering transactions review the result

None of it is sophisticated. It is simply consistent, which is the harder requirement. Measured against the cost of the alternative, the return exceeds almost any other control a small business can implement.