Small Business Bookkeeping: How Often Should You Update Your Books?
It is technically possible to wait until tax season to update your bookkeeping.
That doesn't mean it is a good idea.
For most operating small businesses, bookkeeping should be updated and reconciled at least quarterly or monthly.
A very small business with only a handful of transactions may be able to use a different schedule. Other businesses may need bookkeeping performed weekly—or even more frequently.
But for many small businesses, monthly bookkeeping provides a good balance between keeping the financial information current and avoiding unnecessary administrative work.
Here's why frequency matters.
What Does “Updating the Books” Actually Mean?
Updating your books involves more than downloading transactions from your bank account.
A proper monthly close may include:
Recording and categorizing transactions
Reconciling bank accounts
Reconciling credit cards
Reviewing accounts receivable
Reviewing accounts payable
Recording loan activity
Reconciling payroll
Reviewing sales tax liabilities
Investigating unusual transactions
Reviewing the balance sheet
Preparing financial statements
Once that process is complete, the financial statements should provide a much more reliable picture of the business. If you are unclear about where bookkeeping ends and accounting begins, read Bookkeeping vs. Accounting: What Does Your Business Actually Need?
Why Monthly Bookkeeping Usually Makes Sense
A month is short enough that problems can be identified relatively quickly but long enough to provide meaningful financial information.
If the books are reconciled monthly, you can regularly see:
Revenue
Expenses
Profitability
Cash balances
Outstanding receivables
Debt
Major changes from prior periods
That information can help you make decisions while there is still time to act.
Current Books Make Tax Planning More Useful
Tax planning depends heavily on knowing how much income the business is actually generating.
Suppose it is September and your business has been substantially more profitable than expected.
If your books are current, you can estimate year-end income and begin evaluating the tax consequences.
That might affect estimated tax payments or other planning decisions.
If your books haven't been updated since January, you may not discover the increase in profitability until the following tax season.
By then, many planning opportunities may have disappeared.
Tax planning works best when the underlying accounting information is current.
You Can Catch Errors Earlier
Bookkeeping errors tend to become harder to investigate as time passes.
If you're reviewing July transactions in August, you may remember what an unusual $1,200 payment was for.
If you're reviewing that same transaction the following March, you may have no idea.
Monthly bookkeeping makes it easier to identify and resolve:
Duplicate transactions
Missing expenses
Incorrect deposits
Personal transactions charged to business accounts
Misclassified loan payments
Payroll discrepancies
Sales tax issues
Unusual vendor charges
Small problems can often be corrected before they become year-long problems.
Better Books Can Improve Cash-Flow Decisions
Profit and cash are not the same thing.
A business can be profitable and still experience cash-flow problems.
Current bookkeeping can help business owners monitor:
Cash balances
Customer receivables
Upcoming bills
Debt payments
Payroll costs
Owner distributions
Major expenses
That information can be particularly important when deciding whether the business can afford a new employee, equipment purchase, expansion, or owner distribution.
Financial Statements Become More Useful
A financial statement prepared once per year tells you what happened.
Monthly financial statements allow you to see trends.
You can compare:
This month vs. last month
This year vs. last year
Actual results vs. expectations
That can reveal changes that might otherwise go unnoticed.
Perhaps gross profit is declining.
Maybe software costs have increased substantially.
Maybe revenue is growing but cash isn't.
Those are business questions—not merely bookkeeping questions.
But you need current bookkeeping before you can answer them.
Waiting Until Tax Season Creates a Different Kind of Bookkeeping
When a year's worth of activity is addressed all at once, the objective often becomes:
Get the books good enough to prepare the tax return.
That is different from maintaining accounting records that are useful throughout the year.
Year-end cleanup can involve trying to reconstruct transactions from months earlier, correcting accumulated errors, reconciling accounts, and determining what unfamiliar transactions represented.
The return may ultimately get filed correctly.
But the business owner missed an entire year of potentially useful financial information.
Are There Businesses That Need Weekly Bookkeeping?
Absolutely.
More frequent bookkeeping may make sense for businesses with:
High transaction volume
Significant accounts receivable
Significant accounts payable
Tight cash flow
Inventory
Multiple locations
Frequent payroll
Rapid growth
A restaurant, for example, may need more frequent financial monitoring than a consultant who sends five invoices per month.
The right frequency depends on how the business operates and how quickly management needs financial information.
What About Very Small Businesses?
Not every business needs an elaborate monthly accounting process.
A new side business with a separate bank account and ten transactions per month has very different needs from a company with employees, credit cards, loans, payroll, and hundreds of transactions.
The bookkeeping process should be proportional to the complexity of the business.
But even a small business benefits from periodically reconciling its accounts and reviewing its financial activity rather than waiting until the tax return is due. For a closer look at the work involved, see What Does a Bookkeeper Actually Do for a Small Business?.
A Good Rule of Thumb
For most established small businesses:
Update and reconcile the books monthly.
For businesses with significant transaction volume or cash-flow needs:
Consider weekly bookkeeping or financial monitoring.
For extremely small or inactive businesses:
A less frequent schedule may be reasonable, provided the accounts are still regularly reconciled and reviewed.
The goal isn't bookkeeping for the sake of bookkeeping.
The goal is having accurate financial information when you need it.
Your Books Should Help You Run the Business
If your bookkeeping only exists to prepare a tax return once a year, you're getting only part of its value.
Current financial records can help you monitor performance, plan for taxes, manage cash flow, identify problems, and make better decisions throughout the year.
For many small businesses, that makes monthly bookkeeping a worthwhile routine rather than another tax-season chore.
Ready to Get Your Books on a Regular Schedule?
Sharp Tax & Accounting provides virtual bookkeeping services designed to keep your financial records current, reconciled, and useful throughout the year.
