two people working on business financials calculations

How do I clean up my financial statements?

Do your profits and cash flows make no sense? Is your balance sheet littered with negative numbers and old, incorrect figures? You are not alone: every growing business eventually needs a financial statement clean up. Here’s what you should consider when approaching a catch-up bookkeeping or an accounting clean up project.

Who will do the financial statement clean up?

Clean up bookkeeping is like untangling fishing string – to fix it, you must work smart, not hard. As a rule of thumb, bookkeepers are not qualified to do accounting clean up – you need a trained accountant. Moreover, the person performing your monthly bookkeeping got you into this mess, so they may not be qualified to get you out.

Whoever performs your clean up bookkeeping should also improve accounting processes to avoid future financial statement messes. The person you hire for bookkeeping clean up services may optimize your accounting processes toward different goals:

  • Bookkeepers minimize the burden of repetitive transactional tasks, which may create high-level problems.
  • CPAs optimize financials for tax reporting purposes.
  • Managerial accountants, like CFOshare, optimize financial statements for management decision-making.

The cost and quality of each group will vary widely – what is the best for your business?

What is the root cause of the accounting mess?

Unusable financial statements come from one or many distinct sources. The leading causes include:

  • Poor monthly bookkeeping processes, including invoicing, billing, coding, and accruals.
  • Too many general ledger (GL) accounts.
  • Performing cash basis accounting instead of accrual basis.
  • Incorrect costing or no costing.
  • Unsophisticated GL structures.
  • Bad intercompany processes.

Poor monthly bookkeeping processes.

Routine transaction processing such as invoicing, bill entry, and coding are the foundation for more sophisticated accounting accruals. Transaction processing that is uninformed, uncoordinated, or manually executed can introduce errors, create accrual challenges, and render financial statements unreliable.

Too many general ledger accounts.

Accounting software makes it easy to add GL accounts but hard to remove them. That can lead to “GL diarrhea”: too many ledgers, multi-page P&Ls, and unusable financial statements.

Incorrect costing.

Costs scale with your business growth and are crucial to understanding gross margins. Most small businesses do not know the ins and outs of cost accounting, meaning they leave costs down in operating expenses (or have no costs at all, so gross profit = sales.) Accurate costing is key to a useable profit and loss statement.

Unsophisticated GL structures

Do you group all wages into one GL account, or are they broken out by department? Is your revenue divided by distribution channel, product, or service? Or is revenue one line item? Do you have COGS broken out by revenue category so you can easily calculate gross margin by channel?

Small business owners benefit from a sophisticated GL structure customized to their business plan. These minor tweaks provide quick insight into business performance.

Bad intercompany processes.

Multiple related entities must perform reliable intercompany eliminations and balance reconciliations which are challenging and can distort financial statements.

How do you clean up an accounting mess?

Clean up bookkeeping is a task best left to experienced professionals. If you plan to oversee a financial statement clean up project, here are the steps you should perform.

1. Find a qualified accountant.

Shop around to determine the most qualified accountant to perform the clean up. This person may be in your organization, or they may be a bookkeeping clean up service. Look for someone with experience cleaning business accounting. Test them by showing a copy of your current financials and asking them to identify opportunities.

2. Develop a plan.

Do not just “dive in” without a clean up plan. Accounting is full of dependencies, and tackling the first problem you see will create more work down the road. Clean up is faster and cheaper if you plan the steps to clean up accounting records.

3. Invest in robust processes.

Catch-up bookkeeping is expensive, so small business owners often try to minimize the scope of these projects. That short-term thinking may set you up for another clean up down the road since core processes remain unchanged. Think of it this way: do you want to wash the dirty dishes in the sink, or do you want to install an automatic dishwasher?

Start your financial statement clean up now.

Catch-up bookkeeping becomes more challenging to correct with each passing day. If you are ready to start your clean up bookkeeping, contact us to learn how CFOshare improves your financial statements and monthly accounting procedures.

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