The Necessity of Daily Cash Reports and Reconciliation

By Mike Crabtree

I occasionally do outside consulting work in order to help small companies ensure that their accounting processes are in good working order. Small construction companies often have limited resources, and accounting is not always high on an owner’s list of priorities, especially if operating at a “Mom and Pop” level. However, this can lead to problems.

Bank Account Reconciliations

Perhaps not surprisingly, one of the areas I am frequently asked to address is that of bank account reconciliations. People get involved in the day-to-day activities of operating a business and put off the monthly reconciliation of their bank account for a few days…or weeks…or months.

I was recently asked to come in and catch a company up on their bank reconciliations. The operating account hadn’t been reconciled in 15 months. They had a strong positive cash flow and were not audited, so reconciliations hadn’t been a high priority. After all, what could really be wrong?

The owner wasn’t directly involved in the accounting process, relying on a very young “bookkeeper” he had hired on the recommendation of a friend. She was very good at the day-to-day tasks, such as filing paperwork, processing lien waivers, writing checks, making deposits, etc. However, she didn’t really understand the mechanics of properly recording cash transactions, even at the basic level of understanding that a deposit should be a debit to the ledger cash account and a check should be a credit. Sometimes, she would forget to record a deposit.

Additionally, as is common with many small companies, the owner would frequently write manual checks when he was out of the office. Sometimes he would tell her, sometimes he wouldn’t. Sometimes she would record the ones she knew about, and sometimes she wouldn’t.

It didn’t take long before she realized she was in trouble, but she was afraid to tell her employer. She did make an attempt to reconcile the cash account at first, but because of the number of transactions that had occurred during the month and her lack of understanding, she gave up…and continued on as before.

Again, cash flow was strong, so no disaster occurred.

Eventually, the company wanted to get a bank loan for expansion (they had never before had one due to the strength of their cash flow), and part of the lender’s requirements was current bank reconciliations. At this point, I was called in.

Ultimately, I discovered that there were more than 500 improperly recorded or missing transactions directly related to the cash account, which also caused the books to be significantly off as a whole. After a significant amount of time and fees for my services, we were able to get his cash reconciled and the books in order. The company got the loan, but it was discovered that there was $150,000 less cash than thought. It was an expensive lesson.

Now, the bookkeeper in this situation was a good person, no fraud was committed; she just didn’t understand her job as well as she should have, got behind and was afraid to ask for help. I was able to teach her some basic “debits and credits” so that she could successfully go forward in the future.

The owner in this case was very understanding and kept her at the company (along with my phone number). However, this entire situation could have been avoided if he had required and reviewed the bank account reconciliation. Still, even a monthly reconciliation might have been inadequate given the number of transactions that occurred over a 30-day period.

This is why I recommended a daily cash report with short-term anticipated cash inflows and outflows as well as a reconciliation of cash. With internet access to banking activity available today, it is unnecessary, in fact unwise, to wait until your monthly bank statement to reconcile.

A daily comparison of your banking and book activity allows missed cash transactions or backwards postings to be discovered and corrected in just a few minutes. Situations like this one will never happen again, and management/ownership will always know its true cash position.

Mike Crabtree has over 20 years’ experience in the commercial construction industry.  He is a lifelong Dallas resident, proud graduate of Southern Methodist University, and Corporate Controller with Triune.  Triune is a leading, integrated design-build General Contractor in the Southwest region of the country.

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