A Small Business's Guide to Monthly Bookkeeping

A Small Business’s Guide to Monthly Bookkeeping

Monthly bookkeeping is as natural and essential as breathing for small business owners.

Like breathing automatically, bookkeeping’s routine nature can lead to overlooking details or narrow perspectives.

However, with a few adjustments, you can turn this routine task into a strategic tool for growth and stability in your business.

Achieving the full potential of monthly bookkeeping demands a meticulous, reliable, and accurate routine.

This guide will cover the crucial steps to ensure your financial operations are current, aligned with intelligent decision-making, and compliant with regulations.

Preparation for Monthly Bookkeeping

Preparation is at the heart of any successful endeavor, and monthly bookkeeping is no different.

You set the stage for what’s to come in this initial phase. Here are the pre-month activities that can shape a streamlined process:

Gather Essential Documents

Before you begin each monthly cycle, take stock of the documents that will be crucial to your record-keeping:

Receipts from all business transactions to accurately validate expenditures and track expenses.
Invoices issued and received, offering a detailed record of sales and purchases within the month.
Bank statements for all business accounts are critical for reconciling the bookkeeping records with actual account activity.
Credit card statements, if applicable, to monitor and account for business-related credit transactions.
Loan statements for businesses with outstanding loans to keep track of interest and principal payments.
Payroll records are essential for companies with employees to ensure accurate salary and tax calculations.
Daily bookkeeping records from the current month, if possible.
The previous month’s financial statements used to compare and analyze month-over-month financial performance.

Review Internal Processes

Consistency is critical to accurate bookkeeping.

Regular reviews of internal processes can identify any workflow or structural issues that impede the monthly cycle.

Are there new segments within the business that need specific accounting codes?

Have there been changes to the tax regulations that necessitate an update in the reporting structure?

Reconciling Bank Statements

Reconciling bank statements is the bedrock of financial clarity.

It’s about matching your internal records with the actual bank transactions — this not only catches errors but also deters fraud and reassures stakeholders that your financial statements are reliable.

Mastering the Bank Reconciliation Process

Explore our straightforward, step-by-step guide designed to help you master the bank reconciliation process efficiently:

Gather Documents: Start by collecting all your bank statements and financial records for the period you’re reconciling.
Check Opening Balances: Ensure your records’ opening balance matches the bank statements.
Match Transactions: Match each entry in your records with the bank statement’s entries, ticking them off to prevent mistakes.
Spot Discrepancies: Identify any differences, including missing transactions or differing amounts.
Investigate and Adjust: If necessary, investigate discrepancies, review documents, or confirm transaction details. Then, adjust your records to correct these.
Add Interest and Fees: Include bank interest or fees in your records.
Check Closing Balances: Ensure your final records match the bank statement’s closing balance.
Document the Process: Record the reconciliation steps, discrepancies, and adjustments. This is important for future audits and reference.

Record and Investigate Discrepancies

Dig deep to identify the source if you find any discrepancies.

Bank errors, missed transactions, or internal fraud can be realized and rectified at this stage, preventing more significant issues.

Update Regular Transactions

Regular, recurring transactions, such as loan payments or subscription services, should be checked against the bank statement and updated in your records.

This step ensures that you account for all items and accurately reflect your business’s economic health in your financial records.

Recording Transactions

Accurate transaction recording is the heartbeat of your monthly bookkeeping practice.

This can be a complex dance of multiple inputs and outputs, but a structured approach can simplify the process.

Categorize Transactions

Categorizing transactions allows for a more organized and efficient analysis of financial data. Below are examples of common categories and the types of transactions that fall under each:

Revenue: Sales of products or services, income from investments.
Cost of Goods Sold (COGS): Direct costs attributable to producing the goods sold in a company.
Expenses:
- Operating Expenses: Rent, utilities, insurance, and salaries.
- Marketing and Advertising: Costs connected to promoting the business.
- Travel Expenses: Costs associated with business travel.
Assets:
- Current Assets: Cash, inventory, accounts receivable.
- Fixed Assets: Property, plant, and equipment.
Liabilities:
- Current Liabilities: Accounts payable, short-term loans.
- Long-term Liabilities: Mortgages, bond repayments.
Equity: Owner’s equity, retained earnings.

This categorization facilitates more profound insights into financial performance, enabling informed decision-making.

Enter Transactions Into the System

You must enter categorized transactions into your bookkeeping system. Integrating bank feeds and accounting software can do this manually or automatically.

Identify Income and Expenses: Start by identifying all sources of income and all expenses incurred during the period. This includes sales, returns, interest earned, and operational, administrative, and overhead costs.
Gather Documentation: To support the entries, collect all relevant documentation, such as invoices, receipts, bank statements, and other proof of transactions.
Record Transactions: Use the gathered documents to record each transaction in your bookkeeping system, whether a manual ledger or accounting software. Ensure accuracy in the amount, date, and categorization.
Assign Categories: Allocate each transaction to its appropriate category to simplify future financial reporting and analysis. This categorization should align with your established Chart of Accounts.
Review for Accuracy: Review the recorded transactions to confirm their accuracy and completeness. This step is crucial for maintaining reliable financial records and facilitating smooth audits.

Managing Accounts Receivable

Paid invoices can impact your cash flow and financial health.

Managing accounts receivable ensures you’re on top of your outstanding debts and can take proactive steps.

Implement a Follow-Up Procedure for Unpaid Accounts

To keep cash flow healthy and ensure financial stability, having an effective follow-up process for unpaid accounts is crucial.

Here’s a structured approach for overdue payments:

Initial Reminder: As soon as the account is past due, send a polite, firm email notifying the client of the overdue payment. Include the original invoice for reference.
Telephone Follow-Up: If no one replies to the email within a week, you should make a follow-up call. This can help you understand any payment issues and discuss solutions.
Formal Letter: If the account remains unpaid after email and phone attempts, send a formal letter via certified mail stating the overdue payment, past communication attempts, and a final payment deadline before taking further action.
Payment Plan Negotiation: Offer a payment plan to clients with financial difficulties, allowing smaller payments over time.
Final Notice: If all efforts fail, send a final notice that the account will be handed over to collections or legal action if not settled within a given period.

This step-by-step, escalating approach shows professionalism and the importance of meeting financial commitments.

Review Aging Reports

An aging report categorizes the outstanding invoices based on their due dates, clearly visualizing the debts’ aging process.

This review can help prioritize collections efforts and make informed decisions about credit policies.

Managing Accounts Payable

Just as managing money coming in is crucial, overseeing money leaving the business is vital.

Influential accounts payable management ensures timely payments while maintaining good vendor relationships.

Process for Reviewing and Paying Vendor Bills

A systematic process for reviewing and promptly paying vendor bills is crucial to ensuring smooth business operations and strong vendor relationships.

Invoice Receipt and Validation: Check all invoices for legitimacy and match them with actual goods or services received, cross-referencing delivery notes and purchase orders.
Account Coding: Correctly assign each invoice to the correct expense account for organized finances and easy expense tracking.
Approval Process: Create a transparent approval chain for invoices involving verification and authorization to ensure the goods or services meet agreed standards.
Payment Scheduling: Sort invoices by due dates to manage payments efficiently, avoid late fees, and capitalize on early payment discounts.
Payment Processing: Make payments via the preferred method (check, electronic funds transfer, online platforms), ensuring all transaction details are correct to avoid fraud.
Record Keeping: Keep detailed records of all payments, including invoices, approval records, and payment proofs. These records are essential for audits and resolving disputes.
Vendor Communication: Maintain open communication with vendors about payment schedules, disputes, or adjustments to build solid relationships and potentially better terms.

This process helps businesses manage payments effectively, maintaining solid financial health and vendor relations.

Vendor Invoice Review

Check each vendor invoice against the purchase orders or contractual agreements.

This can prevent overpayments or payments for unauthorized purchases.

Establishing a Payment Calendar

Creating a payment calendar ensures timely vendor payments, boosting your company’s creditworthiness and maintaining good vendor relations.

Start by listing all vendors and their payment terms, for example, net-30 for vendor A and net-60 for vendor B.

Then, schedule payments in your financial software based on the invoice dates, setting reminders a few days before each due date.

This approach prevents late fees and leverages early payment discounts. Regularly review the payment calendar to update for new invoices or cash flow changes, keeping your accounts payable process efficient and reliable.

Reviewing Payroll Adjustments

Payroll could be your business’s most significant expense.

Reviewing payroll adjustments monthly ensures its accuracy and the alignment of employee compensation with financial reporting.

Ensuring Accurate Payroll Records and Compliance with Tax Requirements

Maintain accurate payroll records and follow tax laws for effective business management.

Here’s how to ensure accuracy and compliance:

Conduct regular audits to check the accuracy of payroll details like employee hours, wages, and deductions and correct discrepancies quickly.
Keep up-to-date with changes in tax laws at all levels to ensure your payroll meets current requirements and avoids penalties.
Use reliable payroll software that updates tax rates automatically and provides detailed reports for better management.
Train your payroll team on the latest practices and compliance standards. Ongoing education helps prevent errors and meet tax regulations.
Accurately document and securely store payroll records. Proper record-keeping supports compliance, simplifies audits, and resolves employee queries.

These steps will improve your payroll accuracy and compliance, supporting your business and employees.

Cross-Verify Calculations

Post-calculations cross-verify each payroll item, from hours worked to deductions, to ensure accurate and lawful employee compensation.

Update Employee Records

Any changes in employee records, such as promotions, job changes, or personal details, should be updated to reflect current status.

This prevents any discrepancies and keeps records clean and actionable.

Preparing Financial Statements

Financial statements are the culmination of your monthly bookkeeping efforts.

They provide a snapshot of your business’s financial position and are crucial for decision-making and stakeholder communication.

Likewise, we have provided Excel bookkeeping templates to streamline your financial processes.

Income Statement Preparation

The income or profit and loss statement summarizes the revenues and expenses generated during a specific period.

Preparing this statement offers insights into operational performance and profitability.

Balance Sheet Compilation

The balance sheet displays your business’s assets, liabilities, and shareholders’ equity.

It’s a powerful tool for assessing liquidity, leverage, and overall solvency.

Cash Flow Analysis

Cash flow statements demonstrate how efficiently cash moves in and out of the business.

This is vital for maintaining sufficient cash reserves and meeting financial obligations.

Use Ridgewise’s sample Monthly Financial Report Below (Print This Out – For Your Reference)

Simple Monthly Financial Report for [Month], [Year]

Introduction

Summary of the financial activities and overall financial health of the business.

Income Statement (Profit and Loss)

Revenue: List total revenue from sales, services, and other income sources.
Cost of Goods Sold (COGS): Total costs directly related to the production of goods sold this month.
Gross Profit: Revenue minus COGS.
Expenses: Breakdown of operating expenses (rent, utilities, salaries, marketing, etc.).
Net Profit: Gross profit minus total expenses.

Balance Sheet

Assets
- Current Assets: Cash, accounts receivable, inventory.
- Fixed Assets: Property and equipment (less depreciation).
Liabilities
- Current Liabilities: Accounts payable, wages payable, short-term loans.
- Long-term Liabilities: Long-term debt, deferred tax liabilities.
Equity: Owner’s equity plus retained earnings.

Cash Flow Statement

Operating Activities: Cash received from customers minus operating expenses and taxes.
Investing Activities: Cash used for or generated from purchasing/selling assets.
Financing Activities: Cash received from or paid to finance activities, including debt, equity, and dividend payments.
Net Increase/Decrease in Cash: Total change in cash position.
Beginning Cash Balance: Cash at the start of the month.
Ending Cash Balance: Cash at the end of the month.

Financial Analysis

Key Ratios: Liquidity ratios, profitability ratios, and debt ratios.
Trend Analysis: Month-to-month changes in crucial income and expense categories.
Budget vs. Actual: Comparison of actual figures against budgeted figures.

Conclusions

Summary of financial status and significant changes from the previous month.
Recommendations for actions or considerations for the next month.

Appendices (if applicable)

Detailed transaction lists, additional notes, or specific analyses relevant to the month.

Analyzing Financial Performance

Analysis of financial performance guides strategic planning for the future.

When done monthly, it offers a real-time evaluation of progress and areas that require attention.

Budget-to-Actual Comparison

Comparing actual figures to your budgeted amounts can reveal variances that may signify areas of overperformance or underperformance.

This analysis is vital for making adjustments to the expenditure and investment plans.

Financial Ratios Calculations

Financial ratios, such as liquidity or profitability, can provide actionable insights.

These metrics often serve as benchmarks for performance evaluation against industry standards or company history.

Trend Analysis

Studying financial trends over several periods can uncover patterns or shifts.

Do we need to plan for seasonal fluctuations? Are there trends that indicate a need for a strategic pivot or acceleration within specific business segments?

Closing the Books

Closing the books at the end of the month ensures that the financial statements and records are current and consistent.

It is a vital administrative task affecting tax preparation, audits, and financial decision-making.

Final Checklist for Ending the Monthly Bookkeeping Process

Completing all bookkeeping tasks accurately at the end of each month is essential to maintaining financial integrity and preparing for the upcoming month.

Here’s a streamlined guide for the monthly bookkeeping closure:

Reconcile Bank and Credit Card Accounts: Ensure transactions match bank statements for accurate records.
Review Accounts Receivable and Payable: Check outstanding invoices and bills to manage cash flow and future expenses.
Ensure Payroll Accuracy: Check that payroll transactions, including taxes and contributions, are correct.
Inventory Management: (If applicable) Verify inventory levels and update records for any changes.
Fixed Assets and Depreciation: Record new or disposed assets and apply depreciation.
Adjust Accruals and Prepayments: Adjust for accrued expenses and prepayments to accurately reflect finances.
Review Expense Reports: Check expense reports for accuracy and policy compliance.
Month-End Entries: Record adjusting entries to close the month’s books accurately.
Prepare Financial Statements: Generate and review the income statement, balance sheet, and cash flow statement.
Documentation and Filing: Properly file all financial documents for future reference and compliance.
Management Review: Present financial reports to management for strategic planning.
Backup Financial Data: Securely backup financial data to protect integrity.

This checklist ensures a thorough and accurate monthly accounting closure, laying a solid foundation for the next month’s financial activities.

Post-Closing Adjustments

After the books are closed, make any necessary post-closing adjustments to ensure your financial statements are “the final truth.”

This could involve recording depreciation expenses, updating inventory valuations, or addressing year-end adjustments.

Preparing for Tax Compliance

Monthly bookkeeping is the groundwork for tax compliance.

It’s about staying on top of your financial obligations to avoid last-minute stress and penalties.

Tax-Related Actions Based on Monthly Bookkeeping

Tax compliance is vital in financial management, requiring accurate and detailed monthly bookkeeping. Key actions include:

Accurate Expense Tracking: Record and categorize all business expenses to maximize tax deductions and support them during audits.
Sales Tax Management: Handle sales tax according to local laws, keeping up with changing rates and regulations.
Payroll Tax Compliance: Calculate, withhold, and pay payroll taxes correctly and quickly fix discrepancies.
Estimated Tax Payments: Use monthly finances to make timely quarterly tax payments, avoiding penalties.
Tax Document Organization: Keep tax-related documents well-organized for easy access during tax preparation or audits.
Review and Plan: Regularly review bookkeeping records to assess tax liabilities and uncover tax-saving opportunities.

Incorporating these practices into your monthly bookkeeping routine keeps your business tax-compliant, minimizes liabilities, and prevents disorganization and procrastination.

Effective bookkeeping is crucial for your business’s financial well-being and legal standing.

Pre-Tax Season Planning

Use the months leading up to tax season for planning. Are there tax credits you could apply for? Any deductions you qualify for?

Preparation is power in tax season, as it can reduce financial and mental strain.

What is the most efficient way to manage monthly bookkeeping?

The most efficient way to manage monthly bookkeeping is by utilizing accounting software or hiring a professional bookkeeper.

These tools and services can help automate processes, save time, and ensure accuracy in your bookkeeping records.

Additionally, maintaining organized records and regularly reviewing them can contribute to the efficient management of monthly bookkeeping.

Finding a method that best suits your business needs and staying consistent can significantly improve bookkeeping efficiency.

Takeaways

While not the flashiest part of running a business, monthly bookkeeping is crucial. Its careful and efficient management can distinguish between a struggling business and one that thrives. Mastering these steps sets the foundation for financial flexibility and success, regardless of your business’s size or sector.

Bookkeeping is more than routine tasks; it’s about fine-tuning your business model, staying compliant, and enabling precise, actionable insights. It’s a vital part of your business that deserves as much attention and care as any growth strategy. With this guide, you have the tools to lead your business to success, joining those that survive and flourish.