Bank Reconciliations for Nonprofits

     I’m often asked, “What's the role of a treasure in a nonprofit?” Well, the short answer is, “It depends.” In a small nonprofit, a treasurer may do it all. In a very large nonprofit, a treasurer may just confirm that everything has been done. For more on the role and responsibilities of a nonprofit treasurer, check out my previous article here. Today, I want to share more about the most important financial tools that treasures can use to be the most effective in their role. Today, we’ll look at bank reconciliations. They should be reviewed every single month. Depending on the situation, a treasurer can sometimes serve as the person verifying or reviewing the bank reconciliation process.

Below is my Bank Reconciliation Reviewer’s Checklist that I use with my clients:   

How to Review Your Nonprofit’s Bank Reconciliation

Confirm the Math

     The first step in reviewing a bank reconciliation is simply confirming the math:

                statement balance

            +  outstanding deposits

            -  outstanding checks/payments

               accounting balance 

You’re just checking the numbers on the bank statement and the bank reconciliation report. Does everything add up as it should?

Review Outstanding Deposits

      Next, review the list of outstanding deposits. Money moves fast and typically clears the bank quickly. A lot of things are happening electronically. So, you are looking at the list of outstanding deposits for that month to ask the question, “How old are these?” They should be less than one week old. If you're finding deposits that are more than a week old, I would start to ask some questions. We should not be seeing situations like that. 

Review Outstanding Payments

     The next step is to review the list of outstanding payments. Once again, they really shouldn't be very old; 30-45 days max for paper checks and less than five days for electronic payments. Things move fast. These timeframes really shouldn't be the norm. The most common problem here is a check that was written that hasn't been cashed, so you think you've paid someone, but you actually haven't. This is an important detail for a reviewer to be tracking and discussing with the person doing the accounting.

Review All Deposits

 The next step is reviewing all the deposits that did clear the bank. What's the type of deposit? What's the source of the deposit? 

A Note to Quickbooks Users: One of the things that I really dislike about QuickBooks is that you can leave vendors (or “customers”)  off of both deposit and payment transactions, which doesn't even make sense. So when you review the deposits, does every transaction show its source? For instance, if someone physically takes a cash deposit to the bank, then let's create a “customer” that reflects that. Or if they're electronic payments that are coming through a vendor platform, let's name that customer by its vendor platform, so we can more easily recognize deposit patterns.  

   When you're looking over all the deposits that did clear the bank, you're looking for the type of deposit, the source of the deposit, and you're just looking for patterns and trends there. Review any items that do not follow consistent patterns. So if something seems unusual, you should look into it. 

     Here's a practical example of such a trend to look for. Let’s say you’re a church that operates a cafe.  This cafe typically deposits about $400 every Monday after the weekend services. Well, if we see Mondays where there's no deposit, we should be finding out why there wasn't a deposit. That's just one example of why you're looking at trends and why clearly identifying deposit sources and types can make these trends easier to spot.

Review All Payments

      The next step is to review all the payments that were made that have already gone out. Again, here we're looking for the vendor who has been paid, and the amount paid. Does that vendor and amount make sense? You're looking to see that payments were for approved expenses, which comes in through your verification work. (See my previous Treasurer Tools article on The Verification Report). 

     Next, we're making sure electronic payments have the additional support that might be needed due to the bank batching these transactions. Here’s a common example of why this additional support is so important. Let’s say you’re a church that pays four security officers each weekend. On Monday morning, the security hours get calculated and electronic payments are initiated so that the security officers receive their payment by Tuesday. Well, the bank transaction may reflect $100 as the amount that went out, when in fact it was four separate payments of $25. (Obviously these are not realistic numbers, but they make for a simpler example to follow!)  So, while you might see $100 in payments going out, you still need to see the details behind that $100. This may require greater access than the summary level. You may need to look closer at the detail level. The potential risk here is that maybe someone pays three security officers and throws in a little for themself. So you want to see the amounts that went out ($100) but you also want to see where the money went. But banks typically just batch those ACH payments, which in our example, is $100. You're not seeing who was paid, how many people were paid, and at what amounts inside of that total. So you’ll need to do some work there. 

     In addition to ACH batches, you should also be looking for trends in payments. Sometimes at that high level, you can spot double payments. For example, maybe you paid the graphic company $2,500 via ACH, but you’ve already paid them $2,500 via check. Did you pay them twice? These review steps can help prevent errors or oversights like double payments, so ask questions. 

Review All Transfers to Other Bank Accounts

     Finally, we want to look at transfers that are made to other bank accounts. Maybe we have a primary checking account and a savings account, for example. Anytime you see a transfer go out of one account on a bank reconciliation, you're looking for where it went. Then, you’ll want to go check that other statement reconciliation to see if it arrived there. I know you're thinking, “Well, how could that go wrong?” Well, I'll give you a personal example.

      I helped start a nonprofit and my nonprofit was small. So, I was an authorized signer on that account in the very early days. ( I don’t recommend that long term!) When I set up the bank accounts for that nonprofit, I happened to personally bank at the same bank where one of the accounts was opened. Well, in the process of setting up the nonprofit’s bank account, they attached it to my personal banking information. So when I logged into my personal banking information, suddenly the nonprofit’s checking account was listed in my personal banking login, which was alarming to me because those funds were not mine. It wasn’t even my account. But even more alarming was the fact that it would have allowed me to transfer funds from that nonprofit to my personal checking account! Since I didn’t like that, I immediately made phone calls and got them to fix it. But this is a very real example of why you want to make sure your account transfers are followed from one account to another and traced to make sure that they land and stay inside the nonprofits assets.

     I hope this gives you a great starting point for reviewing your bank reconciliations. If you’d like to receive tips like this each week directly to your inbox, you can subscribe to my blog here. If you have a specific question or situation that you’d like some additional help with, you can book a strategic consult with me here. I look forward to serving you!