Updated: May 7
WHY ARE YOUR BOOKS A MESS?
Every small business owner has the best intentions from the beginning, but heavy responsibilities and busy schedules often lead to important tasks falling to the backburner. One area that is often overlooked is the company's financial tracking. You may have to pay monthly or annual fees for high-quality accounting software programs. However, unless you use it correctly, it will be ineffective. This can lead to a lot of confusion and mistakes. It’s tempting to just ignore the problem, but I assure you that it won’t just go away. Any issues or mistakes with your bookkeeping will grow and spread until it’s a tangled mess. If your books are a mess, you’re putting unnecessary stress on yourself and your business.
So what does it mean, if your books are a mess? Here are some common signs:
You don’t know how much you’re spending each month.
You have a wallet (or file folder) full of receipts or you don't have enough receipts attached for proof.
You’re not sure if your business is profitable.
You’re afraid to log into your bank’s online system.
You have leftover funds in your account every month.
Your monthly reconciliations aren’t happening
You never know the exact standing of your bank accounts
From an accountant’s point of view, your books are a mess when:
There is no clear distinction between business and business owner transactions. Business owners have used personal funds for business expenses or business assets for personal purposes.
The original documents of the transaction are obviously missing on the bank statement. If an accountant cannot clearly distinguish sales revenue from loan/capital revenue, or cannot distinguish between equipment payments and inventory payments, it is almost impossible to accurately determine your profits and tax liabilities.
Trying to save money, small business owners classified the financial transactions according to their own rudimentary understanding of bookkeeping.
The books/records you provide to the accountant cannot be reconciled. For example, the bank statement doesn't reconcile with the cash at the bank account, your physical inventory does not reconcile with your Inventory account, the money owed to you from your customer's list does not reconcile with the accounts receivable account, the list of money you owe to suppliers does not reconcile with the accounts payable account or your list of physical assets does not reconcile with your asset register.
HOW TO CLEAN UP THOSE MESSY BOOKS?
1. Stop Any Further Damage and determine if you have a problem
Therefore, the first step is to prevent damage from occurring from now on. This means that all new, incoming source documents will be routed through a reliable bookkeeping system.
Before a formal inspection of a book, it must be determined whether there is a problem. Often, companies with very messy or incomplete accounting records know they have problems that need to be resolved. However, companies with smaller differences or less obvious problems may not have the vision to understand the root cause and the expertise to solve the root problem.
These common signs can signal accounting record issues:
General ledger errors
Negative cash or credit balances
Inconsistent fixed asset depreciation
Restricted payment terms from suppliers
Static inventory levels
Unaccounted for interest on cash and credit accounts
Muddled business loan records
Missing retained earnings
Excessive business expenses
Bank fees and penalties
Customer and vendor invoice inconsistencies
If there are any of the above red flags, the company should clean up its accounting records.
2. Separate Your Personal and Business Account
Research shows that most start-ups and small businesses fail because they do not separate personal accounts from business accounts. This means that you will have to go through messy business books to find the correct amounts before filing tax returns and debt repayment. By separating personal and business accounts, you will have a clear picture of your financial situation and cash flow, which means you will be able to record all sources of income and expenditure.
There are most two important reasons that you need to separate your personal and business account:
It’s much easier to ensure that you record all business income and expenses, and spend less time figuring out whether the expenses are business expenses or personal expenses
If you choose to transition to a cloud-based accounting system (such as the online version of QuickBooks), you can save a lot of time without having to process too many transactions.
3. Track Every Expense Incurred
To clean up the accounting books, you need to establish an appropriate accounting system (to supplement your specific business), equip it with appropriate accounting software, and integrate your bank account. Then, you will need to create a chart of accounts in which all transactions can be recorded correctly.
You need to label and classify all expenses incurred in the past and develop a comprehensive plan to deal with tax and debt-related requirements. Therefore, if you want to avoid unnecessary income taxes, you must record every transaction. Sole proprietors have the ability to manually record financial transactions, but corporations can’t afford to conduct such practices. Therefore, they must use accounting software with appropriate functions to record and track all sources of income and expenditure in order to make better decisions.
4. Reconcile Your Business Books
Probably the most important step in getting your books in order is reconciling your bank statements.
All this is to achieve the right strategic layout and balance the financial situation. You need to reconcile your business accounts with the actual expenditures and expenses to get the business on track.
Bank reconciliation requires disciplinary action. Many business owners get lost here because they make things pile up. Reconciling your transactions is like washing the dishes. If you spend a little time every day, it's no big deal. But if you let them pile up, now you are really a mess.
There’s really no reason to use a bookkeeping system if you’re not going to keep up with it. Schedule an appointment with yourself once a month to reconcile your bank statements and set your budget for the coming month. You should also check in weekly to code your transactions (making your monthly reconciliation that much faster).
5. Get help when you can
Overwhelmed yet? Yes, keeping your books in line can be time-consuming. But it’s a necessary part of business ownership.
The best scenario is to find someone who can set up for you, integrate the system, reconcile your accounts regularly, and send you financial reports. Ultimately, however you choose to solve it, the key is that you are prioritizing fixing your mess. A financial mess will choke your business and keep it from growing and
While financial illiteracy is not a crime, it is important to get help when you need it, before the situation worsens. Many small business owners like the comfort and safety of having high-level professionals, both for accounting and tax planning. It may seem more expensive, but the impact of better long-term planning may far outweigh the cost. You can save time, effort, and even money, since paying a professional will ensure that you avoid losses, fines, penalties, and additional expenses in the long term.
Irvine Bookkeeping offers a full range of bookkeeping services and promises that in 2-3 weeks, we clean up a whole book for you to prepare for tax seasons. We believe knowing your company's financial health is the key to maintaining control of your business.
If you, as a business owner, see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it.
Call Irvine Bookkeeping now for a Free Quote!