When I begin working with a new client, one of the first things I do is sit down with their books and work through them systematically. It is not just a technical exercise. The condition of a company’s financial records tells me a great deal about how the business is being run — and where the most important opportunities are.
I want to share what I look for, because understanding these things gives you a framework for evaluating your own financial health.
Are the Accounts Reconciled?
The first thing I check is whether the bank and credit card accounts have been reconciled regularly. Reconciliation is the process of confirming that what is in your books matches what is in your actual accounts, transaction by transaction.
When accounts have not been reconciled in months — or ever — it is a signal that the books cannot be trusted. There may be duplicate entries, missing transactions, or errors that have compounded over time. This is the most basic indicator of financial housekeeping, and when it is absent, everything else becomes suspect.
How Is the Chart of Accounts Organized?
A chart of accounts is the categorization structure that every financial transaction is coded to. When it is well-organized, financial statements are clean, meaningful, and easy to read. When it is poorly structured — with dozens of redundant categories, vague catch-all accounts, or expenses lumped together in ways that obscure useful information — the reports it produces are difficult to interpret and even harder to act on.
A bloated or disorganized chart of accounts often tells me that no one has thought critically about what the business owner actually needs to see in order to manage effectively.
Are There Unexplained Balances or Stale Items?
Old, unpaid invoices sitting in accounts receivable. Vendor bills that have not been paid in months. Negative balances where they should not exist. Undeposited funds piling up. Loans that do not reconcile to actual debt balances.
Each of these is a signal. Sometimes it indicates a process breakdown. Sometimes it reflects a one-time situation that was never cleaned up. Sometimes it reveals a more systemic issue with how transactions are being managed. I look for these items not to assign blame, but to understand what has been happening and what needs to be corrected.
What Do the Financial Statements Actually Tell Me?
Once I have a sense of the bookkeeping quality, I look at the financial statements themselves. Is the gross margin appropriate for this type of business? Are operating expenses trending in a way that makes sense? Is there a pattern to cash flow timing that reveals a risk or an opportunity?
What I am looking for is whether the numbers tell a coherent story — and whether the business owner has been using those numbers to make decisions, or operating largely on instinct and cash position.
What It All Means
Here is what I have found, consistently: the condition of a company’s books almost always reflects the degree to which the owner is engaged with their financial information. When the books are clean, current, and well-organized, the owner is typically making more informed decisions, responding to problems earlier, and running a more resilient business.
You do not need to be a financial expert to run your business well. But you do need financial information that is accurate, timely, and organized in a way that is useful. That is what good bookkeeping delivers — and it is the foundation that everything else is built on.
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About the Author:
Joe Herskowitz, EA, is the President and CEO of Lionstone Bookkeeping+, where he helps small and medium-sized businesses take control of their finances with expert bookkeeping and financial insights. With years of experience in business finance, Joe is passionate about making numbers work for business owners—not against them.
Have a bookkeeping or business finance question?
Reach out to Joe at [email protected] or call/text 732-803-7793 (no WhatsApp).
