Most small business owners in the Valley did not start a business to do bookkeeping. They started a landscaping crew, a taquería, a roofing company or a salon. The books get done when there is time, which usually means late at night or not at all.

That is understandable. But a few habits cause most of the trouble we see when owners finally hand their books to a professional. Here are the three most common, and what to do instead.

1. Mixing personal and business money

It starts small. A grocery run on the business card. A supply order on your personal card because it was the one in your wallet. Twelve months later, you have hundreds of transactions that someone has to sort into "business" and "not business," and every one is a judgment call.

Mixed accounts cause three problems:

• Your numbers are wrong. Personal spending inflates your expenses, so you can't tell what the business actually earns.
• Cleanup costs more. Sorting mixed transactions is slow, detailed work.
• It weakens your records. If you ever need to show a lender, a partner or your tax preparer what the business did, mixed accounts make that harder to prove.

The fix: open a dedicated business checking account and a business credit card, and run every business transaction through them. If you operate as an LLC or corporation, keeping business money separate also helps maintain the separation between you and the company. When you need to pay yourself, transfer money from the business account to your personal account and record it as an owner's draw or payroll, whichever fits how your business is set up.

2. Skipping monthly reconciliations

Reconciling means matching every transaction in your books to your bank and credit card statements, then confirming the ending balances agree. Many owners skip it because their software pulls in bank transactions automatically.

Bank feeds are useful, but they are not a reconciliation. Feeds can duplicate transactions, miss some entirely, or import a transfer twice, once from each account. Without a reconciliation, those errors stay hidden and pile up.

The fix: reconcile every bank and credit card account every month, shortly after the statement arrives. When an account is reconciled, the difference between your books and the bank is zero, and you can trust the balance. A month that won't reconcile is a sign something needs attention: a missing deposit, a duplicate expense or a payment that never cleared.

3. Waiting until tax season

For a lot of businesses, the books get done once a year, in a rush, because the tax preparer needs them. That approach has real costs:

• You make a full year of decisions without accurate numbers.
• Receipts and details are harder to remember a year later.
• Catch-up work in March and April is stressful and often more expensive.
• Problems such as an unpaid customer invoice or a duplicate vendor charge are found months too late to fix easily.

The fix: keep the books current every month. A monthly close means transactions are categorized, accounts are reconciled and you get a Profit & Loss and Balance Sheet while the information is still useful. When tax season comes, you hand your preparer clean, finished books instead of a shoebox.

Where to start

If you recognize your business in all three, start with the first one. Separating your accounts takes an afternoon at the bank and makes everything else easier. Then pick a date to start reconciling monthly, and decide whether you'll do it yourself or hand it off.

If your books are already months behind, read our guide on what to do when you're behind on your books.

Being behind on your books is more common than most owners admit. A busy season hits, a key employee leaves or the business simply grows faster than the paperwork. Before long it's been six months, or a year, since anything was entered.

The good news is that catching up follows a clear process. You don't need every receipt in perfect order to begin. Here's how to approach it.

Step 1: Stop the backlog from growing

Before you fix the past, make sure next month doesn't add to the pile.

• Use one business checking account and one business card for all business activity.
• Start saving receipts as you go. A photo on your phone, saved to one folder, is enough.
• If you use accounting software, connect your bank and card accounts so new transactions flow in automatically.

Step 2: Pick a starting point

Decide how far back you need to go. For most businesses this is the first day of the earliest year that isn't finished, usually January 1 of the current or prior year. If an earlier year was already completed and filed, start from its ending balances instead of redoing it.

Step 3: Gather your statements

Bank and credit card statements are the backbone of catch-up work. Every transaction your business made shows up on one of them. Most banks let you download past statements from online banking. If yours doesn't go back far enough, the branch can request older ones.

Collect statements for every account the business used during the catch-up period, including:

• Checking and savings accounts
• Credit cards, including any personal cards used for business
• Loans and lines of credit
• Payment processors such as Square, Stripe, PayPal or Venmo for business

Also pull together sales records, invoices you sent, bills you received and any payroll reports.

Step 4: Work month by month

Resist the urge to tackle everything at once. Take the first month, record and categorize every transaction, then reconcile each account to that month's statement. Only move on when the month balances.

Working this way keeps errors from carrying forward. If March won't reconcile, you know the problem is in March, not somewhere in the last fourteen months.

Step 5: Flag what you can't explain

You will find transactions you don't recognize. Don't guess and don't stop. Put them in a temporary "ask the owner" category and keep going. At the end, go through the list in one sitting. Most items get answered quickly once you see them together.

Step 6: Review the results

When every month is reconciled, run a Profit & Loss and Balance Sheet for the full period. Look for anything that seems off: a month with no sales, an expense category that seems too high or a loan balance that doesn't match the lender's statement. Then share the finished books with your tax preparer.

How long does catch-up take?

It depends on how many months you're behind, how many accounts you have and how many transactions run through them each month. A small service business a few months behind might take days. A busy restaurant a full year behind takes considerably longer. The best way to know is to look at your statements and transaction volume.

Keeping it from happening again

Once you're current, the most important step is staying current. Set a recurring date each month to categorize and reconcile, or hand monthly bookkeeping to someone else. Catching up once is manageable. Catching up every year is expensive and stressful.

If you'd rather not do the catch-up yourself, this is exactly the kind of project we take on. We'll look at your statements, give you a clear quote and bring your books current, then keep them that way.

Ask a small business owner whether the business is making money, and many will check their bank balance. If it's higher than last month, things feel good. If it's lower, they worry.

Your bank balance is important, but it doesn't answer the question. A business can have a healthy balance and be losing money. It can also be profitable and short on cash. To know where you really stand, you need a different report.

Why the bank balance can mislead you

Money moves in and out of your account for reasons that have nothing to do with profit:

• Loans. When a loan is deposited, your balance goes up, but you didn't earn that money.
• Timing. A customer pays a large invoice this month for work done last quarter. Or you prepay six months of insurance at once.
• Customer deposits. A contractor collects a deposit before the job starts. The cash is in the bank, but the work, and the costs, are still ahead.
• Owner money. Money you put into the business, or take out of it, changes the balance without changing profit.

Any of these can make a month look better or worse than it really was.

The report that answers the question

The Profit & Loss statement, also called an income statement, shows what the business earned and what it spent to earn it over a period of time, such as a month or a year. At its simplest:

Revenue − Expenses = Net profit (or loss)

A well-kept P&L separates your costs into useful groups, so you can see not just whether you made money, but where it went.

Three numbers worth watching

Gross profit

Revenue minus the direct costs of delivering your product or service, such as materials for a contractor or food costs for a restaurant. Gross profit tells you whether your pricing covers the cost of the work itself. If gross profit is thin, no amount of cutting office expenses will fix it.

Net profit

What's left after all expenses: rent, insurance, software, vehicle costs, payroll and everything else. This is the clearest answer to "did the business make money?"

Profit after paying yourself

Many owners don't pay themselves a regular amount, so their P&L looks more profitable than the business really is. Try this: subtract what it would cost to pay someone to do your job. If the business only breaks even after that, it's worth knowing.

Profit by job, product or location

The overall P&L can hide a lot. A contractor might be profitable overall while losing money on one type of job. A restaurant might do well on weekdays and struggle on weekends, or the reverse. When your books track revenue and costs by job, service line or location, you can see which parts of the business carry the rest, and price or plan accordingly.

Make it a monthly habit

A P&L is only useful if it's accurate and current. That means transactions are categorized correctly and accounts are reconciled every month. Once that's in place, set aside 20 minutes each month to review it. Compare it to the prior month and the same month last year. Look for what changed and ask why.

Your P&L shows profit. To see whether you'll have enough cash to pay the bills, read our guide on what every small business owner should know about cash flow.

Profit tells you whether the business is making money. Cash flow tells you whether you can pay the bills on Friday. They're related, but they are not the same, and plenty of profitable businesses have run into trouble because they ran out of cash.

Profit and cash are different

Here's a common example. A contractor finishes a $20,000 job in March and invoices the customer. On paper, March looks profitable. But the customer pays in May. Meanwhile, the contractor already paid for materials and labor in February and March. For two months, the business is profitable and short on cash at the same time.

The gap between when you spend money and when you collect it is where cash flow problems start.

Where cash gets stuck

Unpaid customer invoices

Money customers owe you is called accounts receivable. Every dollar sitting in receivables is a dollar you earned but can't use yet. Review who owes you at least monthly, and follow up on anything past due.

Inventory and supplies

Products on shelves, materials in the yard and food in the walk-in are cash you've already spent. Buying more than you need ties up money that could cover rent or payroll.

Loan payments

Here's one that surprises owners. Only the interest portion of a loan payment shows up as an expense on your Profit & Loss. The principal portion doesn't. So your P&L can show a profit while loan payments are quietly draining cash. If you carry equipment loans or a line of credit, account for the full payment when planning.

Seasonal swings in the Valley

Many Central Valley businesses don't earn money evenly across the year. Agricultural service companies follow planting and harvest schedules. Landscapers, pool services and HVAC contractors have busy and slow seasons. Retailers depend on the holidays. Restaurants feel the effect of school calendars, local events and the summer heat.

If your business is seasonal, the busy months have to fund the slow ones. The most common cash mistake we see is spending the strong months' cash as if every month will look like them.

Look back at last year's monthly bank deposits. Mark your slowest months, and set aside part of your busy-season cash to cover them.

Five habits that protect your cash

1. Invoice right away. The sooner you invoice, the sooner you're paid. Don't wait until the end of the month.
2. Make it easy to pay you. Accept card or online payments, and put clear due dates on every invoice.
3. Collect deposits on large jobs. Deposits help cover materials and labor before the job is complete.
4. Keep a cash cushion. Many owners aim to hold enough to cover a few months of fixed costs. Pick a target that fits your business and build toward it.
5. Look ahead, not just back. Once a month, list the cash you expect to receive and the bills you expect to pay over the next 8 to 12 weeks. A simple spreadsheet works. It turns surprises into decisions you can plan for.

It all starts with accurate books

You can't manage cash flow from numbers you don't trust. When your accounts are reconciled every month and your invoices and bills are tracked, you can see exactly what's coming in, what's going out and when.

If you'd like help getting your books to that point, we're happy to talk it through in a free consultation.