Does Your Business Need a Financial Clean-Up?

Though running your own business is rewarding, keeping up with the company’s finances can prove to be a stressful experience for every business owner. This stress, however, can be greatly minimized by periodically performing a financial clean-up. If you feel like you don’t have full financial visibility into your operations, or you don’t receive timely reports, it may be time to clean up your books. And, as addressed in this article, seeking fractional accounting services may be the best option to do so in a cost-effective manner.

What is a Financial Clean-Up?

An accounting or financial clean-up, also called a catch-up, consists of getting all of a business’ books and records up to date. It allows businesses to stop worrying about being behind. The process can also entail reconciling cash accounts with bank statements, or reconciling business credit cards.

Catch-ups are important, as a business’ books are needed both internally and externally. When a business becomes behind on their financials, the lack of visibility can lead to poor business decisions.

What Does a Clean-Up Entail?

The clean-up process may vary slightly from business to business, especially if a business has a revolving loan or line of credit that requires a clean-up. However, for businesses behind on their books, a financial clean-up generally entails the following steps:

Reconciling All Bank Accounts

First, the accountant must categorize all transactions from the catch-up period. This entails using the accounting system, such as QuickBooks, to go through the bank feed and place cash-in and cash-out transactions into categories, such as vendor payments, payments from customers, supplies, and overhead.

Identifying the Exceptions

During the reconciliation process, the accountant will take any transactions that do not fall within a general category to the business owner and determine what type of expense or income it is. This helps to understand anomalies or outliers. ​

Creating Cash-Basis Reports

Once accounts are reconciled, the accountant can then go in and create cash-basis reports retroactively for the months needed. This can include an income statement, balance sheet, or profit and loss.

Taking GAAP into Consideration

Once the business is caught up on their cash-basis reporting, they can consider implementing Generally Accepted Accounting Principles (GAAP), which means moving towards accounting on an accrual basis.

Cash-basis accounting recognizes revenues when cash is received and when expenses are paid. This method does not recognize accounts receivable or accounts payable. On the other hand, accrual-basis accounting—the preferred method—records revenues and expenses when they are earned, regardless of when the money is actually received or paid.

Many small businesses opt to use cash-basis accounting, as it is generally simpler to maintain; it’s easy to determine when a transaction has occurred since it only requires looking at whether the money is in or out of the bank. The upside of accrual-basis, however, is that it paints a more realistic picture of income and expenses during a given period of time, therefore providing a long-term look at the business’ financial health.

Why Are Businesses Not “Caught Up”?

Often, employee turnover necessitates a clean-up. If a smaller business loses someone on their accounting staff, it can be very easy to fall behind on basic reporting and account reconciliation. Similarly common, if a business does not have a full staff dedicated to the accounting work, they may not worry about their financials until an inciting event occurs, such as a tax filing deadline. Additionally, many businesses procrastinate taking care of their financials if they are meeting the barebone essentials, such as making payroll and paying bills on time.

How Can a Fractional Accounting Services Firm Help?

As this article from the Washington Post mentions, small business owners aren’t expected to be experts in finance and accounting, which is why seeking out fractional accounting services can be the ideal solution. Fractional accounting service providers can step in to bolster a business’ accounting department when turnover occurs, or when a business falls behind on their reporting. A fractional accountant can work in tangent with a business’ accounting department to help execute a clean-up while the rest of the department works to maintain ongoing responsibilities. Utilizing fractional accounting services can often be a more cost-effective option to gain full financial visibility, as the business does not need to hire additional full-time staff.

NOW CFO is a full-service, outsourced accounting firm that offers tailored financial support to a wide variety of businesses. Our consultants, ranging from fractional staff accountants all the way to fractional CFOs, can provide the additional support that your business needs.