Bank Reconciliation Made Simple: A Guide for Small Business Owners

Why Bank Reconciliation Is Non-Negotiable

Bank reconciliation is the process of comparing your internal accounting records with your bank statement to ensure they match. It sounds simple, but it is one of the most important financial controls a small business can implement. Skipping it or doing it carelessly opens the door to undetected fraud, missed payments, and inaccurate financial reports.

For Kenyan businesses, reconciliation has an added layer of complexity. Most SMEs receive payments through multiple channels including bank transfers, M-Pesa, cheques, and cash. Each channel needs to be reconciled separately, and the totals need to tie back to your books.

How Often Should You Reconcile?

The ideal frequency depends on your transaction volume. Businesses processing more than 50 transactions per week should reconcile weekly. For lower volumes, monthly reconciliation is acceptable, but never go longer than a month. The longer you wait, the harder it becomes to track down discrepancies and the greater the risk that errors compound.

If your business relies heavily on M-Pesa for collections, consider reconciling your M-Pesa account weekly regardless of volume. M-Pesa statements can be downloaded from the Safaricom Business portal and should be treated with the same rigor as your bank statements.

The Step-by-Step Reconciliation Process

1. 1Gather your documents: Download your bank statement and M-Pesa statement for the period. Pull up your accounting ledger or cashbook for the same dates.
2. 2Compare opening balances: Your ledger's opening balance for the period should match the bank statement's opening balance. If these do not match, you have an issue carried forward from the prior period.
3. 3Match transactions one by one: Go through each transaction on the bank statement and find the corresponding entry in your ledger. Mark each matched pair.
4. 4Identify unmatched items on the bank statement: These are transactions the bank recorded that you did not. Common examples include bank charges, interest earned, direct debits, and returned cheques.
5. 5Identify unmatched items in your ledger: These are entries you recorded but the bank has not processed yet. Common examples include cheques issued but not yet cashed and deposits in transit.
6. 6Record adjustments: Enter any legitimate unmatched bank-side items (like bank charges) into your ledger.
7. 7Prepare the reconciliation statement: Document the adjusted bank balance and adjusted ledger balance. They should now match.

Reconciling M-Pesa Transactions

M-Pesa reconciliation follows the same basic process as bank reconciliation, but there are a few unique considerations. M-Pesa transaction fees are deducted automatically per transaction, so your received amount will always be less than what the customer sent. Make sure your accounting records reflect the net amount received and record the M-Pesa charges as a separate expense.

Another common issue is M-Pesa-to-bank transfers. When you move funds from your M-Pesa till to your bank account, this is not revenue -- it is a transfer between accounts. Both sides of this transaction need to be recorded, and it should net to zero in your reconciliation. Many SMEs accidentally double-count this as income, inflating their revenue.

Common Reconciliation Mistakes to Avoid

• Transposition errors: Accidentally entering KES 5,300 as KES 3,500. These are surprisingly common with manual data entry and can be hard to spot.
• Timing differences ignored: A cheque you deposited on January 31st may not clear until February 2nd. This is not an error -- it is a timing difference that should appear on your reconciliation statement.
• Forgetting bank charges: Most Kenyan banks charge monthly maintenance fees, per-transaction fees, and SMS alert fees. If you do not record these, your books will always be off.
• Lumping multiple payments: When several customers pay on the same day, some businesses record one lump sum instead of individual entries. This makes it nearly impossible to reconcile or track customer balances.
• Not reconciling petty cash: If your business uses a petty cash float, reconcile it at the same time as your bank accounts. Petty cash is the most commonly abused fund in small businesses.

What to Do When the Numbers Do Not Match

First, do not panic. Discrepancies are normal, especially in the first few months of implementing regular reconciliation. Start by checking for obvious errors like transposition mistakes or duplicated entries. Then look at timing differences -- items that appear on one statement but not the other because they were processed at period boundaries.

If you still cannot find the discrepancy, divide and conquer. Split the period in half and reconcile each half separately to isolate when the discrepancy occurred. For persistent unexplained differences, consult a professional bookkeeper. The cost of their time is far less than the risk of inaccurate books.

Building a Reconciliation Routine

The best reconciliation practice is the one you actually follow consistently. Set a recurring calendar reminder for your reconciliation sessions. Prepare a checklist of all accounts to reconcile, including your main bank account, any savings accounts, M-Pesa till, and petty cash. Keep your completed reconciliation statements filed and organized -- your auditor will ask for them.

Using accounting software that supports automatic bank feeds can dramatically reduce the time and effort involved. Instead of manually matching transactions, the software pulls in your bank data and suggests matches. You just confirm or correct them. This turns a multi-hour task into something you can finish in minutes.