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8 Ways to Clean Up Your Small Business Financials

Michelle Lindner June 27, 2022

8 Ways to Clean Up Your Small Business Financials

Fewer things send a chill down the spines of entrepreneurs than the idea of tax returns, financial reporting, and reconciling accounts.

But it doesn’t have to be that way.

Getting your small business finances organized and squared away from the get-go will reduce your stress, give you a clear picture of your business’ financial health, and make things easier during tax season.

Whether you’re just getting started on financial reporting, you want to do a little spring cleaning on your business, or you’re getting your finances in shape to sell your business, here are 8 solid ways to help you get your financial records where they need to be.

1. Keep track of your business finances

Although it might seem a bit obvious to seasoned small business owners, creating a balance sheet or profit and loss (P&L) statement is something every business needs but that many entrepreneurs get a late start on.

Whether you need a balance sheet or a P&L depends on the size of your business and whether you’re holding certain types of assets.

Most online businesses can get away with a P&L, which shows both the monthly revenue and business expenses, as well as any liabilities or business loans. The P&L is a snapshot of revenue and expenses for a given period of time, usually a fiscal quarter or year.

When some entrepreneurs hear fiscal quarter or year, they think they have plenty of time to record their financial transactions. But the best and easiest way to do it is to set aside time once per month to fill out your statement for a clear picture of financial health.

2. Reconcile your financial statements

One of the first lessons young adults are taught when they open their first bank accounts is how important it is to balance the account at the end of the month.

In the time before debit cards, that bank reconciliation meant cross-checking what was written in their checkbooks with transactions on their monthly statements.

You might still be writing business checks, but in a sense, the increasingly digital world has made it easier than ever to reconcile your business financial statements.

Ideally, you should be keeping an up-to-date balance sheet or a profit and loss statement, to keep track of all of your transactions.

Check your balance sheet against your credit card and bank statements to make sure everything is accurately accounted for. Gather all receipts to cross-check them with your statements in case you were overcharged or have to account for refunds.

3. Square away accounts receivable and payable

If you’re a bootstrapped small business owner, you might not have the funds to invest in fancy accounting software to help you keep track of your invoices.

That makes it even more important to verify your accounts receivable and payable on a monthly basis.

It’s especially easy to forget about accounts payable when you’re in the fast-paced world of digital business ownership, which can land you in a tight spot if you end up with extra fines or fees for not paying on time.

Some small business owners might say it’s impossible to forget to collect payments due, but it’s surprisingly easy to put smaller payments out of your mind if you’re caught up in the day-to-day operations of the business.

Whether you’re using cash or accrual accounting, losing track of your invoices can have a devastating impact on your business.

Setting aside time once a month to review accounts payable and receivable could help you avoid unnecessary expenses, increase your cash flow, and keep you in good standing with service providers.

4. Check your payroll responsibilities

Some entrepreneurs interchange the terms “employee” and “contractor”. Whether a worker should be classified as an employee or independent contractor is a question you discuss with a certified public accountant (CPA) or another qualified tax professional.

Even if you don’t owe taxes on your employees or contractors, you might have reporting responsibilities based on where you live, where your business is located, or where your workers are located.

For example, anyone who hires an independent contractor in the US is responsible for reporting all income paid to the contractor to the IRS by the end of each January. You also need to send out a 1099 with the amount reported so the contractor can file his or her taxes.

If you’ve done a one-off short project during the year, it’s easy to forget about payments made to a contractor. That’s why it’s a good idea to add this to your monthly overview so you don’t get caught with a nasty surprise during tax season.


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5. Go over your fixed assets

Accounting for fixed assets trips up a lot of small business owners. A fixed asset is a large investment that in theory appears on your balance sheet for a long period of time.

Fixed assets can be found in just about every type of business, even those that are strictly online. For example, if you run a successful Amazon FBA or FBM business, you might have your own warehouse to receive inventory overflow or fulfill orders.

Where it gets tricky is when these large-scale assets go missing. That could be due to loss, theft, destruction, and so on.

When that happens, what you have on your hands is a “ghost asset.” When you’re dealing with a catastrophe, it’s easy to forget to take the asset of your sheets. Keeping it around as an expense is a sure-fire way to trigger an audit from the IRS.

While you’re balancing your books, check the assets and expenses you have listed to ensure they’re still functional and a part of your business.

6. Keep business and personal finances separated

If you’re just getting started in the world of digital entrepreneurship, you might be tempted to use your personal accounts for business transactions. After all, starting a business is a gamble, and you might not want to set up separate accounts until you’re sure you’re going to succeed.

While this might seem logical, it’s actually best to keep your business and personal finances separated from the get-go.

One of the biggest reasons is that mingling the two can turn your business liabilities into personal liabilities that can wreak havoc on your life.

Aside from that, having your finances separated will simplify your accounting records. Not only will you have a more accurate picture of the financial health of your business, but it also makes things easier if you ever get audited.

You don’t want to be digging through mountains of personal and business transactions to separate them when you need fast and accurate accounting.

7. Invest in Bookkeeping Technology

Paying for accounting services can make it easier to run your business. Most of the time, you hand over your invoices and statements, and an accounting professional takes care of the rest.

But what if you don’t have the funds to pay for a qualified professional?

The best course of action is to invest in bookkeeping software. QuickBooks is the most well known software on the market, but there are plenty of other options to choose from.

Dedicated software can be integrated with your payment methods and bank accounts so that all you have to do is verify the numbers quickly at the end of the month to make sure all transactions are accurately recorded.

With basic plans available for under $20 per month, it’s a good time to apply the mantra “time is money.” You can spend hours recording and reconciling everything on your own, or you can pay a little each month to give yourself more freedom and peace of mind.

8. Don’t wait until the end of the year

A common theme throughout this article has been to check your accounts, transactions, and sheets every month.

It’s not uncommon for small business owners to leave everything until the new year and cram all financial reporting in just before they file their taxes.

If you’ve been operating this way, try switching to monthly accounting. One of the biggest reasons business owners put off reconciling their accounts is they think it will be a long, difficult, and boring process.

But consistent and frequent reconciliation will give you accounts that are in better shape with fewer errors and discrepancies. And by splitting what can often be an overwhelming task into 12 smaller chunks, you might find that you get more enjoyment out of handling your accounting records and a greater sense of pride in your business finances.

Get your whole business into shape

Business finances are just one area you need to focus on to create a healthy asset you can sell later.

It’s vital to build an accurate P&L if you want to attract quality buyers, but there are other areas you need to get in shape in order to get the highest valuation possible for your business.

If you’re wondering what your business could be worth now, check out our free valuation tool.

You can also schedule a call with one of our advisors to get actionable insights into how you can get your business in prime condition to sell.


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