Sometimes it’s obvious to a small business owner that their books are a mess, but in many cases they just don’t know how much of a mess it really is. This might be because they’ve fallen behind with their bookkeeping, don’t know they are doing it wrong or have entrusted it to an individual who isn’t qualified.
Bookkeeping is like a jigsaw, you need all the pieces in the right place to give you the big picture.
At the end of the year your accountant wants to be handed that puzzle as complete as possible so that they can add the last few tricky pieces and turn it into your tax return. Dump 1,000 pieces on the desk and ask them to tell you the answer and it’s a long and complex (and often more expensive) process. This is especially true if there are two or more puzzles in the pile (i.e. business and personal accounts being mixed together or multiple businesses adding to the complexity).
We are focusing on what to do if you find yourself in a mess, the key things to check, common mistakes people make and how to get help.
Don’t Double Up
Duplication is the source of many a bookkeeping mess.
Bills, invoices and receipts entered onto an accounting system multiple times can cause pages of items which seemingly don’t reconcile to anything and can over inflate sales and costs.
Make sure you review your finance system regularly to remove any entries that have been doubled up. Use supplier statements to cross-check against, make sure that what is showing as outstanding actually is and ensure that when you’re reconciling it is matched to the correct invoice or receipt.
Match it up
This is about making sure your bank balance in your accounting software matches your actual bank statement … if it doesn’t there’s clearly something wrong.
The first thing to check is that your opening balance is correct – this is the bank balance on the date you started to use your accounts software. When you start to use any software for managing your accounts you should put this balance in to make sure the two match.
Next you need to make sure that ALL transactions on the statement have been correctly included in your bookkeeping. If you’re on a cloud accounting system such as Xero, and you’ve connected your bank account to receive automatic bank feeds, these should appear automatically. But it’s good practice to check the balance matches monthly, or at least quarterly, as sometimes things can go awry.
Make sure you also do this for any credit card cards, savings accounts and other payment methods such as Paypal and Stripe.
Check what you’re owed
Cash is king in a small business so knowing who owes you money is not only important for your bookkeeping but also for your very own survival.
Check that the outstanding sales invoices in your finance system are still owed by your customers. If these are incorrect check for duplicates, payments on account and payments by others methods – it’s common that cash payments get allocated incorrectly and are not always matched to the correct customer invoice.
Also check that you have invoiced your customers not just correctly, but at all. Sales invoices not sent don’t get paid – we’ve seen it happen!
Forgotten what you’ve bought?!
Another common issue we come across is people forgetting what they’ve bought! They’ve left it so long to do their bookkeeping that they’ve forgotten what they bought which means they are struggling to reconcile the transactions.
It’s a legal requirement to keep financial records and evidence for 6 years. This includes invoices, statements and returns and without a valid VAT receipt you can’t claim VAT back on your quarterly return.
Clearing the backlog can be painful but fixing the issue going forward is the key. A cloud accounting tool like Xero will allow you to store images for each transaction. This can be done instantly via the app so you to take a photo and file the receipt in the bin! No more scrabbling around for documents or wondering what that Amazon purchase could possibly be.
Check your classifications
What happens when you don’t classify your spend correctly?. If you haven’t been consistent when choosing your spend categories then your financial reports won’t make sense. It will also be impossible to track if you’re missing anything.
We’ve seen a coat posted to office equipment, rent as accounting fees and a whole host of purchases dumped in ‘general expenses’.
Review your books in detail and check each classification. Make a note of the regular costs and suppliers and which account code they should be posted to. This is easy with cloud accounting systems such as Xero which allow you to set up rules and default categories by supplier.
Finally, mixing personal with business spend is a big no no and one of our pet hates! If you know there’s personal spend included in your business accounts identify these and classify them as drawings so that they can be appropriately dealt with by your accountant.
If you need any help checking your chart of accounts, or would like some general guidance on how you should be classifying things, please do get in touch firstname.lastname@example.org.