At first, the thought of doing your own books and analyzing your financial statements can seem intimidating. In reality, once you understand the basics, the bookkeeping process becomes a breeze. The benefits to updating your books regularly are manifold. Here is a brief overview of what the monthly bookkeeping process for small business owners typically looks like.
Import Transactions
Generally, when using an online accounting service such as QuickBooks or Xero, you are able to link your business bank account, debit card, credit card, or any other payment method, such as Venmo or PayPal, directly to your online account. This allows you to import all your business-related transactions for a specified period with a click of a button. This can cut out hours of data entry for the business owner.
Classify Your Transactions
Once you import all of the transactions for the month, it is important to classify and match each of them appropriately. This step should be done prior to adding any cash or other ‘out-of-bank’ transactions to your books. Doing so helps avoid any double-counting of incomes or expenses. Properly identify any owner’s investment or drawing, any income or expenses, and any balance sheet transactions. This latter one is the least common, but it is important to make the distinction for such transactions on your books. For instance, capitalizing an asset does not have any effect on expenses until it is depreciated. Similarly, debt payments are not meant to be expensed but rather deducted from your companies’ liabilities. Being clear in your classifications is thus an important step in the overall bookkeeping process.
Reconcile Your Accounts
This includes all of your accounts: bank accounts, credit cards, and even PayPal or Venmo. If you kept proper records of your transactions throughout the month, this should be a short and effortless step in the process, but an important one nonetheless. Reconciling your accounts regularly helps identify any problems before they get out of hand. You can’t always count on your bank to take care of any potential fraud or other errors. Look for duplicate payments, unauthorized checks, missing deposits or transfers. Reconciling your accounts also helps you stay on top of internal problems that may come up, giving a complete picture of your statements.
Review Your Statements
When using an online accounting service, your statements are generally produced for you. That is why properly classifying all of your imported and added transactions is extremely important. Those transactions are how your balance sheet, income statements and other reports are generated. Even if you double and triple checked all your classifications, spend some time going through each statement to ensure everything checks out. The smallest of omissions can throw all your statements off in significant ways.
Review your balance sheet
- Look for any balances that appear to be higher or lower than normal
- Verify bank balances match your actual bank statement
- Verify loans and other debt balances match their respective statements
- As a sole proprietor or small business owner, it is also important to make sure your drawing and investments are properly recorded
Review your income statement
- Compare the statement with previous months
- Compare the statement with last year’s
- Look for any extremely high or low incomes or expenses for the given period
Analyze Your Statements
Your statements provide a snapshot of your business’s current or trending state of affairs. An important part of the bookkeeping process is going back and spending some time analyzing the statements to fully understand that snapshot. Look for trends or areas of weakness that can be improved upon in the upcoming month, quarter, or year. Some questions that you should have answers to on a monthly basis include:
- Did you turn a profit or loss during the month? How does this month compare to the previous months? How does it compare to that specific month on a yearly basis (i.e. how does October 2019 compare to October 2018, 2017, etc)?
- Where are you profiting the most? Can this be improved?
- Where are you profiting the least? Is the time spent on this area still valuable to your business?
- Where are you spending the most money? Can this be decreased?
- How does your expenses compare on a month to month basis?
- How can you start paying off your business’s debts?
- What are your ratios? Price-to-earning? Return on assets? Profit margin? Current ratio?
Procrastination is one of the main reasons many business owners fall behind on their books, and not the lack of expertise. We have helped many business owners get back on track with their bookkeeping and are now successfully managing their own books. Get your act together and start reconciling.
