Company’s coming for Christmas, and you know the drill. You clean the whole house, including rooms nobody’s going to set foot in. The good hand towels come out. And everything that was living on the kitchen counter gets scooped up and shoved in a closet, door shut tight.
For a lot of business owners, the books are that closet. Everything went in there at some point. Nobody’s opened the door since about September.
Here’s the problem. Your guests go home after the holidays. Your books stay put, and in January somebody is going to open that door. Your accountant, your banker, or you.
So what should you do with your books before December 31st? Get them right while you can still do something about it.
This week, Betty runs a food truck
Her books are categorized through September. Her bank and credit card accounts haven’t been reconciled since summer. And her loan balance doesn’t match what the lender says she owes.
On the surface, that’s not a bad spot. Nothing’s on fire. Most of her transactions have a category, and if you printed a profit and loss report, it would come out looking perfectly normal.
But nothing in those books has been checked against anything. Nobody can say for sure that the cash in the books matches the cash in the bank. The loan number is wrong, and nobody knows why. So every number on that report is a maybe, and year-end decisions are about to get made off it.
Why it has to happen before the 31st
Most of the big money decisions in your year have the same deadline, and it’s December 31st.
How much you pay yourself this year. Whether you buy that piece of equipment now or wait. How much you set aside for the tax bill that shows up in April. Once the calendar flips, those are locked in. You can’t go back and pay yourself in last year.
And you can’t make any of those calls on books you can’t see. If two months of expenses never got entered, the year looks better than it was, and it’s easy to spend money that isn’t really there. If something got entered twice, the year looks worse, and you might sit on cash you could have put to work.
Next week’s question is whether buying equipment before year-end actually saves you anything. That one only makes sense once you trust your numbers.
Start by reconciling, then check against the people who keep their own records
Reconciling sounds technical. It isn’t. You put your books next to your bank statement, one month at a time, and make sure they agree. Same ending balance, same transactions, nothing missing, nothing in there twice.
Do that for every bank account and every credit card, for every month that hasn’t been done. For Betty, that’s summer forward. Until the books and the statements agree, you’re working from a guess.
Then go one step further. Your bank isn’t the only one keeping score on your business. Your lender sends a statement. So does your credit card company. Your payroll company has reports. When your books disagree with one of them, assume they’re right until you can prove they’re not.
That’s usually how a loan balance like Betty’s goes sideways. Say the payment is $2,000 a month. About $300 of that is interest, and the other $1,700 pays down what you borrowed. Only the interest is an expense. But it’s easy to book the whole $2,000 as an expense every month, and if you do, the loan on your books never goes down, even though you’ve been paying on it all year.
That one habit causes two problems. Your books say you owe more than you really do. And you’ve been counting $1,700 a month as an expense when it isn’t one, which makes your profit look smaller than it is. On a tax return, that’s a deduction you aren’t allowed to take.
The fix is simple. Put the lender’s year-end statement next to your balance sheet. The two numbers should match. If they don’t, find out why before the year closes.
Clear out what’s never coming and what’s already gone
Most books carry some dead weight by December, and it usually hides in two places.
The first is invoices you’re never going to collect. The customer who moved out of state, closed up shop, or quit answering the phone in May. As long as that invoice sits there, your books say somebody owes you money. If you’re honest with yourself and it’s not coming, it shouldn’t be counted as money you’re owed.
The second is bills you already paid that still show as open. That happens when a payment leaves the bank but never gets matched to the bill it paid. Now your books show the payment that already went out and the bill still waiting to be paid, so it looks like you owe that vendor money you don’t.
Neither one changes the cash in your account. But both make the year look different than it really was, and you want to make decisions off the real version.
Caught up isn’t closed
This is where a lot of owners stop too early. Everything’s entered. Every transaction has a category. Done, right?
That’s caught up. It’s not closed.
Caught up doesn’t mean right. You can have every transaction categorized and still have the wrong numbers in there, like Betty’s loan. And caught up doesn’t mean finished, either. If anyone with a login can go back and change March, then March isn’t done. The numbers you hand your banker in January can quietly change by June, and nobody will know why the two versions don’t match.
Caught up means it’s all in there. Closed means it’s right, and nobody can change it. If you can’t say it’s reconciled, reviewed, and locked, it’s not closed.
We already covered reconciling. Here are the other two.
Review it. Run your profit and loss month by month, side by side, for the whole year. You don’t need to be an accountant to spot problems this way. A month where rent never got recorded, or got recorded twice, sticks out like a sore thumb. Anything that looks odd, go find out why.
Lock it. Most accounting software lets you set a closing date. In QuickBooks, it’s under “close the books.” Once it’s set, nothing before that date can change without a password. And that password belongs to whoever owns the books, not everybody who can log in.
Open the closet while it’s still this year
You’d never let company open that closet on Christmas morning. Your books deserve the same attention. Somebody is going to look at them after the first of the year, and you’d rather they find something you’re proud of.
Betty’s situation isn’t a disaster. It’s a few months of statements nobody has sat down with yet, and there’s still time to do it.
December is the last month you can still change this year. In January, all you can do is report it.
So here’s your one thing for this week. Open your books and find the last month you reconciled. That’s all. Just find out where you stand, and you’ll know how much closet you’ve got to clean.
This is general information, not advice for your specific situation. How your loan and your year-end decisions play out on your return is worth a conversation with whoever does your taxes.
Hear the full conversation on Planting Seeds Episode 18. If your books are already months behind, start with Episode 8 on how to dig out.