Sitting in Montana looking at weekend temps in the triple digits I felt it was appropriate to write this post. Thankfully over the next two weeks I will be surrounded by cold water; first at the in-laws lake cabin and then on a five day river trip on the legendary Smith river. Early July is a time to kick back for the holidays and stay cool. However, the dog days of summer is also a great time for a bookkeeping tune up (I know fun huh?). The year is half over and it's a good time to see where you are at financially, make key decisions and business pivots, and finish the year strong. Here is what I recommend for a mid-summer bookkeeping tune up.
Catch up bookkeeping and reconcile
If your small business bookkeeping records are not current then this is a great time to catch them up. One of the best ways to ensure your books are current is to reconcile QuickBooks accounts. It is important to reconcile all of your accounts not just your main checking account. You should reconcile your bank accounts, credit cards, loans, lines of credit and all of your liability accounts including payroll liabilities. Basically any account that has a monthly ending balance can be reconciled. Remember reconciling doesn't necessarily mean your books are accurate. Just because you are reconciled doesn't mean every transaction is coded to the right spot. I will talk about how to solve this issue later.
Asset Review
One of the common mistakes we often see is for people to misclassify transactions as an asset when they really should be coded elsewhere. One thing you should do is establish an asset threshold minimum with your CPA. Common examples are if a purchase is less than $500 you should not even consider it for asset classification. However you should check with your CPA to get their feedback on a threshold.
The next thing you should do is run a current balance sheet. Does anything look weird or does it look accurate? If something looks off, drill into the account to see if a transaction is misclassified. If you can't figure it out on your own just make a note for your CPA.
The last thing to do regarding assets is to quickly scan the details of each of your asset accounts. Sometimes QuickBooks renaming rules will cause small transactions to end up there if you are not paying attention. Reclassify any transactions necessary and run a balance sheet again for review.
Analyze financial reports
Now that you have updated books and they are accurate to the best of your ability you should run some financial reports and analyze them. Every business owner should have a set of reports that they look at on a regular basis. As a bare minimum I feel that you should be analyzing financial reports on a monthly basis.
Take a look at your small business budget vs actual performance. If you don't have a budget created it is something I highly recommend developing before the start of each new fiscal year. How are you doing compared to your expectations? Are there any big variances and are they all explainable and acceptable? A budget is one key business tool that can really keep you on track.
Forecast and pivot if necessary
Many small business owners spend a significant time analyzing past performance but fail to look forward. Don't make this critical mistake! A financial forecast is extremely important but often overlooked or neglected. So what is the difference between a budget and a forecast? A budget is developed at the beginning of the year and is your best educated guess based on data and expectations of your financial performance for the year. A forecast is something that changes based on actual performance. I like to forecast out no more than three months into the future at a time. I also reforecast our financials every single month. I take our actual performance, no matter good or bad based on expectations, and forecast out how that affects the future.
By creating a forecast every single month you really enable yourself to pivot as an entrepreneur. Too many business decisions are made on gut feelings rather than science and raw data. As an example people often hire when they feel overwhelmed. What they fail to do is look to see if they can actually afford a new employee. A good financial forecast takes away the gut feeling decisions and you start making good business decisions that are based on actual data.
CPA review
The last thing I would recommend is having a CPA review after you have done all of the above steps. A mid-year CPA review may seem frivolous, but it is incredibly valuable. First, you can get any questions answered that you came up with when you were reviewing your own books. It could be general coding questions, asset questions, or questions on your financial reports that just didn't look right. Second, you can get some good tax advice from your CPA. Let's hope you are crushing it and your CPA says, "Dude you are making way more money than last year. Let's do A, B, and C to reduce your tax liability." If this is the case it really gives you confidence to make some purchases that you may have been holding off on. Finally, you will get an understanding of your tax liability for the year so that you have a heads up and so you can make any tax moves in the final half of the year.
Believe me I'm just like you I don't want to be doing this in the summer either. If you are like me you want to kick it back on the deck with a nice cold G&T on the rocks. However tempting that may sound you are running a business and these things need to get done in order to ensure your success.
Want some help with your bookkeeping tune up?
