As a small business owner, you know (if you don’t; listen up!) that bookkeeping is the backbone of financial success and business growth. Accurate data and regular review ensures your business is on track to meet its goals. Healthy financials are not just to wave around, they confirm that you have adequate cash flow to manage daily business activities. Your month end process is an important step to gauging your businesses health, and can alert you to any red flags (hopefully) before they are a problem!
Understanding the Importance of Month-End Bookkeeping
Why Month-End Matters for Your Business
Month-end bookkeeping isn’t just about dotting the i’s and crossing the t’s! Bookkeeping is about gaining insights into financial transactions, cash flow, and analyzing business development. The month-end process lays the foundation for informed decision-making within your business!
Step-by-Step Guide to Month-End Bookkeeping
1. Reconcile Bank Statements:
Start your month-end by reconciling your bank statements. If you are using an accounting software that is connected to your bank, this is as easy as maneuvering to the transactions tab and reviewing + adding your prior months transactions. If you are using an excel spreadsheet, download your transactions from your banking institution and add to your file.
If you don’t have any accounting system for your small business, BARE MINIMUM grab my free excel sheet. You can customize to your small business and don’t have to spend hours in excel leaning how the dang formulas work yourself!
Once all your transactions are added and categorized, grab your month end closing statement. You will want to check your beginning balance, enter your ending balance as well as the statement close date. If you are using an accounting system, you will then navigate to the next screen where you will ensure all income/expenses are accounted for, and nothing is missing.
If you are using a spreadsheet (hopefully mine!) you will also want to grab your bank statement and ensure that all income/expenses you uploaded into your file are complete and correct according to your bank statement.
Reconciling ensures that your records align with actual transactions in your accounting system or your spreadsheet. If you have run into a snag and need additional help, check out my thorough post on how to reconcile like a pro here!
2. Review Income and Expenses:
This is one of my favoriteee parts! I know, I know. I am a total geek when it comes to numbers! Run your profit and loss report. First, review the single month end and look for anything that looks to be incorrectly categorized.
Next, run a 12 month Profit and loss.
This comparative report gives you a birds eye of your business. From here you can discover if expenses are tracking upward, revenue is seeing a downturn, or if you have higher than usual spending in any given category. There is sooo much data that can come out of looking at your business from a comparative level. You can also quickly identify reoccurring transactions when looking across multiple months. Dive into your income and expenses and become familiar with the costs associated with running your business.
3. Look at Accounts receivable & Accounts Payable:
Not all businesses use AR & AP. If your business is strictly cash basis and does not utilize these departments, skip to the next step. If you do have AR & AP, listen up! AR & AP is one of the messiest accounting functions I see when onboarding new clients or preforming a clean up service. If you are not correctly applying payments to invoices, you can quickly create a problem. When you invoice customers, make sure their payments are being applied to the correct open invoices. Same goes with AP. When you pay vendors, make sure that the transaction coming through the banking feeds are being allocated to the bill payment so you are not doubling your expenses.
If you are concerned with the current state of your AR or AP, reach out to a professional before you begin deleting or voiding or changing anything! Edits in prior years can cause tax issues if not handled correctly. I’m here if you ever have any questions or want a second set of eyes on your books.
Sorry for the impromptu rant. Now, back to WHY you need to ensure your AR & AP are correct at month end. Using AR & AP as a gauge, you can determine cash flow and ensure you have dollars available for necessary expenses. With a quick review, you can also discover who has not paid their invoices or who has an overdue balance. AP helps you understand when bills will be coming due to ensure you have capital to pay outstanding debts.
4. Verify balance sheet accounts:
The balance sheet is an under utilized report that NEEDS to be kept up to date. You balance sheet gives you a snapshot of the following:
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- Your Cash position and liquidity
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- Your debts owed
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- Your equity invested
The Asset section of your balance sheet shows you how much cash you have on hand, what assets you have, and who (if anyone) owes you (think AR or any loans outstanding). You want to make sure all liquid accounts are reconciled at month end–checking, savings, etc.
If you have any debts, balances due on bills (AP), or credit cards those will show up in your liability section. You need your loan statements to allocate principal & interest on all loan payments made during the period. This is important because while the principal balance of the loan is NOT an expense, the interest is. Reconcile all loans, credit cards, & intercompany payables monthly.
Finally the equity section show a snap shot of what you have withdrawn or invested from your business. Draws are owner payments, while contributions are owner deposits into the business. The retained earnings account shows the overall long term health of a business.
A review of your assets and liabilities ensures your balance sheet reflects your business’s true financial position. Look for discrepancies or unusual trends. Compare book balances to bank balances on all bank accounts, credit card accounts, and loan accounts.
Closing Thoughts: Your Month-End Success Blueprint
Yay! You’ve mastered the month-end bookkeeping process. By integrating these steps into your routine, you’re not just managing finances; you’re steering your business toward sustained success!