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Growing a successful business is already hard enough. Making money gets your foot in the door but keeping it is a different animal. As revenue grows, you have taxes to plan for, cash flow to protect, and most importantly, people to pay.
Still, most service business owners keep meaning to get their bookkeeping sorted, but it never feels urgent enough. They focus on more revenue, and revenue only, while the books fall behind.
Knowing your numbers is how you know if you are really in business. But how can you use your numbers to avoid tax issues, reduce taxes, and protect cash flow if you can’t fully trust them?
This article explains five easy-to-spot fundamental signals every growing service business owner should look for to know if their books are right or wrong before relying on their numbers.
Before getting into the fundamental signals, good bookkeeping does two things, it works for you by giving you a clear financial picture, and it protects you from the IRS by substantiating what you claim on your tax return.
First, bookkeeping works for you by giving you:
Second, bookkeeping protects you from the IRS by:
That is what makes bookkeeping right. Your books should give you clear insight and defend the numbers behind your tax return.
Life is too short, time really does fly, and while detailed accurate books are great, numbers that are just detailed enough for your needs are exceptional.
That is why, at Westfront, if you cannot get a clear picture of your financials within two minutes of looking at them, too complicated.
Let’s be real, as a growing small business owner, you already have too much on your plate to put on an accountant hat every time you want to know how the business is doing. You should not have to dig through duplicated expense categories or messy contractor payments.
If you run your profit and loss statement and it looks like a two to three page essay, that is an essay, not a profit and loss statement.
Exceptional bookkeeping should let you quickly see the big picture first. Then when you have time or need more detail, the books should be flexible enough to let you look under the hood.
Has it ever happened to you when looking at tables or numbers that, after a while, it all starts to look the same and your mind starts to betray you?
That is how missing transactions and duplicates sneak into your bookkeeping.
Bank and credit card reconciliations are what help make sure your financial statements are complete and every dollar was counted once.
You can quickly check this in QuickBooks Online by heading to the menu and clicking Reconcile.
The profit and loss statement gets all the attention, but the balance sheet is where the bodies are buried. And for small business owners, one of the easiest places to check is the equity section of the balance sheet.
On the balance sheet, is where you find how much money you have put into the business and how much money you have taken out of the business. Think about it, those transactions need somewhere to live.
Look for these accounts at the bottom:
The names vary, but the idea is the same.
If you do not see any of these on your balance sheet, huge red flag.
That is a symptom of those transactions living in your profit and loss statement. Money you put into the business may be getting counted as income. Money you are taking out of the business may be getting counted as an expense.
When was the last time you checked your outstanding mortgage balance? My guess is probably not recent enough.
And while you may not check your outstanding mortgage balance every year, bare minimum, the IRS does on your business tax return. Especially if your entity is an LLC taxed as an S Corporation or a multi-member LLC.
Also, if you ever want financing or want to convince people to invest in your business, creditors and investors will very much be interested in your liabilities.
This is why it is important to have accurate liabilities on your balance sheet. But you do not need to be an expert to know if they are right.
Run your balance sheet for the last 12 months, and if your liabilities do not change month over month, red flag.
This is usually a signal that the monthly loan payments have been accounted for as an expense, overstating your expenses on your profit and loss, and understating your income, which then understates your tax liability for the year.
If, however, there are payments reducing your liabilities, check to see if those payments are correctly split between principal and interest. If the transactions are going entirely to principal, then you are missing interest expense deductions and now you are overpaying taxes.
Most small business owners think that they protect themselves against the IRS by paying a CPA to file a “perfect” return. But when the IRS questions your return, they don’t want to see your return. They already have it. They just don’t believe it.
So what does the IRS look for when they question your return? Your records. In other words, your bookkeeping. Despite this, to this day, I have not seen a new client come aboard with bookkeeping that matches what happens on the tax return.
If you run your balance sheet and check whether your total assets at the beginning of the year match the total assets reported on your most recently filed business tax return, I’ll buy you a coffee if they match.
Don’t you think that is interesting? Most business owners start bookkeeping for the same reason, taxes. Yet most books are never congruent with what happens on the return. The books exist because of taxes, but somehow, they do not match what happens for your taxes.
Awesome.
If you have any of these signals, yes, you are exposed.
Exposed to making wrong decisions. Exposed to the IRS questioning numbers you may not be able to defend. Exposed to expensive guesswork that only gets more expensive as your business grows.
And the most unfair part about it is that most business owners dealing with bad bookkeeping are not trying to do anything dishonest or unethical. They are not trying to cheat the code. They are just trying to run their business, make money, and pay their people.
But when the bookkeeping is wrong from the beginning, you eventually pay for it. Either with more money than it would have cost to do it right from the get-go, or with long nights, stress, and reactive decisions made with numbers you don’t fully trust.
There is obviously more to reviewing and maintaining exceptional books, but hopefully this article was practical and simple enough to act on.
With our CPA bookkeeping, we help guide, protect, and structure your business so you can finally have peace of mind that your books are right and that you are tax optimized at every step of the way.
We call it the Business GPS System™. It’s our firm’s service model.
And if you are curious, we are based in Fort Lauderdale, Florida, and help growing service businesses like yours. Schedule a free discovery call today.
Jose Cardenas, CPA, EA
Jose is a Certified Public Accountant in the state of Florida and an Enrolled Agent, and is the Founder of Westfront Tax & Accounting. He helps small businesses grow without expensive guesswork. His work is centered on helping owners upgrade to an audit-proof accounting process that helps them, not just the IRS. Since 2021, Jose has helped protect over $55M in client revenue through clean books, tax optimization, and financial systems built for growth.
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