Most business owners don’t expect their bookkeeping to be perfect every day. Nor should they. There will always be an invoice waiting to arrive, a payment that needs identifying or something that needs checking before we’re quite sure where it belongs.

But there comes a point where we want to use the bookkeeping for something else, and at that point “nearly finished” can become a problem.

There’s a difference between a judgement and an unknown

This came up in a conversation recently. There was some year-end work to do and most of the bookkeeping was complete, but there were still a number of queries outstanding. Could we start the next piece of work anyway?

Possibly, but first I wanted to know what was missing.

There’s an important difference between knowing that the accounts contain a small discrepancy which isn’t worth spending any more time investigating, and having transactions missing that we haven’t yet identified. One is a judgement; the other is an unknown.

Take a supplier invoice for £10,000 which hasn’t yet been entered into the accounts. If it hasn’t been paid, the bank can be completely reconciled and everything may appear fine. But the accounts are showing £10,000 too much profit and £10,000 too little owed to suppliers. Depending on what was purchased, the VAT position might be wrong as well.

If all we’re trying to do is finish the bookkeeping, that’s something we need to correct, but the bigger problem comes when we start relying on those figures for something else.

What happens when we rely on incomplete figures?

We might use them to decide whether the company can afford a dividend, review its margins, prepare a cash-flow forecast or carry out some more specialist tax work.

If that missing cost is relevant to the work we’re doing, we’ve now started answering a completely different question using incomplete information.

The same applies to management accounts. There’s little value in producing a lovely report showing that gross margin has improved if some of the costs which should be included in it haven’t been recorded yet. The report itself can be perfectly accurate; it’s the information we’ve fed into it that’s wrong.

Bookkeeping is the foundation

This is one of the reasons I put quite a lot of emphasis on bookkeeping, even though bookkeeping isn’t really what I’m interested in. What I’m interested in is what we can do with the information afterwards.

If I know the bookkeeping is reliable, we can start asking much more useful questions about how the business is performing, where the cash is going, whether margins are changing, what the next few months might look like and what the owners can safely take out of the business.

There are increasingly clever tools available to help answer those questions. Accounting packages will produce reports at the click of a button, and forecasting and reporting software can turn the data into dashboards and some very impressive-looking graphs.

None of them, however, can tell us about the invoice that never made it into the accounts.

Finished doesn’t have to mean perfect

That doesn’t mean I expect bookkeeping to achieve some impossible standard of perfection before we’re allowed to use it. Quite the opposite.

Accounting involves judgement and materiality, and sometimes spending another hour trying to find a tiny difference makes absolutely no commercial sense. If I know there’s a £5 discrepancy and decide it isn’t worth another hour of somebody’s time to find it, I can make that decision knowing what I’m dealing with.

What concerns me more is not knowing whether the difference is £5 or £5,000.

That’s why clearing bookkeeping queries isn’t simply an exercise in making everything tidy before the accountant starts the “proper” work. The bookkeeping is the foundation for the proper work.

The further we move from basic compliance into management accounts, forecasting, tax planning and financial advice, the more we’re relying on that foundation. Better analysis doesn’t compensate for worse information underneath it.

So, when is the bookkeeping actually finished?

Not necessarily when every last penny has been accounted for.

For me, it’s when we’ve dealt with the important unknowns and understand anything that remains well enough to decide whether it matters.

At that point, we have something much more useful than tidy books: we have numbers we can actually trust.

If you’re running a business and aren’t confident that the numbers you’re looking at tell you what’s really going on, get in touch.

We can have a chat about where the problems are and whether I can help you get to the point where your accounts are useful for more than filing the next return.