“Bookkeeping is the key to unlocking the secrets of your business’s financial health.” – Melanie Hodgdon.
Welcome to another deep dive that will impact your business—bookkeeping!
Before you yawn and consider clicking away from this blog, let me say something. Solid bookkeeping can lead to business growth, funding, and peace of mind.
Proper bookkeeping provides an accurate measurement of a company’s success. Bookkeeping is an essential tool businesses use to monitor performance and make well-informed decisions.
Still not convinced?
Consider this: What if you’re missing out on hidden cash? Or what if you’re about to hit an audit iceberg and don’t even know it? Scary, right?
Today, we’ll unravel the how’s and whys of catch-up bookkeeping, so grab a coffee, and let’s get into it!
Key Takeways Insights
- You must document payments when you make and receive them in cash accounting. We note revenue when we credit money. The same holds true for costs. This remains true regardless of when you rendered or used the service or product.
- Accrual accounting records revenues and costs when they generate or spend them, regardless of when they collect or pay the money.
- The Modified Accrual approach is a compromise between cash basis and accrual accounting, combining simplicity with a comprehensive financial view. The Modified Accrual method takes into account both basic and in-depth analyses of a company’s finances.
- Businesses with revenue of 200k USD or less should adopt for cash basis accounting.
- Businesses with revenue between 200k USD to 5 million USD, should adopt for Modified Accrual method.
- Businesses with revenue of more than 5 Million USD should opt for the Accrual accounting method.
Understanding Catch-up Bookkeeping
90% of businesses that fail do not have accurate bookkeeping records. (Source: US Small Business Administration)
“Bookkeeping is the art of recording all the financial transactions accurately and systematically.”
What is Catch-up Bookkeeping?
You should not complete catch-up bookkeeping on a lazy Sunday afternoon. It’s more like a financial janitorial service.
Catch-up bookkeeping helps records to find and fix any mistakes. This service enables businesses to rectify errors, streamline their financials, and establish a groundwork for achieving success. By doing so, you can guarantee the accuracy and currency of your records.
Completing catch-up bookkeeping will help you to understand your business’s finances better. This will allow you to make better decisions based on accurate information. Catch-up bookkeeping also ensures you follow all your business’s accounting rules and regulations.
Catch-up bookkeeping can take time, but keeping your business healthy and prosperous is necessary.
Now, Let’s understand,
When does a Business Need Catch-up Bookkeeping?
60% of businesses spend less than 5 hours per month on bookkeeping. (Source: FreshBooks)
“Neglecting proper bookkeeping is akin to neglecting the foundation of your house; eventually, problems will arise.”
Businesses often rely on catch-up bookkeeping services to enhance the precision of their records. This is crucial for reasons such as:
1. Software Migration
Say you’re transitioning from an Excel spreadsheet to a software like QuickBooks. Moving messy, outdated records is like moving to a new house but carrying all your old junk with you.
Before the migration, catch-up bookkeeping will ensure you keep your current assets and liabilities distinct. Even though the data may be correct, you may want to migrate over all the data in the new system.
Software like QuickBooks allows you to export your data to Xero, so you may not need catch-up bookkeeping.
Still, most of the time, you will need catch-up bookkeeping.
2. Financial Reporting and Funding
Maintaining up-to-date bookkeeping records is an investment for businesses aiming to enhance their reporting and increase funding prospects.
As per an investor friend of mine, “If you can’t manage your finances, how can I trust you to manage the other 10 things you need to do to grow the business?”
When you’re looking to woo investors, they’ll want to see financial reports as clean as a Michelin-star kitchen. Any inconsistency can turn into a red flag, making them wonder what else is wrong with your business. I have found this to be why people fail to get investors.
3. Tax Filing
Imagine filing your taxes and realizing your books are as tangled as a bowl of spaghetti.
Unclean books are the #1 reason people file late or incorrect tax returns, resulting in late fees and audits. The IRS needs more patience for inaccurate or incomplete records. Catch-up bookkeeping helps you untangle the mess before it’s too late.
4. Unreconciled Transactions
Need help finding yourself with mismatched invoices and payments? Or are your bank statements not aligning with your internal records? That’s your business crying out for a good session of catch-up bookkeeping.
In this situation, seeking assistance from a professional catch-up bookkeeper is crucial. They will assist you in identifying and rectifying any mistakes, reconciling your accounts, and updating your records. This process will provide insight into your business’s performance and enable you to make well-informed decisions.
5. Changing Reporting Format
Switching from cash-based accounting to accrual? You’ll need to rework your accounting records to match the new format, which means adjusting entries for things like unearned revenue or prepaid expenses.
Further, keeping the business’s accounts payable and accounts receivable up to date is always an essential activity in the catch-up bookkeeping process. This process will help determine the pending invoices to be sent and which overdue payments need to be followed up. It will also help to identify bad debt expenses and address any bad financial records, including bad financial data.
Additionally, if you started a new vertical in your business, you may want to track their profitability separately; then, you also need to realign your numbers to reflect the new reality. Ensuring that all financial records are current and complete is crucial as part of the clean-up bookkeeping process. Reconciling receipts for all modes of payment is essential for accurate bookkeeping and reporting.
6. Unable to Get the Correct Information
If you’re making business decisions based on inaccurate information, you’re playing financial Russian roulette. This is the #1 reason people come to me asking, “Gary, I don’t know if my books are correct or not. THE RESULTS ARE VERY DIFFERENT when I compare my back-of-paper math with the books. I don’t know whom to trust and which decision to make.”
This is the emergency siren! Book a free call with me, and let’s silence is siren today. Here is the link to book the call.
Now, let’s discuss some tools and resources that will help you with catch-up bookkeeping.
Tools & Resources
50% of businesses say that bookkeeping is their least favorite task. (Source: QuickBooks)
“Maintaining up-to-date bookkeeping records is an investment for businesses aiming to enhance their reporting and increase funding prospects.”
Businesses can utilize tools and resources to manage their catch-up bookkeeping needs. Some used options include:
Think of software like QuickBooks, Xero, or FreshBooks as your personal assistants for managing your bookkeeping paperwork, including tax preparation. They track income and expenses and can generate financial statements.
Consider choosing cloud-based systems that offer real-time updates and backups. Utilizing this type of software reduces the chances of errors and saves time, making tax preparation easier and less stressful. It also enables you to concentrate on other critical business management aspects.
2. DIY Checklists
A checklist acts as your map, helping you navigate through the jungle of ledgers, account statements, and invoices. We have provided a list here that we used at Ledger labs. You can download the free checklist from here.
Bookkeeping consultants are like your business therapists. They dive into your financials, identify issues, and offer solutions. They can be your quickest way out if you’re in a real mess.
As a business owner, you have enough things on your hands. Let the work of accounting be in the hands of a consultant. You can book a free call with me for a free audit.
Now that you have a grasp of the tools and resources at your disposal, it’s time to begin familiarizing yourself with the ins and outs of Catching up on bookkeeping.
The Process of Catching Up on Bookkeeping
33% of businesses admit to making bookkeeping errors. (Source: Xero)
“Behind every successful business is meticulous bookkeeping, and catch-up bookkeeping is the first step to success.”
How catch-up bookkeeping is done can differ based on the requirements of each business. Nevertheless, there are some procedures that all businesses should adhere to:
1. Reviewing the Chart of Accounts
Think of the Chart of Accounts as your bookkeeping skeleton. It outlines all your business’s financial accounts, breaking them into categories like assets, liabilities, income, expenses, and equity. Make sure each account is correctly labeled and categorized to avoid confusion later.
Once, a business owner got a tax audit from the IRS because their business expenses were high. However, their Cost of Goods Sold (COGS) weren’t that high. Hence, you must have all your entries correctly.
2. Analyzing Bank and Credit Card Statements
You need to be a detective here. Hunt for discrepancies between your statements and your internal records. Identify each transaction, label it, and assign it to the appropriate account in your accounting software.
3. Reconcile Vendor Bills, Payments & Statement of Accounts
Ensure you’re not overpaying or underpaying your vendors. Match each bill to its corresponding payment and double-check these against vendor statements to ensure accuracy.
4. Reconcile Customer Invoices & Payments
Do your books reflect the income you actually earned? Match invoices to payments, and identify any unpaid or partially paid invoices.
5. Reconcile Loan Accounts
Loans are tricky. Not only do you have to account for the principal, but also the accumulating interest. Make sure you have a system for tracking these separate elements.
6. Reconcile Fixed Assets
Did you buy a computer or vehicle for your business?
These are fixed assets, and they depreciate over time. Ensuring your fixed assets and their depreciation are correctly recorded will save you headaches in the future.
7. Reconcile Inventory
If your inventory on the books doesn’t match what’s in your warehouse, you’ve got problems. An accurate inventory affects everything from sales to taxes.
8. Reconcile Equity Accounts – Separate Business and Personal Expenses
Refrain from muddying the waters by mixing personal and business expenses. Separate these to gauge the financial health of your business accurately.
9. Reconciling Bank Accounts
If your bank account balances don’t match your books, you have some detective work to do. Identify and reconcile any discrepancies to ensure you’re not leaking money.
Importance of Receipts and Invoices in Catch-up Bookkeeping
25% of businesses say that bookkeeping is a major source of stress. (Source: FreshBooks)
“Your financial records are the heartbeat of your business; catch-up bookkeeping ensures a healthy pulse.”
Receipts and invoices play a role in any business, particularly when it comes to catching up on bookkeeping tasks. These documents serve as proof of income and expenses, allowing for the recording of financial transactions. To help with catch up bookkeeping, here are a few tips for utilizing receipts and invoices;
1. Business Expenses
No receipt, no proof. Every time you lose a receipt, you lose a tax write-off.
2. Tracking Customer Invoices and Payments
An unpaid invoice is a loan you’ve given to your client. Keep track of them to maintain a healthy cash flow.
3. Tracking Vendor Bills and Payments
You can’t control your costs if you don’t know what they are. Every bill from a vendor should be recorded and tracked against payments.
4. Tax Deductions
From office supplies to professional services, tax deductions can shave off a significant amount from your tax bill. But without invoices or receipts, you’re flying blind.
Benefits of Catch-up Bookkeeping
63% of small businesses say that catch-up bookkeeping is a major challenge. (Source: Wasp Barcode Technologies)
“Catch-up bookkeeping is the bridge that connects your financial past to a prosperous future.”
Catch up bookkeeping refers to the practice of revising and rectifying a company’s records to ensure their accuracy and currency. It plays a role in enhancing a business’s financial management strategies.
Engaging in catch up bookkeeping offers advantages, which include:
1. Avoiding Mistakes and Tax Errors
Mistakes and errors can lead to penalties, audits, or legal consequences. Catch-up bookkeeping can act as your safety net.
2. Achieving Accurate Financial Reports
Your financial reports are the health check-up of your business. With accurate books, you can diagnose issues before they become problems.
Impact of Missed Bookkeeping on Business
42% of businesses say that catch-up bookkeeping takes more than 20 hours per month. (Source: FreshBooks)
1. Potential Loss of Tax Deductions
If your books aren’t up-to-date, you could miss valuable tax deductions, effectively paying more taxes than you should.
2. Cash Flow Complications
Inaccurate books can give you a misleading picture of your cash flow, making it harder to make informed decisions.
How Often is Catch-up Bookkeeping Required?
35% of businesses say that catch-up bookkeeping is the most time-consuming aspect of accounting. (Source: QuickBooks)
“The frequency at which catch-up bookkeeping should be performed varies based on the complexity and scale of business transactions.”
The need for catch up bookkeeping varies among businesses. Depends on the complexity and volume of their transactions. It relies on how busy a business’s financial landscape is.
Some businesses with several transactions or complex financial structures need weekly catch-up sessions.
Weekly reviews keep financial records up-to-date and accurate, reducing the risk of errors, discrepancies, and oversights.
On the other hand, businesses with smaller financial operations may find that a monthly review is enough. In some cases, the frequency of activity is lower and less complex, allowing for longer intervals between catch up sessions.
Each business should determine the frequency of catch up bookkeeping based on its financial characteristics and requirements. These characteristics are the following:
- The size and complexity of the business
- The industry the business is in
- The business’s tax filing requirements
- The business’s financial reporting needs
Estimating the Cost of Catch-up Bookkeeping
28% of businesses say that catch-up bookkeeping is the most expensive aspect of accounting. (Source: Xero)
“The cost of catch-up bookkeeping is a small price to pay for the peace of mind it brings.”
Whether doing it yourself or hiring a pro, catching up on accounting can be costly and time-consuming. The amount of work needed will vary depending on how far behind you are, but it’s important to understand the upfront investment involved.
As a business owner, you have to juggle many things at once. This is where Ledger Labs comes in. Ledger Labs offers full accounting and bookkeeping services to help you get back on track quickly and efficiently. They have experience working with businesses of all sizes and industries, so they can tailor our services to your needs.
Here are just a few of the benefits of working with Ledger Labs to catch up on your accounting:
- Save time and money: Ledger Lab can help you get your books up to date quickly and accurately so you can focus on running your business.
- Zero Errors: Their experienced accountants and bookkeepers will ensure that your books are prepared correctly, which can help you avoid costly errors and penalties.
- Gain insights into your business: Ledger Labs can provide reports and analysis to help you make better financial decisions.
If you’re ready to get your accounting back on track, contact Ledger Labs today for a free consultation. They will help you assess your needs and develop a plan to get you back on track.
Here is the link to book a free call today.
Maintaining Your Books Post Catch-up Bookkeeping
“Catch-up bookkeeping is the flashlight that helps you uncover hidden financial treasures within your records.”
Maintaining a clean house is easier than cleaning a dirty one. The same principle applies to bookkeeping.
Once you’ve caught up on your accounting with Ledger Labs, it’s important to have a plan in place to maintain your books on a regular basis. This will help you avoid falling behind again and make it easier to track your financial performance and make informed business decisions.
Here are a few tips for maintaining your book’s post-catch-up bookkeeping:
- Set aside time each week or month to review your books. This can take a little bit of time, but it’s important to be consistent.
- Record all of your income and expenses as soon as possible. This will help you avoid forgetting things or making mistakes.
- Use cloud-based accounting software. This will make it easy to access your books from anywhere and collaborate with your accountant or bookkeeper.
- Reconcile your accounts regularly. This will help you identify and correct any errors in your books.
If you need help maintaining your books, Ledger Labs offers various ongoing bookkeeping services. We can help you with everything from recording your transactions to preparing your financial statements.
Deciding Between DIY and Professional Bookkeeping Services
75% of businesses that hire a bookkeeper to help with catch-up bookkeeping are able to improve their financial performance. (Source: Bench Accounting)
Going the route for DIY or Professional bookkeeping in your choice. However, I recommend assessing your needs, budget, and time constraints. Sometimes, bringing in an expert is more cost-effective than DIY. This is especially true for bookkeeping, which can be complex and time-consuming, especially for businesses with multiple transactions and complex financial statements.
A professional bookkeeper brings more than their expertise. They also save you time, money, and headaches for any errors. A professional bookkeeper can help you focus on running your business and achieving your goals.
Common Bookkeeping Errors to Avoid
“Mistakes and errors can lead to penalties, audits, or legal consequences. Catch-up bookkeeping can act as your safety net.”
Watch for errors like duplicating entries, mids-categorizing expenses, or overlooking small transactions. They can add up quickly. Here are some common bookkeeping errors to watch out for:
- Not Recording Transactions Promptly
- Mixing Personal and Business Finances
- Incomplete Records
- Not Reconciling Bank Statements
- Data Entry Errors
- Misclassifying Expenses
- Ignoring Petty Cash
- Forgetting to Record Depreciation
- Not Backing Up Data
- Inconsistent Record-Keeping Practices
- Overlooking Tax Deadlines
- Not Seeking Professional Help
- Failure to Reconcile Accounts
- Receivable and Accounts Payable
- Lack of Documentation
- Ignoring Financial Reports
By being aware of these common bookkeeping errors and implementing best practices, you can maintain accurate financial records and make more informed financial decisions for your business.
Can Catch-up Bookkeeping Impact My Business Taxes?
“According to a recent survey by Clutch, 60% of small businesses in the US have fallen behind on their bookkeeping.”
Yes, catch-up bookkeeping can impact your business taxes. When you need to catch up on your bookkeeping, tracking your income and expenses can be difficult. This can lead to you overpaying or underpaying your taxes.
Catch-up bookkeeping can help you identify hidden deductions. This can reduce your tax liability and save you money. However, catch-up bookkeeping can also reveal unreported income. If you still need to report income in the past, you may owe back taxes and penalties.
Here are some specific ways that catch-up bookkeeping can impact your business taxes:
- Uncovered deductions: Catch-up bookkeeping can help you identify deductions that you may have missed in the past. This can include things like business travel expenses, home office expenses, and depreciation.
- Unreported income: Catch-up bookkeeping can also reveal unreported income. If you still need to report income in the past, you may owe back taxes and penalties.
- Tax errors: If your bookkeeping needs to be more accurate, you may have made errors on your tax returns in the past. Catch-up bookkeeping can help you identify and correct these errors.
- Tax audits: If the IRS audits you, your bookkeeping will be one of the first things they look at. Having accurate and up-to-date bookkeeping will help you pass an audit more easily.
If you need to catch up on your bookkeeping, hiring a professional bookkeeper is important. This will help you avoid costly tax errors and penalties.
Limitations to What Catch-up Bookkeeping Can Do
“Catch-up bookkeeping is like trying to put a puzzle together after you’ve already thrown away half of the pieces.”
While it’s a powerful process, catch-up bookkeeping can only forecast the future and replace good financial management practices.
Here are some specific examples of the limitations of catch-up bookkeeping:
- Catch-up bookkeeping cannot recover lost data:- If you need to gain financial records, such as receipts or invoices, catch-up bookkeeping will not be able to help you.
- Catch-up bookkeeping cannot correct past mistakes:- If you have made past mistakes on your tax returns, catch-up bookkeeping will not be able to correct them.
- Catch-up bookkeeping cannot predict the future:- Catch-up bookkeeping can help you understand your past financial performance but cannot predict your future financial performance.
Despite its limitations, catch-up bookkeeping can be a valuable tool for businesses of all sizes. If you need to catch up on your bookkeeping, catch-up bookkeeping can help you get your books in order and improve your financial performance. However, it is important to know the limitations of catch-up bookkeeping and consult a professional bookkeeper if you have any questions or concerns.
Alright, folks! There you have it. This is catch-up bookkeeping in a nutshell.
Ignoring your books is akin to ignoring the foundation of your house. Sooner or later, cracks will appear. So grab those bank statements, dust off those receipts, and let’s get your financial house in order!
Frequently Asked Questions
Q1: What is catch up bookkeeping, and when is it necessary?
Catch-up bookkeeping refers to the process of bringing your business’s financial records up to date. When a backlog of transactions requires recording, it becomes essential to address them. This situation often arises when there is a need to catch up on bookkeeping tasks or during the tax season.
Q2: Is catch up bookkeeping expensive?
Costs can range from a few hundred to several thousand dollars, depending on the state of your books.
Q3: Is catch up bookkeeping time-consuming?
It can take anywhere from a few days to several weeks.
Q4: What are the potential implications of failing to address catch-up bookkeeping?
Not keeping up with bookkeeping can lead to incorrect records, missed opportunities, tax issues, financial problems, and potentially legal complications.
Q5: How frequently should businesses consider conducting catch up bookkeeping?
The frequency at which catch up bookkeeping should be performed varies based on the complexity and scale of business transactions. Some businesses may find it necessary to conduct catch ups, while others may find reviews sufficient.
Q6: What are some mistakes or pitfalls to avoid during the catch-up bookkeeping process?
It is important to avoid errors such as duplicating entries, misclassifying expenses, overlooking transactions, and failing to reconcile accounts accurately.