How to Spot When Your Books Are Wrong

Check these five financial ratios and reconciliation points to catch bookkeeping errors before they compound into bigger problems.

1. Run your cash reconciliation first. Your bank balance should match your books within $50 for businesses under $1M revenue, $200 for larger operations. If it doesn't, you have posting errors, missing transactions, or timing issues. Pull your bank statement and compare line by line for the past 30 days.
2. Check your accounts receivable aging. If more than 15% of your AR is over 90 days old, your collection process or posting is broken. Calculate total outstanding divided by average monthly sales — healthy businesses stay under 2.5x monthly revenue in total AR. Higher ratios signal phantom sales or uncollectable accounts.
3. Verify your gross margin consistency. Your gross margin should stay within 3-5 percentage points month over month unless you changed pricing or product mix. Wild swings indicate inventory posting errors, missing COGS entries, or revenue recognition problems. Calculate (Revenue - COGS) / Revenue for each month.
4. Test your balance sheet equation. Assets must equal liabilities plus equity, always. If they don't balance to the penny, you have fundamental posting errors. Check retained earnings — it should equal your total net income from all prior periods minus distributions.
5. Cross-check tax account balances. Your payroll tax liability should equal roughly 15-25% of gross payroll for the quarter. Sales tax liability should match your collection rate times taxable sales. If these accounts show zero when you owe taxes, or huge balances when you're current, your bookkeeper isn't posting correctly.