Fundamentals of the Monthly Financial Workflow for Small Businesses

A business owner should possess a fundamental understanding of the bookkeeping and accounting monthly workflow to ensure their financial records are accurate and up to date. Here’s what’s important to know:

Understanding the Workflow

  1. Documentation Gathering

  • Invoices and Receipts: Keep all sales invoices and purchase receipts organized.
    • Invoices are not just requests for payment; they are detailed records of sales or service transactions. Keeping sales invoices and purchase receipts well-organized is crucial for tracking the inflow and outflow of goods and services. When you have Organized invoices it simplifies the reconciliation process, ensuring that all transactions match bank statements and purchase orders. This is key for accurate financial reporting and audit readiness. I highly suggest using a digital tool for invoice management to reduce clutter and improve efficiency. Ensure a consistent filing system – whether digital or physical – and regular updates to this system.
  • Bank Statements: Collect monthly statements from banks and credit cards.
    • Monthly bank statements offer a snapshot of your business’s financial health, showing cash available, deposits, withdrawals, and fees. Collecting and reviewing these statements monthly is vital for accurate bookkeeping. They serve as a foundation for reconciling accounts and understanding the business’s cash flow. As Accountants I always compare our clients’ bank statements with their internal records and invoices to spot any discrepancies early. I also suggest that you leverage banking software or services that integrate with your accounting software for streamlined processes.
  • Expense Reports: Employees should submit reports for any expenditures.
    • Expense reports are critical for keeping track of business spending, especially related to employee-incurred expenses. They play a significant role in budgeting and financial planning. When you have accurate and timely expense reports it ensures that all business expenditures are recorded and categorized properly. This is essential for maintaining up-to-date bookkeeping, enabling detailed financial analysis and strategic decision-making. I highly encourage timely submission of expense reports by employees. It’s helpful to implement a standardized process or software for expense reporting to minimize errors and ensure consistency in how expenses are reported and reimbursed.
  1. Recording Transactions

  • Data Entry: Record all financial transactions in an accounting system.
    • In essence data entry is the foundational step of recording financial transactions in an accounting system. You want to ensure accuracy and timeliness in entering data and again to utilize digital tools for efficiency and minimize human error.
  • Categorization: Assign each transaction to the appropriate account.
    • Categorization is the process of grouping transactions into predefined categories for better financial analysis and reporting. This is done by utilizing your chart of accounts and assigning your income, expenses, cost of goods sold, liability and assets to the cash that is coming into your business and going out of your business. Proper categorization facilitates budget tracking, tax preparation, and financial planning. On the Other hand, incorrect categorization can lead to misleading financial insights, and unfortunate future costs associated with cleaning up your financial records.
  • Reconciling: Match entries with bank statements to ensure accuracy.
    • Reconciliation is the process of matching bookkeeping records with bank statements to ensure consistency and accuracy. This process identifies discrepancies, prevents financial errors, and ensures the integrity of financial statements. It is also crucial for audit readiness and financial health assessment. Thou I hope even if you have your financial records in order, you will never have to experience an audit.
  1. Accounts Payable (AP) Management

  • Vendor Invoices: Review and confirm the accuracy of invoices received.
  • Payment Scheduling: Pay vendors on time to avoid late fees and maintain good relationships.
    • Efficient vendor invoice management is Important. The timely processing of vendor payable invoices prevents late fees and maintains positive vendor relationships. It’s crucial for securing favorable terms in the future. In addition, proper and accurate tracking of vendor invoices can save you money, I don’t know how many accounts we have cleaned up only to find duplicate vendor payments made by a company.
  1. Accounts Receivable (AR) Management

  • Invoicing Clients: Send timely invoices for services or goods sold.
  • Payment Tracking: Monitor incoming payments and follow up on late payments.
    • Efficient customer invoice management is just as important as vendor invoice management – If not more so. The efficient management and prompt issuance of customer receivable invoices encourage timely payments from customers, enhancing cash flow. Without a solid system for collecting payments, your business risks being at the mercy of customer payment habits. Cash flow is the lifeblood of your business; without consistent cash inflow, it’s like depriving your business of oxygen, essential for survival and growth.
  1. Payroll Processing

  • Employee Payments: Process payroll according to the schedule (bi-weekly, monthly, etc.).
  • Payroll Taxes: Calculate and remit payroll taxes to the respective authorities.
    • Payroll processing is another important, and sometimes stressful task for any business owner! You will always Process payroll according to the schedule of weekly, bi-weekly, or monthly – all dependent on your companies set up and schedule. With that you will also need to process and pay Payroll Taxes, this involves you calculating and remitting all payroll taxes to the respective authorities – this can include local, state and federal.  highly suggest you work with a professional accountant, bookkeeper or payroll company. They can support you in ensuring your payroll is processed on time and properly. Errors in payroll and tax filing can be time consuming and a headache to address.
  1. Inventory Management (if applicable)

  • Stock Monitoring: Keep track of stock levels.
  • Cost of Goods Sold (COGS): Calculate the cost of inventory sold during the period.
    • Managing inventory is always a challenging topic regardless of if you have an inventory system in place or not. An inventory system is vital for businesses of any size as it enhances operational efficiency by ensuring optimal stock levels, preventing overstocking or stockouts. Additionally, it provides valuable data for financial planning and decision-making, directly impacting profitability and customer satisfaction.
  • What does managing inventory involve?
    • Monitoring Stock Levels: Regularly review stock levels to prevent overstocking (which ties up capital) or stockouts (which can lose sales).
    • Calculating COGS (Cost of Goods Sold): Determine the COGS to understand the direct costs tied to the production of the goods sold. This is crucial for pricing strategies and profit margin analysis.
    • Inventory Audits: Conduct periodic audits to reconcile physical inventory with recorded inventory, ensuring accuracy in financial records.
    • I highly suggest you set up your accounting system to track inventory as it will make inventory management so much easier. If you have large amounts of inventory management, you may want to use external software to manage it.
  1. Expense Review and Analysis

  • Regular Checks: Review recurring expenses for any irregularities.
  • Cost-Benefit Analysis: Evaluate expenses versus benefits to optimize spending.
    • Reviewing expenses is a critical yet often neglected aspect of cash management, as it not only identifies potential areas for cost reduction and efficiency improvements but also helps in predicting future cash flows and making informed decisions. This practice ensures optimal utilization of resources, directly impacting a business’s profitability and sustainability. This is a vital process, one of the first strategies we suggest in addressing cash flow issues and with the Implementation of the Profit First System.
  1. Financial Statement Preparation

  • Balance Sheet: A snapshot of the company’s financial standing at a point in time.
  • Income Statement (Profit & Loss): Shows revenues, expenses, and profit over the period.
  • Cash Flow Statement: Details the inflows and outflows of cash.
    • Preparing Financial Statements is essential as they provide a comprehensive overview of a business’s financial health, revealing trends in revenue, expenses, and profitability. From these documents, a business owner can assess operational efficiency, make informed strategic decisions, and plan for future growth or adjustment needs.
  • What needs to happen to have accurate financial records to review?
    • First and foremost, you need to have accurate data, this starts with a solid chart of accounts and then ensure the information that is entered into your accounting system is accurate and consistent.
    • It’s also important to have any reviews and adjustments completed by you or your accountant for the period end.
    • Accurate financial statements are crucial for internal decision-making, investor relations, and regulatory compliance.
    • Then the process is simple, the compiled data on revenues, expenses, assets, and liabilities will create the Income Statement, Balance Sheet, and Cash Flow Statement.
  1. Review and Adjustments

  • Accountant Review: Have an accountant review the books to spot potential errors.
  • Journal Entries: Make any necessary adjustments to correct the financial records.
    • The pillars of financial analysis, including the meticulous review of expenses and the careful preparation of financial statements, form the foundation of a business’s financial health. Accountant reviews and adjustments play a critical role in ensuring the accuracy and reliability of this financial information, guiding strategic decisions and fostering trust among stakeholders.
  1. Compliance and Reporting

  • Tax Obligations: Ensure all tax-related documents are prepared for monthly, quarterly, or annual filings.
  • Financial Reporting: Prepare reports for stakeholders or for internal decision-making.
    • Making sure your business follows tax laws is important to avoid fines and keep a good reputation with government agencies. It shows that your business is honest and handles money responsibly. A solution is to implement a systematic approach to track and manage tax-related deadlines, utilize professional tax advice, and leverage tax planning strategies to optimize tax liabilities.
  1. Analysis and Planning

  • Budget Comparisons: Compare actual results against budgeted predictions.
  • Forecasting: Use the financial data to forecast future revenues and expenses.
    • Analyzing budgets and forecasting is crucial for making decisions that can impact the businesses’ long-term health. Budget analysis and forecasting are essential for setting realistic financial goals and preparing for future market conditions. They allow businesses to allocate resources efficiently and pivot strategies as needed. You want to regularly compare actual financial performance against budgeted projections to identify variances. Use these insights for refining forecasts and making informed decisions on expenditures, investments, and growth initiatives.
  1. Secure Data Storage

  • Backup: Keep secure backups of all financial data.
  • Data Security: Implement security measures to protect sensitive financial information.
    • Keeping financial data backed up and secure is paramount to protect against data loss, breaches, and cyber threats, ensuring business continuity and stakeholder trust. Protecting financial data through regular backups and robust security measures is not just a best practice—it’s a necessity for safeguarding your business’s financial integrity and reputation. Implementing these measures diligently can significantly reduce the risk of financial data loss or compromise.

Best Practices

Key Takeaways

Keeping a clean set of books requires diligence, organization, and a clear understanding of the monthly accounting workflow. As a business owner, appreciating this process aids in maintaining financial health, allowing you to make informed decisions for your business’s future.

Business owners often have several concerns regarding bookkeeping and accounting, as these areas are crucial for financial health and compliance.

Here are the top three questions that business owners typically have:

  1. How can I ensure accuracy in my financial records?

Owners want to know the best practices for maintaining accurate and reliable financial data. They are interested in:

  • Effective Systems: What kind of bookkeeping/accounting software should I use?
    • Use software that is simple and best supports your business model. You want to look at what works for you and your team. Ease of use, ability to intergrade and automation is important.
  • Processes: What internal controls can I implement to prevent errors?
  • Segregation of Duties: Divide responsibilities among different employees to prevent fraud and errors. Ensure no single individual has control over all aspects of a financial transaction.
  • Authorization and Approval: Establish clear policies for authorization thresholds. Require managerial approval for transactions above a certain value or of a particular nature.
  • Access Controls: Limit access to financial systems and records to authorized personnel only. Use strong passwords, two-factor authentication, and regular access reviews.
  • Reconciliations: Regularly reconcile bank statements, invoices, and ledgers to ensure transactions are accurately recorded and accounted for.
  • Documentation and Record-Keeping: Maintain thorough and organized documentation for all financial transactions. Implement a document management system to track the flow of documents and ensure their integrity.
  • Regular Audits and Reviews: Conduct periodic internal audits to assess the effectiveness of internal controls and identify areas for improvement. External audits can also provide an unbiased evaluation.
  • Training and Awareness: Provide ongoing training to employees on financial policies, procedures, and best practices. Promote a culture of accuracy and accountability.
  • Use of Technology: Leverage financial management software equipped with built-in controls, error detection, and reporting capabilities. Ensure software is regularly updated and backed up.
  • Professional Assistance: Should I hire an in-house bookkeeper/accountant or outsource?
    • Choosing between hiring an in-house bookkeeper/accountant and outsourcing depends on your business’s complexity, transaction volume, and budget. In-house staff offers deep understanding and control but comes with higher upfront costs. Outsourcing provides cost efficiency, expertise, scalability, and allows you to focus on core activities. Small to medium businesses often find outsourcing more beneficial, while larger enterprises might benefit from an in-house team. Consider your business size, industry specifics, and growth projections to make an informed decision, potentially consulting with a financial advisor for tailored advice.
  1. How do I manage cash flow effectively?

Cash flow is the lifeblood of any business, and owners often seek advice on:

  • Projections: How can I forecast my cash flow needs?
    • This approach will help you anticipate your cash flow needs, enabling strategic planning and maintaining financial stability.
  • Review Historical Data: Start with past cash flow statements to identify trends and patterns.
  • Forecast Income: Use sales data, market analysis, and projections to estimate future revenue.
  • Estimate Expenses: Detail expected fixed and variable costs, adjusting for any known changes ahead.
  • Account for Timing: Consider the timing of receivables and payables, including credit terms and seasonal factors.
  • Include a Buffer: Set aside a contingency fund for unexpected expenses or income delays.
  • Use Forecasting Tools: Employ technology to streamline the forecasting process, allowing for dynamic updates.
  • Regularly Update Forecasts: Adjust your forecast with real data regularly to maintain accuracy.
  • Scenario Planning: Prepare forecasts for various potential scenarios to anticipate different financial situations.
  • Management Strategies: What are the best strategies for managing accounts payable and receivable?
  • To effectively manage accounts payable and receivable, prioritize critical payments and negotiate favorable terms with suppliers.
  • Automate payment processes to ensure timeliness and regularly review payable accounts for potential savings.
  • For receivables, set clear payment terms, invoice promptly, and offer multiple payment options to expedite collections.
  • Implement reminder systems for due and overdue payments and consider incentives for early payment.
  • Utilize technology to streamline operations, maintain strong relationships with partners and customers, and perform regular reconciliations to identify discrepancies.
  • These strategies enhance cash flow management, ensuring financial stability for your business.
  • Improvement Measures: How can I improve my cash flow to ensure that my business runs smoothly?
    • To enhance your business’s cash flow:
  • Accelerate Receivables: Invoice immediately, enforce clear payment terms, offer early payment discounts, and promptly follow up on late payments.
  • Manage Payables: Negotiate extended payment terms with suppliers, prioritize essential payments, and take advantage of any early payment discounts if financially viable.
  • Optimize Inventory: Keep inventory lean and consider a Just-in-Time (JIT) approach to minimize holding costs.
  • Cut Costs: Regularly review and reduce unnecessary expenses and postpone non-essential spending.
  • Boost Revenue: Explore new products/services and review pricing to increase profit margins.
  • Secure Financing: Have a line of credit for short-term needs and explore other financing options for growth.
  • Use Technology: Implement financial software for better cash flow visibility and forecasting.
  • Forecast Cash Flow: Perform regular cash flow forecasts to plan for future financial needs.
  1. What are my tax obligations, and how do I stay compliant?

Tax compliance is a significant concern for business owners, with questions revolving around:

  • Tax Deadlines: When are my tax filings due, and what are the consequences of late submission?
  • Tax filing deadlines vary depending on the type of tax return and your specific circumstances. For most individuals, the annual income tax return is due on April 15th of the year following the tax year. For businesses, deadlines can differ based on their structure, such as corporations or partnerships. It’s crucial to verify the specific deadlines applicable to you or your business.
  • Late submission of tax filings can result in penalties and interest charges. The nature and amount of these penalties can vary, including failure-to-file and failure-to-pay penalties. The longer the delay in submission, the greater the charges can accrue.
  • Given the complexity and potential for changes in tax laws and deadlines, I strongly recommend referring to the Internal Revenue Service (IRS) website or your local tax authority for the most current and applicable information for your specific situation. If needed, seeking personalized advice from a tax professional can also help ensure compliance and minimize any potential penalties.
  • Deductions: What expenses are deductible, and how can I maximize my deductions?
    • The tax code outlines a variety of expenses that may be deductible for individuals and businesses, aiming to reduce taxable income. For individuals, common deductions include certain educational expenses, mortgage interest, medical expenses, and charitable donations. Businesses can often deduct operating expenses like rent, salaries, and utility costs, among others.
  • To maximize deductions, thorough record-keeping and understanding of applicable tax laws are crucial. It’s also essential to stay informed about changes in tax legislation, as new deductions may become available or existing ones may be altered.
  • However, it’s important to note that tax laws are complex and frequently subject to change. What’s deductible and how to maximize those deductions can vary greatly depending on your specific financial situation and the current tax regulations. Therefore, I recommend consulting with a tax professional who can provide advice tailored to your unique circumstances. They can help ensure that you’re not only maximizing your deductions but also complying with all relevant tax laws and regulations.
  • For the most accurate and personalized advice, consider scheduling a consultation with a professional tax advisor that can delve into the specifics of your situation.
  • Changes in Tax Law: How do I stay updated with tax laws and regulations to avoid penalties?
  • Staying informed about the latest tax laws and regulations is essential for compliance and minimizing the risk of penalties. The tax code is complex and subject to frequent changes, making it challenging to stay current. Here are some strategies to consider:
    • Regularly Visit Official Sources: The Internal Revenue Service (IRS) website and other government tax authority websites are primary sources for the latest tax news, laws, updates, and guidance.
    • Subscribe to Tax Newsletters: Many professional organizations and tax software companies offer newsletters that summarize recent tax law changes and important deadlines.
    • Attend Tax Seminars and Workshops: These can provide valuable insights into recent tax law changes and best practices for compliance.
    • Hire a Tax Professional: Perhaps the most effective way to ensure you’re up to date and compliant is to engage with a tax professional or accountant who can provide personalized advice and updates relevant to your specific situation.
    • It’s important to remember that while these strategies can help you stay informed, the application of tax laws to your individual or business circumstances can be complex. Consulting with a tax professional for personalized advice tailored to your unique situation can help ensure compliance and avoid penalties.
    • Please note, while I strive to provide accurate and up-to-date information, it’s crucial to verify any advice with a qualified professional or directly with the IRS or your local tax authority, especially as tax laws and interpretations can change.

These questions are critical as they address the foundational elements of financial management that can significantly impact the business’s operational success and compliance with regulations.

For more insight and guidance on running a successful trade business, visit our blog or contact our industry experts for personalized advice.

Disclaimer: This article is for informational purposes only and should not be taken as professional business advice. Always consult with a business professional or financial advisor before making significant changes to your business strategy.

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