As a business owner, you rely on your financial information to make important decisions. But how do you know that information is reliable?
In Episode 41 of QuickBooks Mastery for Small Business Success, Erica Northrup and Lee Davis discuss what it really means to trust your books.
Listen to Episode 41!
The goal isn’t necessarily to have perfect books. Perfection can be difficult, especially for a busy small business.
The goal is to have a process that gives you confidence that the major pieces are accurate.
Can you answer questions such as:
- Are my bank accounts accurate?
- Does my Profit and Loss reflect what actually happened in the business?
- Do my customers really owe the amount shown in Accounts Receivable?
- Do my vendor balances accurately show what I owe?
- Do my payroll liabilities make sense?
- Are there transactions or accounts nobody can explain?
- Can I trust these numbers enough to make a business decision?
If you can’t answer these questions, it may be time for a bookkeeping health check.
Your Books Don’t Have to Be Perfect
One of the most important points from this episode is that your books don’t have to be perfect to be useful.
What matters is having a process for checking the areas that have the greatest impact on your financial statements.
For some businesses, that may mean cleaning up the books before they can truly understand what the numbers are saying.
Once the cleanup is done, the next step is maintaining the books through regular reviews.
A monthly health check can help you catch problems before they become bigger problems.
1. Are All of My Bank Accounts Reconciled?
Start with your bank and credit card accounts.
Ask:
Are all of my accounts reconciled through the most recent statement?
A bank reconciliation compares what QuickBooks says you have with what the bank says you have.
If your bank statement shows one amount and QuickBooks shows another, you want to identify the difference.
Reconciliation can uncover:
- Missing transactions
- Duplicate transactions
- Incorrect amounts
- Transactions recorded in the wrong account
- Other bookkeeping errors
Don’t simply assume the balance is correct because the bank account is connected to QuickBooks.
Reconcile it.
2. Is Anything Old or Unexplained Sitting in the Bank Feed?
Bank feeds can be helpful, but they shouldn’t become a place where transactions sit indefinitely.
Review transactions that are still waiting in the bank feed.
An old transaction may have been:
- Categorized incorrectly
- Duplicated
- Entered previously but not matched
- Left unresolved because nobody knew what to do with it
The longer unexplained transactions sit there, the harder it can become to understand what your books are telling you.
Make reviewing the bank feed part of your regular process.
3. Does Accounts Receivable Represent Money You Actually Expect to Collect?
Accounts Receivable represents money your customers owe you.
But the balance in QuickBooks isn’t automatically a guarantee that you’ll collect all of it.
Look at your Accounts Receivable Aging report.
Ask:
- Who owes us money?
- How long have they owed it?
- Are these customers still active?
- Are there old balances we don’t understand?
- Are there amounts we realistically expect to collect?
An old balance can make your Accounts Receivable look larger than the amount you are actually likely to collect.
If your books say customers owe you $50,000, but a significant portion of that balance is several years old and unlikely to be collected, the report isn’t telling the full story.
Your books should help you understand reality, not just display numbers.
4. Does Accounts Payable Really Represent What We Owe?
The same principle applies to Accounts Payable.
Ask:
Does Accounts Payable accurately represent what the business currently owes?
Look for old balances.
If a bill has been sitting in Accounts Payable for months or years, determine why.
Is it still owed?
Was it already paid?
Was it entered twice?
Was there a mistake in how the payment was recorded?
Old Accounts Payable balances can distort your understanding of your obligations and cash needs.
5. Do My Payroll Liabilities Make Sense?
Payroll is another area that deserves regular attention.
Payroll doesn’t simply create an expense. It can also create liabilities that the business needs to pay.
Review your payroll liability balances at month-end.
Ask:
- Are there old payroll liabilities sitting on the books?
- Do the balances make sense?
- Were payroll taxes and other liabilities actually paid?
- Are there amounts that nobody can explain?
If old liabilities continue accumulating, don’t ignore them.
They may indicate that payroll was recorded incorrectly or that payments were not properly connected to the liabilities.
6. Is There Anything Unusual on the Balance Sheet?
Your Balance Sheet can reveal problems that aren’t obvious when you’re only looking at your bank account.
Review it for unusual items such as:
- Negative balances
- Very old balances
- Accounts you don’t recognize
- Accounts nobody can explain
- Unexpected asset or liability balances
A Balance Sheet should tell a logical story about what the business owns, what it owes, and the owner’s equity.
If something looks strange, investigate it.
7. Does My Profit and Loss Make Sense?
Next, look at the Profit and Loss.
Don’t just look at whether the business made money.
Ask whether the numbers make sense based on what actually happened during the period.
For example:
- Does the income look reasonable?
- Did sales increase or decrease as expected?
- Are expenses consistent with business activity?
- Are there unusual changes?
- Did any expense category suddenly increase?
You know your business.
Your Profit and Loss should generally reflect what you experienced.
If something doesn’t make sense, that’s a reason to investigate—not simply accept the report.
8. What Expenses or Costs Have Increased?
Comparing your current numbers with historical information can reveal changes that aren’t obvious when looking at one month by itself.
Compare this year to last year.
Look for expenses and costs that have increased significantly.
A change may have a perfectly reasonable explanation. Perhaps you hired an employee, expanded, purchased equipment, or experienced higher material costs.
But you want to know why the number changed.
This is where accurate historical QuickBooks data becomes especially valuable.
9. Are There Mystery Accounts or Transactions?
Every business eventually encounters transactions that don’t immediately make sense.
But mystery transactions shouldn’t remain mysteries forever.
Look for items such as:
- Unapplied income
- Unapplied payments
- Uncategorized transactions
- Accounts nobody recognizes
- Old balances without an explanation
If nobody can explain a transaction, don’t simply leave it sitting there.
Find out what happened.
A small unexplained item may not have a major impact. But a pattern of unexplained transactions can indicate a larger bookkeeping problem.
10. Do I Trust These Numbers Enough to Make a Business Decision?
This may be the most important question of all.
Do I trust these numbers enough to make a business decision?
Can you use your financial statements to determine:
- Whether the business is profitable?
- Whether sales are improving?
- Whether expenses are increasing?
- Whether you can afford to hire?
- Whether you have enough cash?
- Whether pricing needs to change?
- How the business is performing compared with previous periods?
If you don’t trust your numbers, you’re forced to make decisions based on guesswork.
That defeats one of the biggest benefits of using QuickBooks.
Don’t Forget Personal Transactions
Another important part of reviewing your books is checking for personal transactions.
Personal and business expenses should not be mixed together.
Review transactions to make sure personal purchases aren’t being recorded as business expenses.
This is particularly important because incorrectly categorized personal expenses can distort your Profit and Loss and make the business appear more or less profitable than it really is.
Review Loan Payments
Loan payments also deserve attention.
A loan payment isn’t necessarily one expense.
Typically, part of a payment goes toward principal, while another portion goes toward interest.
The principal reduces the loan liability, while the interest is an expense.
If the entire payment is recorded incorrectly, both the Profit and Loss and Balance Sheet can be affected.
Review loan balances and payments regularly to make sure they make sense.
Don’t Ignore Cash Transactions
Cash transactions can be easy to overlook, especially when a business uses both bank and cash activity.
Make sure cash transactions are recorded appropriately and that the balances make sense.
If cash is being withdrawn, spent, or deposited without being properly recorded, your books can quickly become difficult to understand.
Build a Monthly Habit
Trusting your books isn’t about looking at QuickBooks once a year when your tax return is due.
It’s about developing a regular habit.
At the end of each month, take time to review the major pieces:
Bank accounts → Bank feed → Accounts Receivable → Accounts Payable → Payroll liabilities → Balance Sheet → Profit and Loss → Expense changes → Mystery transactions → Business decisions
This doesn’t have to take hours every month once the process is established.
The important thing is consistency.
What If Your Books Aren’t Reliable?
If you go through this health check and find problems, don’t panic.
You may need to clean up your books before you can rely on the financial statements.
Start with the biggest issues.
Reconcile the bank accounts. Investigate old receivables and payables. Review payroll liabilities. Look at unusual Balance Sheet accounts. Clean up unexplained transactions. Make sure personal expenses aren’t mixed with business expenses.
You don’t have to fix everything at once.
Take small steps toward accurate books.
And if you find yourself in deeper waters, getting help can save time and prevent additional problems.
Trust Your Numbers Before You Act on Them
QuickBooks is a tool for understanding your business, but the software can’t tell you whether every number makes sense.
That requires a process.
A monthly health check helps you move beyond simply entering transactions and toward actually understanding your financial information.
Your books don’t have to be perfect.
They need to be reliable enough to tell you the truth about your business.
When your bank accounts reconcile, your receivables and payables make sense, your payroll liabilities are accurate, your Balance Sheet is logical, and your Profit and Loss reflects what actually happened, you can have greater confidence in your decisions.
And that’s ultimately what trustworthy books are about:
Knowing your numbers well enough to use them.
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