Are you a small business owner who never looks at your books? Uh oh! Have no fear. I’m here to explain why reconciling your books is the most important bookkeeping task that you can do for your business.
Does this sound like you?
You look at your books and the balance showing does not match your bank balance.
Why, you ask? It’s because you are not reconciling your books regularly. Need help with the monthly reconciliations? I’ve got you covered with 5 simple steps for monthly bookkeeping.
Read more to understand 4 reasons why you need to be reconciling your books.
Reconciling your books
1. Ensures All Transactions Are Entered
This is a big one. How else are you going to know if all your business income and expenses are accounted for?
While accounting software might pull transactions from your bank and credit card automatically, you still need to double-check all is good.
This doesn’t mean just your main checking account. You need to double-check all your accounts – savings, credit cards, loans, and even your merchant account like PayPal or Stripe.
If your account has a monthly statement, then you need to be reconciling your books for that account.
Reconciling your books is the only way to be sure that you have accounted for every transaction that occurred in a given time period.
2. Double-check categories
Well done. You have reconciled all your accounts for the previous month.
You need to make sure all the numbers are recorded to the correct category or account. Just because you have reconciled your books doesn’t mean every transaction is properly coded.
This is an important step as you move along so you can make sure reports are accurate.
What do I mean by this?
If you accidentally recorded a transaction to the wrong category it will show up incorrectly on your reports.
For example, if you have a telephone charge and accidentally record it to advertising. You need to correct this. It should show up in the proper category for your reporting.
You’ll see why it’s important to have accurate reports as we move along in this journey. After all, reports show the financial health of your business.
3. Reports and financial health
Just like you go to the dentist regularly to check up on your teeth. You should be checking up on your business finances including reports.
If you skip the dentist, how will you catch that cavity that’s starting to form? The same concept applies to your business books.
Without accurate reports how will you truly know how your business is doing?
What if you are spending too much on certain items and do not even realize it?
Nowadays we have so many things on autopay. Plus, the price of things is quickly increasing. It’s definitely important to check up on expenses monthly. You’ve ensured all the transactions are recorded to the right category as you work on reconciling your books.
Now it’s time to run reports including profit and loss (aka income statement) and balance sheet. You can also pull a cash flow report. These will all help you review your numbers and see the finances for your business are on track.
Remember we’re checking for those newly formed cavities just like the dentist does. Catch them early and you’ll be able to correct things. Catch it too late and it’s no fun at all.
You can catch overspending or possibly even realize one stream of income is not performing as you expected.
Once your business has been around for several years or even quarters you can start to see trends for spending and income. You can compare months, quarters, and years.
4. Forecasting and growth
Once you are confident that you are looking at accurate financial reports, then you can feel more confident in making business decisions.
You can understand if you have the money for growth, for hiring a new employer or contractor, for outsourcing something you don’t enjoy doing (hello, bookkeeping), or whatever else is important to your business’s growth and future.
Reconciling your books gives you the ability to help create financial projections. Business owners tend to look at last month’s (or last quarter’s) profit and loss statement. While it is important to look at the past performance of your business, it is equally important to use the past to predict the future.
What am I talking about here?
Look at last month’s numbers and see if you’ll match them this month or next month. What happens if you sell more? Do your expenses go up along with income? Do you have control over your expenses so that you can scale?
Reviewing your reports and predicting the future every month is an incredibly powerful business tool. Take your actual financial performance and compare it to your expectations.
How does it match up? Are you on track?
Look for any variances and use this information to create predictions for your future financial performance. Use your past performance along with your knowledge of what is happening in your business to help with this.
Are you rolling out any new products or services? Do you have pending proposals that you expect to get signed?
Create a financial forecast at the end of every month for the next two to three months, then compare your projection to what actually happened. I think you’ll find it exciting to see your numbers increase as your business grows.
It’s not just me that finds numbers the fun, is it?
A financial forecast is one of the best tools you can use to keep your business on track moving toward your desired outcomes.
Do you enjoy reconciling every month and are you using your bookkeeping as a growth tool?