As tax season approaches, many business owners will focus on ensuring their books are ready to hand over to their tax preparer. Here are 4 red flags your books aren’t quite ready and what you can do to fix it this year and make next year easier.
4 Red Flags You Aren’t Prepared
1. Every business transaction in the tax year is not recorded.
If you look at your financial reports and there are chunks of (or any) missing transactions, your books are not ready to have taxes filed on them. Transactions include anything that went into or out of your business. You should record every check you received, every dollar you spent, every new piece of equipment you financed, and every loan payment you made in your books. If not, your records are not ready to be used to prepare your taxes.
I have looked at books that were missing months of information. Where bank feeds failed and transactions stopped flowing into the accounting software, leaving the owners feeling overwhelmed and unsure of what to do next. It is paramount to your business to record all these transactions in your books.
2. Your transactions aren’t categorized.
The old adage “A place for everything and everything in its place” applies to your bookkeeping. Every transaction that comes through your business should have a category (a place). If it does not, your books are not ready to go to your tax preparer.
I recently had a client with hundreds of transactions sitting in their bank feed uncategorized. Transactions sitting in the bank feed have not been recorded in your books and therefore are not part of your financial reports. This omission leaves you running your business blind. Expenses and Income should not be categorized as “Uncategorized Expense or Income .” When income and expenses are not categorized or improperly categorized, you cannot make wise business decisions. You can not see the full landscape because the overgrowth of large meaningless numbers overshadows the problems. Do you need to cut back on staff? Is your sales team making enough calls to bring in the sales and revenue you need? Did you overspend on office supplies?
3. Your bank accounts and balance sheet have not been reconciled.
Most business owners have heard the word reconciled, but few know what it means or entails. Reconciliation is the process used to verify every single transaction that has been recorded in your books. It verifies that there are no missing or, just as importantly, no duplicate transactions artificially inflating or deflating your financial documents.
I had a client call me in a panic. The conversation that ensued was quite eye-opening for me. This client informed me they had enquired of their accounting software company why their account balances in the software did not match the account balance in their bank account. It was off by several tens of thousands of dollars. The software company let them know their accounts would need to be reconciled, which this client had never heard of. After reconciling all the accounts, we discovered income had been double recording, causing them to overstate their income for the prior year and current year, which, if left uncorrected, would have led to overpayment of taxes.
4. You have negative account balances.
Now here me out, some accounts will naturally have negative balances, so not every negative balance is a bad thing or incorrect. However, any negative balance warrants further review to ensure it is correct and accurate. Having a clean and accurate set of books saves you money. If you are feeling anxious because you see yourself in any of the above situations, have no fear, bookkeepers are here! A good bookkeeper can help you catch up, clean up a mess, and prepare for tax season. Catch-up and clean-up projects do take time, though. So, I recommend you seek a qualified bookkeeper as soon as possible. As January turns into February and March, bookkeepers tend to fill up and may not be available to help, so get on the schedule early.
Let the Bookkeeping Specialists at PMB Capital Solutions Help!
How do you avoid this feeling next year? Make sure to retain a bookkeeper throughout the year. The benefit of running your business off a clean set of books throughout the year far surpasses the peace of knowing you are compliant and ready for tax season.
Are you looking for help catching up on your bookkeeping or cleaning up a set of books with inaccurate or missing information? Contact the bookkeeping specialists at PMB Capital Solutions to see how we can help you. Call us at (704) 397-3193 or complete our inquiry form online. You can also email us at firstname.lastname@example.org.