Small Business Bookkeeping

We are talking about audits, not the IRS kind, but the ones business owners never see coming. These are the reviews that show up when you are trying to get surety bonds, apply for a loan, sell your business, or when the EDD decides it is time to take a closer look at your books. None of these situations are bad. They are simply moments that test how strong your accounting really is, and moments where you find out whether you have financials or excuses.

Below are the real-world situations I have seen, where a simple request for financial statements turned into a stress test of how well a company’s books actually tell its story.

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1. Bond and Surety Companies

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If you work in construction or any field that requires bonding, you already know that bond underwriters want a lot more than a balance sheet and income statement. They want your Work-in-Progress schedule, a detailed look at every project currently underway. That schedule shows each job’s contract amount, cost incurred to date, how much has been billed, and how much profit is left to earn. It is the clearest picture of how your business performs in real time.

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Underwriters look for profit fade or profit gain, whether your margins hold steady, and whether your billing rhythm matches your costs. They want to know if your team has the capacity to handle additional work. If your bookkeeping does not track costs by job, or if your WIP schedule does not tie to your P and L, they notice immediately. That can shrink your bonding capacity or increase your premiums. In some cases, applications get denied entirely.

When your books are clean and costs are coded properly, producing a WIP schedule is not a scramble. It is proof that your business runs with discipline and clarity.

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2. Loan Underwriting: The Silent Audit

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If your business needs a loan, your bank or SBA lender will ask for the same package every time: two years of tax returns, a year-to-date P and L and balance sheet, a debt schedule, and recent bank reconciliations. The underwriter’s job is simple. They need to know whether they can trust the numbers in front of them.

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If your books do not tie to your tax returns, or if cash flow swings wildly because you are still cleaning up old transactions, that confidence disappears. Most loan denials are not about creditworthiness. They are about documentation. Clean, consistent financials open doors. Messy ones close them quietly. And with interest rates as high as they are, banks are scrutinizing every detail to ensure borrowers can sustain the payments.

When your books make sense, lenders stop digging and start approving.

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3. Selling Your Business

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When it is time to sell, buyers perform financial due diligence. They are not there to catch you off guard. They are verifying whether the profit you claim actually exists. They cross-check revenue against deposits, analyze expenses, normalize EBITDA, compare margins year-over-year, and question unusual fluctuations. They look at payroll, vendor payments, and anything else that stands out.

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If your bookkeeping is clean, this process is quick. If it is not, every inconsistency is a red flag. Every missing invoice or unexplained adjustment becomes another question. I have seen deals lose seven figures in valuation because the financials did not line up. Buyers discount what they cannot trust, and once that confidence is gone, it is almost impossible to get back.

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Clean books do not just make due diligence easier. They make a business more valuable because they show discipline, transparency, and control.

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4. The EDD Payroll Audit

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Now for the one that makes California business owners the most anxious. The EDD audit. When the Employment Development Department decides to audit you, they start with your books, not your payroll provider. They request your general ledger, bank statements, prior DE-9 and DE-9C filings, and even check images. They want to see how money actually moved.

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If they find payments to individuals marked as consulting, bonus, or miscellaneous, and those people were not reported through payroll, they will assume those amounts were wages. They can reclassify them retroactively and apply back taxes, penalties, and interest. They also test officer compensation in S-corps, unpaid payroll liabilities, and misclassified contractors. EDD auditors read ledgers line by line, looking for patterns. And yes, they can subpoena your bank records.

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Clean coding and reconciled liabilities make this process far less painful and show that your business takes compliance seriously.

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5. Payroll Company Audits

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This last one surprises owners because it does not come from the government. It comes from their payroll provider. If you have large adjustments, process garnishments, or use third-party benefit systems, your payroll company may initiate an internal compliance review. They are protecting themselves and your employees because payroll withdrawals are large, and your financial stability matters.

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They will ask for documentation, corporate authorization, tax ID verification, and old filings. They may want access to your bank balances and a clear understanding of your liabilities. If your books do not match their data, they freeze changes or slow down processing until everything aligns.

This is another place where clean books save time.

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Why All These Audits Matter

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Every lender, bonding agent, buyer, or tax agency is asking the same question. Can we trust your numbers? The answer depends entirely on how consistent your bookkeeping is. Routine bookkeeping does more than keep you compliant. It saves you money.

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Banks reward clarity with better terms. Bonding companies reward accuracy with higher capacity. Buyers pay more for businesses with clean financials. And agencies like the EDD move on faster when everything reconciles.

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Good books buy you time, trust, and options. They prevent you from paying attorneys and CPAs to fix avoidable mistakes. And they make every audit, review, or financial event feel manageable.

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