Given that small business owners often deal with time constraints, inadequate bookkeeping software, and non-compliance with tax laws, it’s easy to have inaccurate books come tax time. With these bookkeeping challenges and long to-do lists, many entrepreneurs push their bookkeeping tasks to the back burner, thinking that “they’ll catch up later.”
This may result in cash flow crunches, higher taxes, and even problems securing financing for growth and expansion. So, how do you sort your books by the annual closing time? Well, here’s a 7-step action plan to catch up on bookkeeping before CRA audits knock on your business’ doors.
1. Get Your Paperwork in Place
The first step is to get your paperwork in place, including receipts, invoices, and bank and credit card statements for all the months you have not recorded in your books. If you have purchased products or services from suppliers (office supplies, equipment, maintenance checkups), ensure that you have a bill for all of these, reflecting:
- Bank & Credit Card Statements.
- Loan Statements.
- Customer Invoices
- Supplier Bills
- EFT and Wire Payment Receipts
- Inventory Tracker (if not managed electronically).
- Insurance Premium Papers.
- Lease Agreements.
- Employee, Customer and Supplier Agreements.
- Details about the GST/HST paid on these expenses
Having proof of your expenses will help you claim tax deductions come tax time, as all business-related expenses without valid supporting paperwork may not be considered tax-deductible. That said, here’s a list of small business deductions you can use to ensure that you’re claiming all admissible expenses — because who doesn’t love paying less in taxes?
Plus, take the time to review your debt collection status. Is there a customer who didn’t pay for the services availed? If yes, deduct the bad debt expense from your tax liability, and also gather proof to demonstrate to the CRA that you took appropriate measures to recover the amount but failed to do so.
2. Separate Business and Personal Expenses
According to the business entity concept, a business and its owner are two separate entities, so their accounting records must be maintained separately. For example, if a small business owner pays $2,500 for business rent and $1,500 for school supplies (and tuition) for their child, the bookkeeper will only record the $2,500 expense and ignore $1,500.00 personal expenses in business books.
To avoid piercing the corporate veil, it’s best to separate your personal and business expenses as soon as you can. Start by downloading the statements for business accounts, highlighting any personal payment you made (like a coffee run or a town trip). Similarly, check your personal bank or credit cards for any business-related payments and pinpoint these so it’s easier to get ready for year-end taxes.
Once done, use these tips to separate your personal and business expenses for the next years:
- Open a separate small business bank account
- Get a business credit card only for business expenses
- Use accounting software to track and categorize expenses
- Do not use your personal account for business expenses, or repay these later
3. Complete Data Entry From Bank & Card Accounts
After you’ve separated your business and personal expenses, the third step is to enter these bank and card transactions into your accounting software. To do this, gather the statements of all your accounts, including savings, checking, and credit cards. Then, enter these transactions into your system with their date, description, amount, and category (income, expense, or transfer). This ensures that all financial transactions are precisely recorded and there are less-to-no errors in your books.
After the data entry process, double check to ensure that all your credit card receipts, supplier invoices, and customer bills are correctly recorded or matched in your accounting system. For those who want to get rid of the manual legwork, put accounting softwares like Hubdoc or Dext to the job. Both of these tools automatically fetch and record data into your software, which helps save time and improve the efficiency of your bookkeeping process.
4. Reconcile Banking Statements
According to research, 41% of respondents say inaccurate financials make it harder for a business to secure financing, hindering long-term growth. This underscores the importance of reconciliation — a practice that compares the transactions on a company’s bank statements to their accounting records, spotting accounting errors and fraudulent entries.
But how do you reconcile bank statements? Start by gathering your bank statements and accounting records (cash books and general ledgers) for the same period. Then, tally the opening and closing balances in the accounting records with your bank statements.
If you see unrecorded transactions in your bank statements, make appropriate adjustments in your books, and you’ll be well on your way to accurate, reliable financials. Alternatively, you may use an accounting tool like QuickBooks to automate the reconciliation process.
5. Review Outstanding Invoices & Supplier Payments
When it comes to catchup bookkeeping, the most essential step is reviewing the status of your customer invoices (AR) and supplier bills (AP) for the tax year. The goal here is to verify that all expenses are rightly recorded in your books, ensuring that there are no duplicate payments. This step helps facilitate timely settlements with suppliers and helps businesses build positive supplier relationships.
To verify your account’s receivable account, gather a list of all invoices sent to clients. Then, cross-reference and match any payments that have been collected against these customer invoices. If any invoices have remained unpaid by the end of the year, highlight them and send reminders to the clients. You may also negotiate payment plans, if necessary.
For reviewing supplier payments, here are a few steps you can take:
- Make a list of all supplier/customer invoices payable/receivable with details like amount, due date, invoice date, and supplier’s name (This report can be produced from the accounting app if you use any).
- Organize the list by due date to cross-verify if it reflects any unnecessary payables/receivables or missing any invoices, and correct those errors. When the list is error-proof, considering prioritize payments to the most urgent payments and following with customers for overdue invoices.
- If you’re dealing with cash flow problems, negotiate longer payment terms or installment plans with suppliers and keep your Accounts Payable up to date.
- Regular tracking of outstanding customer invoices is essential for consistent follow-ups and faster cash inflow.
6. Set up a Sustainable Bookkeeping Schedule
Catchup bookkeeping can help update and reconcile your books, but your goal should be to prevent falling behind in the first place. Thus, the bottom line is to establish a sustainable bookkeeping schedule and review your financials at regular intervals (weekly, monthly, or quarterly).
This helps maintain accurate and organized records, which reflect the true picture of your business at any given time. Besides ensuring legal compliance and facilitating data-backed decisions, a bookkeeping schedule helps you win the trust of stakeholders and investors — because who doesn’t like a company with transparent, updated financial records?
7. Hire a Professional to Review Your Books
If you want to catch up on bookkeeping and file taxes on your own, great! You’ve made the most cost-effective decision for your small business. However, we strongly recommend hiring a professional bookkeeper or accountant to review your books. Your business needs a professional accountant like that since these experts are compliant with tax laws and legal regulations, they help businesses maximize their tax deductions and prepare accurate, reliable financials.
Plus, bookkeeping experts spot and identify any discrepancies in financial records before tax filing, avoiding costly audits and CRA penalties. So, if you want your books reviewed by certified professionals and want an expert to catch up on that bookkeeping backlog for you, contact us today!
Final Thoughts
If you’re a small business owner looking to maintain accurate finances and ensure compliance with legal regulations, catch up on bookkeeping today. Start by gathering all the relevant paperwork and checking up on unpaid dues, before you log in the transactions in your books.
Then, reconcile your records against those on your bank statements to spot any errors and discrepancies beforehand. Lastly, schedule regular bookkeeping check-ins for your company to avoid getting off track, and have an accurate picture of your financial standing at any given time. Sounds like a bit too much burden on your small business’s shoulders? Hire us to take care of the bookkeeping aspect!
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