Stop Treating Your Bank Account Like a Financial Report: The Bookkeeping Mistake Small Businesses Keep Making

When many small business owners log into their banking app, they will first see how much money is available to them. If the figure appears to be in a healthy state, they believe that the business is in a healthy state. That’s not always the case. A bank balance reflects cash flows. Does not provide information on profitability, outstanding, overdue and unpaid invoices or future bills and business liabilities. Records are important for businesses to track progress and to ensure that financial statements are accurate, according to the IRS.

Playing Cash In The Bank Can Give You A False Sense Of Security

It is possible that a business could have $20,000 in the bank and owe thousands of dollars in payroll, taxes, and/or payments to suppliers or credit card bills. The reverse also may occur. Don’t assume a temporary low balance is necessarily a poor sign for the business. For instance, if a company has issued $30,000 worth of invoices but customers have yet to pay for them. This cannot be reflected on the bank account alone as a receivable position. Cash and accrual accounting can give widely divergent perspectives on business activity, the SBA explains.

Bank Reconciliation is More than Matching Numbers

One of the tasks which is overlooked the most in bookkeeping is bank reconciliation. Checks accounting records and reconciles with bank statement. This process can identify that there is a missing transaction, an incorrect entry, or bank fees and timing differences. Reconciling regularly is recommended by Xero as small discrepancies can grow and be more difficult to resolve as the time passes. FreshBooks also explains that reconciliation allows you to see which transactions haven’t been matched, and also helps you make sure that what you record in your books matches what you see in your bank account.

Your Books Need More Than a Bank Feed!

While it’s beneficial to have a business account linked to the accounting software, automation doesn’t take the place of bookkeeping responsibility. Proper categorization and review of transactions is still required. Business owners should also keep a copy of their supporting documents, such as their invoices and receipts. The IRS says that these records document business books and tax returns. Money can move and a bank feed will show you. It is not always able to provide you with reasons for the transaction and the impact it should have on your financial reports.

Create Financial Reports In Support of Business Decisions

A good bookkeeping system should be able to answer practical questions. Are sales increasing? What are the best margin products? What is the Customers’ outstanding balance? What’s the cost of what going up? Does the firm have the budget for another worker? These answers need organized books and not just a simple bank balance. SCORE suggests having the accounting systems set up so that the financial information is consistent, and it suggests that owners should look at the financial statements – Profit and Loss statement and Balance Sheet.

Stop Guessing And Start Managing

Good bookkeeping is making business information out of financial activity. That can involve reconciling accounts on a regular basis. This can also involve dividing your personal and professional expenses and maintaining organized receipts. Outsourced bookkeeping for small businesses can offer structured support to growing companies when internal bookkeeping gets challenging. SCORE has a special message for business owners: Ask for assistance when you can no longer keep up with your books. Your bank account is an important financial tool. It should never be mistaken for the complete financial report of your business.