Running a business can be overwhelming in a multitude of ways. As a business owner, you’re trying to hit targets, deal with customers and set up the action plan for the upcoming year. It’s easy to push your bookkeeping duties to the back burner and say, “I’ll catch up later.” We get it. But it's definitely important to get your books' figures sorted before you officially close out of the year. Why? Inaccurate and delayed bookkeeping can lead to higher taxes, difficulty securing capital for growth and ultimately, in the worst-case scenario, force you to shut your doors.
So, if you’re falling behind and want to know how you can catch up on years of bookkeeping, here’s your chance. Below, we cover what catch-up accounting is, why it is necessary and how you can get your accounting ready for the end of the year.
What Is Catch-Up Bookkeeping?
In basic terms, catch-up bookkeeping is updating your finance and accounting books so they are ready for year-end taxes, reports and filings. Catch-up bookkeeping is crucial because it paints an accurate picture of how your business is doing and allows you to make sound business decisions.
The Cost of Being Behind on Your Books
Whether you are behind a few months or years, the reality is that poor bookkeeping practices will cost you a lot of money — both now and in the future. According to a U.S. Bank study, 82 percent of businesses cited poor cash flow as a reason for their failure. Delayed bookkeeping practices also increase your chances of getting a visit from the IRS. Here's what else can happen if you're behind on your books.
Mistakes and Tax Errors
A few overlooked errors might seem like nothing, but these errors can snowball over months and years and lead to inaccurate financial statements and taxes. You don’t want to be overpaying or underpaying your taxes. If things don’t match up on the tax forms, you could face penalties that could run up to 75 percent of the taxes underpaid.
Accurate bookkeeping allows you to make sound, data-based decisions for your company. If you don’t have a crystal-clear picture of your finances, you might end up spending on unnecessary expenses without having sufficient funds.
Missing Potential Tax Deductions
As a small business owner, you want to maximize your tax deductions. A few missed receipts can add up along the course of the year and you won’t be able to account for them as expenses, resulting in overpaid taxes.
Cash Flow Issues
According to Small Business Computing, the average U.S. small business has $53,999 in outstanding receivables. That’s a lot of money left on the table. If you don’t catch up on overdue invoices, you're towing a dangerous cash-flow line that could ultimately cost you your business.
Difficulty Securing Capital
If you are in a position of taking your business to the next level but haven't caught up on your bookkeeping, it could impact your loan application or pitch with investors.
If you’ve ignored reconciling receipts, tracking overdue invoices or calculating profits because you were busy handling day-to-day operations or setting up processes, opening your books to catch up can seem like a nightmare. But don’t panic — there are ways to tackle this.
Year-End Checklist for Small Business Bookkeeping
Here’s how you can catch up on bookkeeping and get your business back on track. Our year-end checklist and tools will help you tackle the backlog on your own.
Step 1. Gather All Receipts
The first step is to gather all your receipts, bank and credit card statements related to any business expenditure for all the months you have fallen behind. Don’t sweat it if you can’t find the receipt for a $5 coffee, as the IRS only requires receipts for anything over $75. Use this small business tax checklist to make sure you're tracking and claiming every deduction available.
If you’ve worked (or are currently working) with vendors, make sure you have a bill for all activities. If there’s a gap, contact them right away as these expenses will make a huge difference in year-end statements and tax deductions.
We recommend creating a digital backup of all receipts and bills. You can upload and organize them on Google Drive, or opt to use one of these free receipt scanners: Wave, Smart Receipts, Evernote and Expensify.
Step 2. Track Customer Invoices and Payments
Review your customer accounts to see you’ve sent and been paid for all invoices. Depending on which accounting system you use, cash or accrual, you’ll record these differently.
Send out pending invoices and follow up on overdue payments. If you run into the issue of some customers not paying no matter how much you follow up, you could possibly write those off as a bad debt expense.
Step 3. Reconcile Bank Accounts
Sit down with your bank and credit card statements and reconcile all the transactions. How? Compare each transaction from your bank statement with the corresponding transaction in your records. If the numbers don’t tally up, identify and fix the errors. The balance in your bank statement should match that of your company’s records.
QuickBooks, Zoho and FreshBooks are the most frequently used small business accounting software that can make reconciling more productive and efficient. FreshBooks even offers a reconciliation template.
Step 4. Separate Personal and Business Expenses
When it comes to business (and many other things), it’s best to keep your business and personal accounts separate. If you mix the two up, you might become personally liable for any business liabilities. Review your statements and ensure all the expenses are strictly business. Use this IRS Business Expense Guide if you’re unsure what qualifies as a deductible business expense.
Step 5. Collect W-2s, W-9s and Form 1099
Did you work with contractors or employees over the year? Set aside time to document and file the appropriate forms for them. If you've paid a contractor over $600, you’ll need a Form W-9 and a Form 1099-MISC. If you are new to this, read more about Form 1099 and if you need to file for it.
You'll need to create a Form W-2 for your employees, which they’ll use for their personal tax filings. Create your W-2 using this online generator.
Step 6. Call in the Professionals
We totally get it if you want to catch up on your books and file taxes on your own — it’s definitely cost-effective. However, we strongly recommend getting all your books and filings checked with a certified public accountant (CPA) or tax professional to eliminate any errors and ensure you're maximizing your tax deductions.
Get Caught Up Now
As a small business owner, it pays to have an accurate understanding of your business’s finances. By catching up on your bookkeeping, you will get a clear picture of your business, be able to make sound decisions and avoid stiff penalties from the IRS.
Whether you’re behind a few months or a few years, Incfile can help bring your finances up to date. Incfile offers dedicated bookkeeping and accounting solutions, which include catch-up bookkeeping, bank reconciliation and tax filing.