Spring is in the air and if you are like me, that means it’s time for Spring cleaning! As an accountant, Spring is about reviewing financials and making sure your books are clean as well as doing a Q1 Financial Review.
Here are a few of my favorite tips for Spring (financial) cleaning.
Review your Chart of Accounts
Often businesses will use a standard Chart of Accounts and try to make their business fit that mold. I’m guessing that your business is probably unique in some aspect and your books should reflect that. If your Chart of Accounts is not set up properly, your financials won’t give you the information that you need to make informed, strategic business decisions. You know – garbage in, garbage out…
So, how do you know if your Chart of Accounts needs cleaning?
Here are a few common issues that signal a cleanup is in order:
- You don’t like reviewing your financial statements
- You don’t find the information on your financials to be useful
- You don’t understand the information you are seeing on your financials
If you can relate to any of the above situations, now is a good time to meet with your accountant/bookkeeper to review and clean up your chart of accounts.
Clean up your Chart of Accounts
The issues associated with a Chart of Accounts are a bit reminiscent of Goldilocks’s famous situation – too big, too small, and needing to find just the right size.
Too Few Accounts – if you don’t have the detail that you need, you may not be able to see what is working (or not working) in your business. For example, a business that has multiple streams of income and books all revenue under one line item will not have insight into the profitability of each stream. While you may think that revenue is revenue, tracking each line separately will help gain insight into how each line is performing and shape future strategy. The same can be said about tracking expenses. You need to know where your money is really going to get a good sense of how your business is doing.
Too Many Accounts – while detail is great, there is a point when too much of a good thing can become a bad thing. If you have too many accounts to manage, you can get lost in the detail, which leads to frustration and the inability to get a clear picture of what is happening in your business. For example, some businesses may find it useful to track expenses per vehicle in their fleet, but for many other businesses, that may be too much detail.
As with Goldilocks, you want to find the right option – the option that is just the right size for your business, which usually requires some level of customization.
Q1 P&L Review
Once you have your books in order, it’s time to review your Q1 financials to see how your business picture is looking. The Profit & Loss report is great place to start when reviewing your business trends and activity.
When reviewing your P&L, you want to look for any trends or anomalies year over year or quarter over quarter.
A few questions to consider in your review:
- Does the financial activity on the report make sense with what your business is experiencing?
- Are you seeing trends to capitalize on or any that need to be reversed?
- How is income trending?
- If your income is trending up and you think that will continue through the year – great! However, you may want to meet with your tax accountant and financial advisor to start planning strategy for the increase in income.
- If your income is trending down, what changes can be made to improve the situation? Do expenses need to be adjusted?
- Are expenses being allocated correctly?
- It’s a good practice to review your financials with your accountant/bookkeeper to make sure that your expenses are being booked to the correct account. Making sure you are recording expenses in the right category is always a good practice, but even more so if you participated in the PPP loan process or any other type of COVID relief funds.
Ready to clean up your books? Keep in mind that one of the main benefits of Spring cleaning is that you are not left with a big mess at the end of the year. Plus, cleaning up your books now can help you make better business decisions and will save you time, money, and frustration in the long-term. Let’s make sure you get the information you need and a nice, clean manner.
If you need assistance with cleaning up and managing your books, give us a call at 505-850-3908 or drop us a note at email@example.com.