1. You Can't Reconcile Your Bank Account "Too Often"
Most people who work in the bookkeeping think its best to reconcile your bank account once a month to your bank statement. That's false.
The best bookkeepers (yes, that includes office managers, and DIY-bookkeeper-business owners!) reconcile the bank account in their accounting software every day to the online balance.
Every day? Yep.
Do you have to reconcile it every day? No, the circumstances for every company are different.
The higher the transaction volume, and the more research your bank transactions need, then the more often you should be reconciling. For many companies every week is okay. But you shouldn't wait until the end of the month.
Think about the principles behind this:
This idea makes many bookkeepers uneasy at first, because they're taught to reconcile to statements. So, YES, on the last day of the month, you should ALSO reconcile to the statement. Then you've complied with that accounting best practice as well.
2. Clean Up Rogue Transactions Monthly
You know the ones... every company has them... the negative accounts receivable balance that's been in the accounting system for a year. The uncleared check from 2015 that you've been ignoring in your bank reconciliation month after month.
The difference between a bookkeeper and a Controller is usually is: bookkeepers get 95% of the transactions right. Controllers have a system to identifying everything that isn't in its rightful home in the accounting software, and don't consider the situation closed until everything is accounted for properly.
To avoid messy books, don't allow your records to have those few transactions that need attention and are oh-so-easy to pass over every month.
3. Making Payroll Is The Top Priority When Cash Is Tight
Despite the pressure many business owners feel to cover the short term goals, the true fundamental objective of any business is to make sure it is still here to operate in 10 years, 20 years, etc...
Continuity of operations... surviving to fight another day... should always be the top priority when resources are scarce and finite.
When a business doesn't have enough cash to pay everything that's due, the top priority is on anything that will grind operations to a halt if that payment doesn't get made. At most companies, that's payroll. Once a payroll is missed, a domino effect of problems gets set into motion (starting with: some of your employees might not come back to work!) that has the highest risk of ending with: Your business no longer operates.
So when you're analyzing your cash, and considering what you should pay with the dollars you have, always keep in mind the amount by which you'll clear your next payroll based on the assumptions you have today.
4. Good Business Managers Identify Leading vs Lagging Indicators
Analyzing the financial health of your business based on the cash in your bank account each day is a recipe for risk and failure.
Analyzing your business based on what your cash is GOING TO be in the future... that's a much better way to understand your company's financial health.
Think about how cash works at a typical professional services company, for example. In order to receive a dollar in cash from a customer, these things need to happen first:
So, if the business owner wants to make decisions to improve the financial health of the business, should that be based on the cash balance today, or leading indicators of the cash balance in the future?
The future cash balance at this company will be better or worse than it is today based on:
Good business owners look at their cash balance - but only as a check to make sure their leading indicators are having the direct relationship to the future cash position that they're expected to have. The real success is in knowing where the business is going to be at future points in time, and making decisions to optimize where the company will be in the future.
5. Your P&L and Balance Sheet Reports Should Always Show TRENDED (Months as Columns)
Knowing where you are isn't very helpful if you don't know where you're going, and you can't tell where you came from. That's why every time a business owner is shown a profit & loss report and a balance sheet, they should show the trend of periods leading up to the current one.
Financial statements should either 1) validate the business owner's expectations about what he/she thought the numbers would say about this period, or 2) surprise and inform the business owner about the operations of the business through the numbers.
In either situation, the context... the expectations of "what should I have expected each of these numbers to be?" is the key comparison to actual performance.
If a company spent $2,000 on office supplies this month, is that good or bad? It depends, right? The manager of the business would want to know:
Providing a profit & loss to the CEO that shows that we historically spend $1,000 - $1,500/mo on office supplies over the past year will be viewed very differently from one that shows we're averaging $3,000 - $5,000/mo, when the current month column shows that we spent $2,000 last period.
Providing all financial statements in the context of history significantly improves an understanding of the financial health of the business. Extra gold stars if the company creates a financial "plan" (a budget or forecast), and then provides a profit & loss statement that compares actual performance to plan on each line item.