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Many entrepreneurs start their businesses with a great idea or a particularly strong skill set, but often lack of knowledge in financial management. In fact, 21% of small business owners admit to not understanding bookkeeping, which can lead to significant issues down the line. Often characterized by inaccurate and incomplete financial record-keeping practices, bookkeeping can take many different forms, such as misclassification of revenue and expenses, incorrect recording of transactions or failure to reconcile accounts properly.
Threatening Financial Viability
Regardless of the specific mistakes, poor bookkeeping can be financially devastating for a small business, putting its future viability at risk. Here are eight significant challenges presented by poor bookkeeping:
- Cash Flow Issues: Cash flow is the lifeblood of any business, and more companies fail due to cash flow problems than any other cause. Accurate bookkeeping is crucial for monitoring cash as it flows into and out of a company. Without it, a business may face cash shortages that lead to severe financial problems, including bankruptcy. Conversely, sound bookkeeping practices provide businesses with a clear picture of cash flow, helping ensure smooth financial operations.
- Inaccurate Financial Statements and Reporting: Business owners, along with strategic partners and stakeholders, rely on timely and accurate financial statements and reports in order to make informed business decisions. Poor bookkeeping can hinder the accurate and timely completion of these statements, eroding trust among stakeholders, including banks and creditors. Additionally, inaccurate reporting may result in fines and penalties from regulatory agencies.
- Poor Financial Decisions: Owners and managers rely on accurate financial data to make critical decisions about allocation and investment of resources. Without timely and accurate information from quality books, identifying profitable opportunities for business growth becomes challenging. A well-maintained bookkeeping system equips business leaders to make smart, informed decisions.
- Missed Tax Deadlines: One of the most serious problems that can arise from poor bookkeeping is missing tax deadlines. Failure to maintain current and accurate records can make it difficult to prepare and submit tax documents and payments timely. Filing and paying taxes late can lead to tax penalties, fines and interest, as well as increased scrutiny and audits from tax authorities. Additionally, it may lead to increased costs associated with tax preparation.
- Auditing Difficulties: Poor bookkeeping presents a major challenge for financial auditors, who must verify the accuracy of financial and accounting records, ensuring these are prepared in accordance with generally accepted accounting principles (GAAP). Inaccurate records can complicate and lengthen the auditing process, making it more expensive and disruptive for your business.
- Legal and Compliance Problems: Depending on your industry, your business may be subject to strict legal and compliance regulations concerning financial records and reporting requirements. Poor bookkeeping can lead to inadvertent regulatory violations, which can expose your business to both financial and legal repercussions, including penalties and fines, as well as reputational damage.
- Invoicing Errors and Delays: Mistakes and delays in invoice processing due to poor bookkeeping can quickly snowball. Inaccurate invoices can delay payments by customers, strain cash flow and event result in customer credits or rebills. Customers may also lose trust in a business that fails to prepare accurate invoices consistently.
- Increased Fraud Risk: Poor bookkeeping practices create opportunities for dishonest employees to commit fraud or embezzlement. Even businesses with long-standing, trusted financial employees can be vulnerable to internal fraud. To deter fraud, bookkeeping practices should include robust internal controls, such as adequate separation of powers and proper checks and balances.
A Practical Solution: Outsourced Accounting Services
One of the most effective ways to avoid these and other problems presented by poor bookkeeping is to use outsourced accounting services. These services can lower accounting costs, improve operational efficiency and supply better access to financial data, in addition to providing access to high-level financial and accounting expertise.
Frazier & Deeter offers comprehensive Outsourced Accounting Services that are tailored to meet your company’s specific needs. Contact our experts today to learn more about how our services can benefit your company.