We understand that your plate is already full. The tasks of managing bank reconciliations and maintaining your general ledger can be a time-consuming, administrative burden – your time is better spent managing and growing your business. And when you consider how costly bookkeeping errors can be, it becomes clear: Bookkeeping is best left to an experienced accounting professional who understands the complexities of record keeping.
Accurate books are the backbone of a successful business. Comprehensive bookkeeping services can help you improve your business’ overall financial health, spot opportunities for increased profitability, and better manage your cash flow. With bookkeeping services such as monthly operating statements, bank reconciliations, general ledger, balance sheets, financial graphs, and budgets, we can help you better manage your business’ financial records.
Chart of Accounts
The key to effective bookkeeping is to create and maintain a chart of accounts to capture all of your financial transactions and provide the right information to manage your business. A chart of accounts typically includes most of the following:
Cash – It doesn’t get more basic than this. All your business transactions pass through the cash account, which is so important that often bookkeepers actually use two journals, Cash Receipts and Cash Disbursements, to track the activity.
Accounts Receivable – If your company sells products or services and doesn’t collect payment immediately, you have “receivables,” or money due from customers. You must track Accounts Receivable and keep it up to date so that you send timely and accurate bills or invoices.
Inventory – Unsold products are like money sitting on a shelf and must be carefully accounted for and tracked. The numbers in your books should be periodically tested by doing physical counts of inventory on hand.
Accounts Payable – No one likes to send money out of the business, but a clear view of everything via your Accounts Payable makes it a little less painful. Concise bookkeeping helps assure timely payments and avoid paying someone twice! Paying bills early can also qualify your business for discounts.
Loans Payable – If you’ve borrowed money to buy equipment, vehicles, furniture or other items for your business, this account tracks payments and due dates.
Sales – The Sales account tracks all incoming revenue from what you sell. Recording sales in a timely and accurate manner is critical to knowing where your business stands.
Purchases – The Purchases Account tracks any raw materials or finished goods that you buy for your business. It’s a key component of calculating “Cost of Goods Sold” (COGS), which you subtract from Sales to find your company’s gross profit.
Payroll Expenses – For many businesses, payroll expenses can be the biggest cost of all. Keeping this account accurate and up to date is essential for meeting tax and other government reporting requirements. Shirking those responsibilities will put you in serious hot water.
Owners’ Equity – This account has a nice ring to it. Basically, it tracks the amount an owner (or owners) puts into the business. Also referred to as net assets, owners’ equity reflects the amount of money an owner has once liabilities are subtracted from assets.
Retained Earnings – The Retained Earnings account tracks any company profits that are reinvested in the business and are not paid out to the owners. Retained earnings are cumulative, which means they appear as a running total of money that has been retained since the company started. Managing this account doesn’t take a lot of time and is important to investors and lenders who want to track how the company has performed over time.
Many business owners think bookkeeping is a dreaded chore, but if you understand and effectively use the data your bookkeeper collects, bookkeeping can be your best ally.
Bank Account Reconciliation
While a clean set of books is a key objective for every accountant, it’s also important to match the accounting records with the monthly bank statements. Our bank reconciliation services ensure that every deposit and withdrawal aligns with entries into your accounting records, and it gives you a clearer picture of your cash position for addressing planned outlays and investments.
A bank reconciliation is the process of matching the balances in a business’s accounting records for a cash account to the corresponding information on a bank statement. The goal of this process is to ascertain the differences between the two, and to book changes to the accounting records as appropriate. The information on the bank statement is the bank’s record of all transactions impacting the bank account during the past month.
A bank reconciliation should be completed at regular intervals for all bank accounts; otherwise, one may find that cash balances are much lower than expected, resulting in bounced checks or overdraft fees. A bank reconciliation can also detect some types of fraud after the fact; this information can be used to design better controls over the receipt and payment of cash.
If there is so little activity in a bank account that there really is no need for a periodic bank reconciliation, you should question why the account even exists. It may be better to terminate the account and roll any residual funds into a more active account. By doing so, it may be easier to invest the residual funds, as well as to monitor the status of the investment.
The essential process flow for a bank reconciliation is to start with the bank’s ending cash balance, add to it any deposits in transit from the company to the bank, subtract any checks that have not yet cleared the bank, and either add or deduct any other items. Then, go to the company’s ending cash balance and deduct from it any bank service fees, NSF checks and penalties, and add to it any interest earned. At the end of this process, the adjusted bank balance should equal the company’s ending adjusted cash balance.
Financial Statements & Benchmarking
The bookkeeping process is a means to an end: creating accurate financial statements to help you analyze your business and increase your financial intelligence. This enables you to critically evaluate your business and to use numbers and financial tools to make good decisions.
Per generally accepted accounting principles (GAAP), companies are responsible for providing reports on their cash flows, profit-making operations, and overall financial conditions. The following three major financial statements are required under GAAP:
A Balance Sheet that gives a snapshot of your overall financial condition (assets, liabilities, and equity) at month, quarter, and/or year-end;
An Income Statement (a.k.a. Profit and Loss Statement) that summarizes revenues, expenses, and net profits so you can assess the operating performance of your business;
A Cash Flow Statement that shows how changes in your Balance Sheet and Income Statement affect your available cash.
We can also provide many other financial reports to help you analyze your business:
A Comparison of Actual Performance to Budget so you can identify trouble spots in your revenue stream or spending patterns;
A Profit and Loss Comparison Report so you can compare your business’s income and expenses in the current period to a prior month, quarter, or year;
A Job Profitability Report so you can see how profitable individual jobs are (particularly important for contractors);
An Accounts Receivable (A/R) Aging Summary so you can see how much customers owe you and how delinquent they are in paying;
A Tax Liability Report so you can see how much you owe in sales, income, or payroll tax.
Our analysis of your financial statements helps you frame strategic initiatives (e.g., business expansion, acquisition) as well as tactical plans (e.g., accounts receivable and accounts payable management). Professionally prepared financial statements are also an essential resource when dealing with creditors and investors.
Accurate financial statements will allow us to calculate key benchmarks (financial ratios) for your business. These can help you evaluate your organization’s financial status and rate of success. They are also used by those evaluating your business for potential investment or lending opportunities.
Generally speaking, there are four categories of financial ratios: liquidity, profitability, activity, and leverage. Your balance sheet and income statement will help you calculate the ratios within each category.
Liquidity ratios assess your organization’s ability to meet its obligations in the short term. Put simply, liquidity measures your firm’s ability to pay its bills.
Current ratio – This measures the amount of debt relative to total assets (total assets divided by total liabilities). A current ratio of at least 1 (ideally, greater) indicates your business has enough assets to cover its current obligations.
Acid test or quick ratio – This ratio measures your organization’s ability to pay its current obligations with accessible assets. In other words, it helps you assess its “cash position.” The calculation is (cash and cash alternatives plus marketable securities plus accounts receivable) divided by current liabilities. The higher the ratio, the stronger its position. A low ratio could indicate a potential cash crunch.
These ratios help measure how profitable your organization is.
Gross profit margin – This ratio determines how much remains after accounting for the cost of goods sold (COGS) to pay for expenses, taxes, interest, etc. It is calculated by dividing gross profit by sales. (Gross profit equals sales minus COGS.)
Net profit margin – Net profit allows you to gauge how well your company is performing per dollar of revenue. It is calculated by dividing net income (income after expenses) by net revenue (revenue after adjusting for discounts and refunds). While growing revenue year over year can be impressive, growing revenue alongside a growing net profit margin demonstrates strong overall management.
Return on assets – Calculated by dividing net income by average total assets, this ratio shows the organization’s ability to generate income relative to overall assets. Therefore, it helps gauge management effectiveness in putting those assets to use. (To calculate average total assets, add the total assets at the beginning and end of the year and divide by two.)
Also known as efficiency ratios, activity ratios measure how effectively your organization manages its assets.
Accounts receivable turnover ratio – This ratio is used to evaluate the quality of receivables and to help determine how successful your organization is in collecting outstanding payments. It is determined by dividing net sales by average receivables outstanding over a given time period. (Average receivables outstanding is calculated by adding the beginning and ending balances of accounts receivables over a period of time and dividing by two.)
Inventory turnover ratio – This ratio can help determine whether your company is efficiently managing inventory. It is calculated by dividing the COGS by the average inventory (the average of the beginning and ending inventories over a period of time). A high ratio may indicate that inventory typically runs low and may present a risk of “selling out.” By contrast, a low ratio may indicate that product is overstocked or not moving well for a particular reason that might warrant further investigation.
Also known as debt, coverage, or solvency ratios, leverage ratios can help assess whether debt levels are appropriate.
Debt to asset ratio – This ratio measures the percentage of assets that is financed with debt, rather than equity. The calculation is total debt divided by total assets.
Debt to equity ratio – This ratio compares an organization’s total debt to its total equity. The calculation is total liabilities divided by total equity. A high ratio may indicate a business has assumed a great deal of risk.
Understand Your Industry’s Benchmarks
Before evaluating your organization’s financial ratios, it may be helpful to understand ratio benchmarks within your industry. What may seem like a high or low ratio on its own may actually be in line with other, similar operations in your field. We can help identify the most appropriate benchmarks for you.