Time for a Cleanup?

Why Books Fall Behind

Very few businesses set out to let their books slip. It usually happens gradually. Bookkeeping is handed to whoever has time, or the owner does it in the evenings. A busy season comes, a month gets skipped, then another. A bookkeeper leaves, a software service shuts down, or the business grows faster than the person keeping the books can handle.

The result is the same in each case: books that are behind, incomplete, or complete but wrong. The last one is the hardest to spot, because the reports still look normal.

The Signs

Each of these on its own is common and fixable. The more of them that apply, the more likely the books need a structured cleanup rather than a few corrections.

The books are behind

• The most recent month that is fully recorded is more than a month or two ago.
• Transactions are waiting in the bank feed to be reviewed, sometimes hundreds of them.
• You can't get a Profit and Loss for last month without waiting for someone to catch up.

The numbers don't match

• The bank balance in your accounting software is different from your actual bank balance.
• Credit card or loan balances in the books don't match the statements.
• No one can say when each account was last reconciled, or the answer is "never."

The reports don't make sense

• The Profit and Loss shows a profit, but there never seems to be cash in the bank, or the other way around.
• An expense category is far larger or smaller than you know it should be.
• The Balance Sheet has negative balances in accounts that should never be negative, like a bank account or inventory.
• Revenue doesn't line up with what your sales system or payment processor reports.

There are placeholders and leftovers

• Large balances sit in accounts named "Uncategorized Income," "Uncategorized Expense," "Ask My Accountant" or "Opening Balance Equity."
• Old customer invoices show as unpaid even though they were collected, or bills show as unpaid even though they were paid.
• The same transaction appears twice, once from the bank feed and once entered by hand.

Business and personal are mixed

• Personal cards were used for business purchases, or business cards for personal ones, and the books don't separate them.
• Money you put into the business, or took out of it, is recorded as income or expense.
• Vehicles, equipment or loans are missing from the Balance Sheet.

Outside parties are noticing

• Your tax preparer makes large adjustments every year, or asks for information the books should already have.
• A lender, investor or buyer asked for financial statements and you weren't confident handing them over.
• You have received notices about late or incorrect payroll, sales tax or other filings.

What It Costs to Wait

Books that are behind rarely fix themselves, and the cost of putting off a cleanup grows in a few ways.

• The work gets larger. Every month added is another set of statements to reconcile and another round of transactions to explain.
• The details get harder to recall. Explaining a charge from last month is easy. Explaining one from fourteen months ago often isn't, and some answers are lost.
• Tax time gets harder. Your preparer either works from numbers that aren't right or spends billable time fixing them. Missed deductions, overpaid tax and amended returns are all common results.
• Decisions are made without numbers. Pricing, hiring, borrowing and spending decisions get made on instinct because the reports can't be trusted.
• Opportunities are missed. Loan and financing applications, and conversations with buyers or investors, stall when clean statements can't be produced quickly.

What a Cleanup Involves

A cleanup brings the books back to a point where every account is reconciled and every report can be relied on. The work generally follows the same order.

1. Assess

The bookkeeper reviews the existing file, the accounts and the statements to see how far behind the books are, which months were reconciled, and where the larger problems are. The scope of the cleanup is set from this review.

2. Gather

Statements for every account are collected for each month being cleaned up, along with payroll, loan and tax records. Missing statements are requested from banks and lenders.

3. Correct and catch up

Missing transactions are recorded, duplicates removed, miscategorized items fixed, and personal activity separated out. The owner answers questions about transactions only they can explain.

4. Reconcile

Every account is reconciled to its statements, month by month, until the books match the bank at every month end in the cleanup period.

5. Review and hand off

The finished reports are reviewed with the owner, and adjustments are tied back to the most recent tax return where needed. From there, the books move onto a regular monthly close so the cleanup doesn't have to be repeated.

That last step matters most. A cleanup without a monthly routine afterward usually leads back to the same place within a year.

Cleanup or Fresh Start

Most of the time, the existing file can be corrected. Occasionally the problems run deep enough that it's faster and more reliable to start a new file from a clean opening balance and rebuild the current year from statements. This is more common when the original setup was poor, when several people have kept the books over the years, or when years of unreconciled activity have piled up. A good bookkeeper will tell you which approach fits after the assessment, and why.

Self-Check

Answer each question honestly. If you answer "no" or "not sure" to three or more, a cleanup is likely worth a conversation.

• Are your books fully recorded through last month?
• Does the bank balance in your books match your bank statement?
• Has every bank, credit card and loan account been reconciled in the last 60 days?
• Are "Uncategorized" and "Ask My Accountant" balances at or near zero?
• Are business and personal spending kept separate in the books?
• Do your vehicles, equipment and loans appear on your Balance Sheet?
• Did your tax preparer finish last year's return without major adjustments?
• Could you hand a lender a current Profit and Loss and Balance Sheet this week?
• Do you receive financial reports on a set date each month?
• Do you trust the numbers enough to make a decision from them?

This guide is general information to help owners assess their books. The scope of any cleanup depends on how many months are involved, the number of accounts, and the condition of the records.