How to Rescue Your Business in 3 Moves

I’m no superhero, but I have saved more than one SMB from going bankrupt.

At Scalable, whenever we work with a client facing bankruptcy, we launch a three-pronged attack to reverse the situation.

Over the next three weeks, I’ll be sharing exactly how to take our approach and apply it to your business—should you ever need to.

At a high level, here’s what it is.

Step 1 is to clean up the books. Step 2 is to streamline reporting. Step 3 is to build a plan to address the issue at hand, reset, and then build a solid financial foundation going forward.

This week, we’re starting with the books.

I know what you’re thinking here. “Connor, I’m running out of cash. Are you seriously suggesting that I prioritize a big cleanup effort right now?!?”

Yes.

Stay with me here.

While starting here can seem intimidating let alone inefficient at first glance, this isn’t a step in the process that you can afford to skip.

This is for two reasons.

First, messy books can conceal the root of your present financial issues. Second, moving forward without a clear view of the business will make the third step of the process—the one where you actually get out of this mess and start thriving again—fraught with unnecessary trial and error.

So, what do I mean by cleaning up the books exactly?

I’m about to show you how to do this in 6 steps. The best part? You don’t need an extensive accounting background to do this. You might want to bring on a professional, but it’s not a necessity.

How to Get Your Books in Order

The first step is to gather your records.

This includes all of your bank statements, receipts, invoices, and other pertinent documents. Your email and payroll system are great places to comb through to ensure you don’t miss anything. Reaching out to current and past clients or vendors is also an option if you’re missing a considerable amount of information.

Once you’ve pulled everything—either since the last time you overhauled your books or since you set up shop—sort everything by date.

Next, decide whether you want to move forward with all hard copies or electronically for now. Based on your preference, scan paper copies into a common location or print out your electronic records to store in a physical file.

Now that you have everything in one place, it’s time to study your bank statements. If you use a third-party payment processor, repeat this exercise there. Then, do the same for your credit card statements and accounting software.

Highlight any transactions that you don’t have a corresponding record of in your stack of invoices and purchase orders. Track down anything that’s missing by reaching out to the other party or your financial institution.

If you’re still missing invoices and/or don’t have records of a transaction that you know occurred (i.e. monthly rent payments, ordering supplies, etc.), you can either create a fill-in invoice based on recent amounts or fill in the record using historical data. I generally prefer using more recent amounts as my fill-ins to avoid painting too rosy of a financial picture, but this is your call.

Once you have everything in one place and have filled in the gaps, your next step is to categorize each transaction.

Here’s where your chart of accounts comes in. All it is is the list of categories that you’ll use to sort each transaction.

My recommendation is to avoid creating too many categories and stick with 10-15 for now. Most accounting software packages will populate a few sample categories for you to help with this step, but you should play around with these until you find what works best.

Working from your chart of accounts, pull like transactions into their corresponding accounts. You’ll also want to review old transactions and make sure they’re still categorized appropriately as you go.

As you do this, make detailed notes about the purpose of each transaction. For example, if you paid payroll, how many employees did you pay, and what was their rate, etc.?

Don’t skip the notetaking here, because you’ll need the added context to file your taxes later.

Going forward, you’ll want to spend some time getting to know your accounting software so that you can automate future updates like this.

Now you’re ready to reconcile your bank statements.

All this really means is making sure that for a given period, every transaction that’s reflected in your bank statements has a corresponding entry in your accounting software.

As in the previous step, highlight any discrepancies. Then manually add missing transactions to your accounting software as needed.

You’ll know that this step is complete when the balances reflected in your bank statements and accounting software match.

Moving forward, you’ll want to revisit this process at the end of each month to stay on top of your books.

Step 4 is to adjust entries as needed.

In some cases, you’ll need to manually edit some of your entries to reflect accruals, depreciation, and/or amortization. Be sure to take your time here or reach out to a bookkeeper if you’re struggling with this step since getting it right will ensure accurate financial statements.

So how do you know which entries need adjusting?

For the most part, this only applies to transactions that were not recorded in the same period in which they occurred. That said, you might also have to adjust entries if you still have any incorrectly recorded transactions at this stage in the cleanup process.

To get started, here are 5 instances in which you’ll typically need to perform an adjustment.

1. Accruals

   These are expenses that have been incurred but not yet paid or recorded. Payroll is a common example, but you should also check for interest on loans, rent, and utilities.

2. Prepayments

   Unlike accruals, these adjustments are necessary when you’ve paid upfront for an expense but haven’t yet incurred it. Examples include paying insurance policies in full for the year or ordering supplies far in advance.

3. Depreciation

   This is an expense recorded to accurately reflect the value of assets on your balance sheet. This could include vehicles, machinery, or even computers.

4. Amortization

   Amortization is similar to depreciation but used to record the expense of intangible assets—such as patents and trademarks—over their useful life.

5. Accrued Revenue

   Finally, accrued revenue refers to revenue that your business has earned but not yet received. In other words, accrued revenue happens when you perform a service or deliver an order to a client during one accounting period but don’t receive payment until the next. In these instances, you’ll want your entries to reflect the revenue that was earned in the period rather than the revenue received.

Now it’s time to pause and revisit your taxes.

All you need to do here is make sure that you’re up to date and in the right amounts with the tax man.

If you’re behind, file an extension and consider paying quarterly taxes if you are not already.

With your books newly organized, now is also a good time to start working with a CPA to ensure that your future tax payments are made correctly and on time. They’ll also make sure that you’re taking advantage of every break available to you as a business owner.

99% of the time, working with a CPA—once your books are this clean—will more than pay for itself.

Finally, it’s time to build the right systems.

You’ve done it.

You’ve finally sorted your books out, laid the groundwork for solid reporting, and settled up with the IRS.

Now is your chance to build the right internal systems to make sure that you don’t have to do this kind of overhaul ever again.

Since every business is different, the right approach moving forward will be determined by what got your books all messed up in the first place.

If you’re not already using an accounting software—or if it wasn’t properly implemented to correctly sync with your payment processor and financial institution at a minimum—start there.

If you had trouble collecting all of your receipts and invoices in step 1, establish a regular cadence for collecting these documents in one place and categorizing them immediately.

Whatever you decide to put in place, make sure that it can be done consistently. The good news is that whatever you commit to, it will get easier and faster with time.

But if the time, skill, and/or effort required to stay on top of your books is too much right now, there’s no shame in getting some professional help. Most of the time, all you need is an external bookkeeping firm to help you stay on track. And I’ve yet to work with a client who didn’t make their investment back and more when hiring one.

There you have it. How to clean up your books once and for all—in just 6 steps.

Join me next week for a crash course in reporting. We’ll walk through how to put together accurate and clear reporting, how to interpret the core financial statements, and how to use those insights to drive your business forward.

In the meantime, if you’re looking to get your books in order and still need some help, feel free to reply to this message or shoot me a DM. I’m always happy to assist and read every reply.

Putting It All Together

Here are your top takeaways from this week’s post.

1. If you ever find your business in dire straits, the first thing you need to do is get your books in order. While better bookkeeping won’t in and of itself turn the ship around, getting organized will lay the groundwork for the work that comes next. Skipping or rushing through the cleanup process will only frustrate your efforts later.

2. Cleaning up the books sounds daunting, but it can be broken down into 6 steps. The first step is to gather your records. The second step is to categorize each transaction using your chart of accounts. The third step is to reconcile your bank statements. The fourth step is to adjust entries as needed. The fifth step is to revisit your taxes to make sure that you’re in good standing. The sixth and final step is to re-evaluate your internal processes so that you can stay on top of the books going forward.

3. You may want some professional help in adjusting your entries or staying organized, but it’s not required.

4. That said, I’ve yet to work with a client who did not more than make their investment back when hiring a bookkeeper. Most of the time, working with an external firm is all you need.

5. If you’re interested in bookkeeping services, feel free to reach out. Scalable offers that as well.

Hungry for More?

1. Follow me on Twitter and LinkedIn for daily content to take your business to the next level.

2. Shoot me an email with your questions or requests for what you’d like me to write about next.

‘Til Next Time,

Connor