The difference between book and bank balances…

If you were to ask most people how much money they have at any given time, their answer would likely sound something like this, “whatever my online banking access tells me I have”. For individuals, this may be true. However, if you are a business with frequent transactions and activity, this is usually not the case. In fact, as transaction volumes increase, the previous answer becomes less accurate. So then, how much money do you really have? To answer that question we need to understand what book balance means and why it’s important.

Book Balance = your bank balance –  any uncleared checks + any deposits in transit.

If you’ve written checks that have not cleared your bank account, even though those funds are still in your account, it is not really available to spend. Those checks were written with the intent that they would clear, right?

Conversely, if you’ve received checks but have not deposited them in your bank account, those funds can be considered at your disposal as long as you deposit them promptly assuming that they will clear.

Why is this important? Suppose you are a small business and the operations depend on an expensive piece of machinery that just broke without repair. You need to make a large purchase on short notice. You log onto your bank’s website which tells you there is $10,000 in your account. The new piece of machinery only costs $5,000 and you decide to purchase. The next day you check your bank account and you’ve over drafted, how can this be? When you made the purchase you did not consider the fact that you had previously written checks totaling $6,000 that had not cleared your bank account yet. You really only had $4,000 to spend. With the right information, you could have made a better decision.

While the above example may seem extreme, there are a number of scenarios where knowing your book balance can help you make more informed decisions and improve your cash flow. Suppose in the example above, that you only had $2,000 in uncleared checks, no deposits in transit, and your bank did not charge you with an overdraft after the machinery purchase. However, you have an upcoming rent payment due and owe your vendors for products you purchased totaling $3,000. You now only have $2,000 available; who will you decide to pay? Again, had you considered your book balance, you may have looked into other options for replacing the machinery.

Next time you pay your vendors or make a large purchase, consider your true funds available by checking your book balance first. As technology advances, checks are clearing very quickly and cash flow management is critical to your company’s reputation and sustainability.

Written by:
Andrea Murray
TGG Accounting

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