It’s Friday night and you’ve just logged into your Netflix account to find a good movie. But there’s a problem. Instead of seeing an organized list of movies by genre, personalized recommendations, and so on, you just see a list of movies with no descriptions. It’s already hard enough to agree on which movie you’ll watch. A disorganized Netflix would make it that much harder.
Now imagine being asked to organize all of those movies…
It’s the same concept with your company’s bookkeeping and bookkeeping cleanup.
Just like a messy Netflix would make it impossible to find a great pick for movie night, messy bookkeeping makes it impossible to generate reliable financial reports, maximize tax incentives, stay compliant with tax reporting requirements, and many more vital functions of a business.
Enter bookkeeping cleanup. Once you’ve had enough of messy bookkeeping, you either DIY a cleanup (also called “catchup bookkeeping) or outsource it to an amazing firm like MBS Accountancy (shameless plug).
When done properly, bookkeeping cleanup helps you “catch up” on overdue bookkeeping work and create a set of organized, accurate books so you can confidently use your balance sheet and other statements to make decisions. Not to mention the tax benefits and favorable lending outcomes that accompany a strong bookkeeping foundation.
Signs you need bookkeeping cleanup
So how do you know that you really need bookkeeping cleanup? I mentioned “messy bookkeeping” at the beginning of this post, but that is vague and not helpful when you’re trying to diagnose bookkeeping problems. Here are some surefire signs that you have messy bookkeeping and could use a good cleanup:
- Missing or unorganized receipts or invoices
- Irregular reconciliations of bank statements and credit cards
- Personal expenses are mixed business expenses (here’s why that causes big problems)
- Incomplete or inaccurate financial records
- Inability to produce financial reports promptly
- Problem calculating or forecasting tax payments
- Audit preparation difficulties
- Cash flow management because of no visibility into spending
Why bookkeeping cleanup is vital for growth and success
We’ve talked before about how messy bookkeeping causes problems besides audit readiness, but here’s a quick summary of why messy bookkeeping is so detrimental to your business (and why bookkeeping cleanup is so helpful):
- Bad bookkeeping means your financial statements lie: As CPA and CEO Cassidy Jakovickas pointed out on LinkedIn, inaccurate financial statements lead to misguided business decisions because you can’t trust your financial statements. Income statement errors translate to bad pricing decisions on services and products. Balance sheet errors paint a false reality regarding your liabilities, assets, and equity. Errors in your cash flow statement lead to liquidity issues and poor cash management.
- Good bookkeeping is your ally if you’ve decided to sell your business: With proper bookkeeping hygiene, you won’t be a stinky buyer that drives buyers away. Instead, you’ll have financial statements that perfectly capture your business’ financial performance. You’ll have organized financial records that support a fair evaluation of your tangible and intangible assets, which helps you set (and defend) your price. Good bookkeeping also helps you understand your debt profile so you can structure the transaction as a cash deal, stock swap, or a combination of the two. As CPA Victor Godinez says, “Good bookkeeping gives you an advantage in business deals because you have clarity about your finances.”
- Tax planning is “tax guessing” with bad books: If your company’s books aren’t organized and well-maintained, it’s a herculean task to do any tax projections so you’re not unpleasantly surprised by your quarterly estimates or annual tax bill. If you’re not properly categorizing expenses because of core issues (like if your chart of accounts is a mess), it will be challenging if not impossible to properly claim tax credits and tax deductions. You might even over-report deductions, which is also bad for business. While there are a lot of other tax problems that will come up when you have bad bookkeeping, we’ll cut this short and say that bookkeeping cleanup makes tax planning better.
Tips and best practices for catch-up bookkeeping
Now that you’re aware of the impact of bad bookkeeping habits, I’d like to explain how to clean up your books. After you’ve completed a catchup bookkeeping sprint, you’ll be ready to remedy problems like inaccurate financial reporting and flawed tax planning. Here are the steps you can take to clean up your financial records:
- Check for data entry errors: This point is important since bookkeeping data entry errors like transposed numbers and flip-flopped debits and credits can take a lot of time to find and fix. Cleaning up data entry errors is just the first step, however. Once you’ve fixed them, you can prevent them from happening again by double-checking and reconciling regularly and by preparing trial balances at the end of each period.
- Make sure you’re not omitting figures: This kind of error is the cousin to data entry errors since it can happen just as often. Errors of omission occur when you don’t record a transaction. You can fix this by reviewing your bookkeeping records and documents like receipts and entering any missing transactions.
- Reconcile bank statements and credit card accounts: Reconciling your financial records with your bank accounts, credit card accounts, and other external accounts lets you compare what’s recorded in your ledger. A ledger reconciliation like this is very helpful during cleanup projects and should be done at least quarterly. Compare your bank statement or credit card statement to your accounting software. If you have unpaid deposits or missing transactions, adjust them.
- Review accounts receivable: It’s best to generate an accounts receivable aging report to assess how much is owed and for how long it’s been owed. Then, follow up on overdue payments and record them properly within your books. If you’ve tried reminders and follow-ups but still can’t collect an outstanding balance, you may need to write it off as uncollectible debt.
- Review accounts payable: Similar to your A/R review, start checking on your company’s accounts payable by generating an A/P aging report that shows what you owe and the period it’s been outstanding. Pay overdue bills and enter them properly into your books.
- Review payroll records: Examine the payments and deductions on your latest payroll report. Verify that all employee information is up-to-date, including contact information, Form W-4 withholdings, and other key details.
- Determine if your tax filings are timely: Part of good bookkeeping includes proper tax compliance since penalties and fines impact your cash flow. Review your tax obligations and, if you find any underreporting, inaccuracies, or late filings, take action to fix them or hire a tax professional.
- Review inventory records: If you sell products, it’s vital that you record purchases and sales are properly documented. This helps you avoid ordering or manufacturing more or less than is needed. Before you start reviewing inventory records, generate an inventory report so you know how much inventory you currently have in stock. Reconcile discrepancies by comparing your accounting records and physical inventory counts. Consider liquidating slow-moving inventory and review your prices to ensure they’re reasonable and appropriate.
- Clean up your chart of accounts: If your accounts aren’t categorized or set up properly, your chart of accounts will look like a mess. Clean up unused or unnecessary accounts like old vendor or customer accounts, misclassifications of expenses in the wrong accounts, and other bookkeeping errors. If you need help with a COA cleanup, try QuickBooks COA templates.
If you need to catch up with bookkeeping cleanup, let us know!
Bookkeeping cleanup projects can be tedious and time-consuming. That’s why most companies choose to outsource them to a CPA firm like MBS Accountancy. Since 2011, we’ve provided tax services, accounting, and controller services for companies and nonprofits with between $500K and $10M in revenue. If this describes you and you find yourself in need of a bookkeeping cleanup but no resources to do it, let us know. We look forward to helping you gain financial clarity and control.