Bookkeeping is one of the most fundamental aspects of any business’s financial side. It provides information on areas that generate great profits and those that cause losses. Efficient bookkeeping helps your business:
- Improve cash flow
- Generate accurate financial reports
- Ensure statutory compliance
- Enhance financial forecasting
You need to know the direction your firm is heading and how much capital you need to meet your business objectives. Bookkeeping keeps you informed about what you should do to have enough cash to stay afloat.
On the contrary, businesses with poor bookkeeping might face adverse effects on their financial situation, making it difficult to achieve profitability and growth goals.
Here are some examples of poor bookkeeping practices:
- Unorganized financial records
- Not performing bank reconciliations
- Overlooking issues with bookkeeping basics
- Not monitoring workflows
- Not executing audit trails
In this article, you will learn how poor bookkeeping affects your business’s financial data, including balance sheets, profit and loss statements, etc. It will also emphasize how you can scale your business. Let’s begin with understanding the impacts of poor bookkeeping on your business.
Impacts of Poor Bookkeeping
Cash Flow Problems
In the absence of good bookkeeping practices, your business becomes prone to cash flow problems. If your days payable outstanding takes a lot of time, you experience a shortage of available credit, or you face overdrafts on accounts, without sound bookkeeping, you cannot improve your cash flow.
With poor bookkeeping, you miss out on a lot relevant to cash flow. For example, lack of visibility into accounts payable and receivable, inefficient invoice management, and less clarity into the company’s financial statements.
Failing to Meet Tax Deadlines
Tax time can turn into a massive headache if your books of accounts are not in order. Poor bookkeeping fails to maintain updated records of finances, leaving you with huge stacks of receipts and statements to check while preparing for taxes. Things can worsen as the deadline approaches, and you are still sorting out your financials.
As a result, you might either fail to meet the deadline or make mistakes while filing taxes in a hurry, leading to fines or an IRS audit. These are also some reasons why many companies hire tax preparation outsourcing services to ensure accuracy and prevent penalty risks.
Exposure to Internal Fraud Risks
Regardless of how much you trust your staff, your business might be at risk of internal fraud. Your company is at risk of loss owing to internal fraud due to:
- Insecure bookkeeping and accounting processes
- Improper separation of duties
- Allowing all finance staff to access the company’s confidential financial information
Your business might end up with losses that can force you to shut down due to successful internal fraud attempts.
Wrong Pricing – Leading to Less Profit
If you don’t have a systematic process for tracking expenses and employees’ work time, you won’t know your actual total costs. Without this knowledge, making effective pricing decisions is impossible.
Lack of authentic financial information prevents you from measuring your profit margins, leading to failure to optimize pricing, which can result in fewer profits. Poor bookkeeping also keeps you from determining the true potential of your products or services.
Compliance Issues
Bad bookkeeping practices can put your firm at risk of statutory/legal issues. The situation can worsen if your company has internal and external stakeholders. When you become aware of mistakes, you spend more time addressing them.
Additionally, you might hire an attorney to help minimize legal penalties. Poor bookkeeping is often the root cause of these issues, which could have been prevented with efficient bookkeeping.
Overlooking Financial Performance
What drives your business? Finances, right! To deeply understand all financial aspects and their significance on your business, you need numbers. Numbers that tell you how much your company makes, how much your staff costs, how much you spend on marketing and sales departments that convert into revenue, how financially sound your company is, and more.
With poor bookkeeping, you cannot get the accurate numbers you need to understand your business’s financial performance and health.
Poor Bookkeeping Results in Poor Decisions
As a business owner, you are responsible for making sound business decisions, for which you need to maintain precise records of your firm’s financial transactions. For instance, you need to review several statements and compare them with previous months’ financials to get a clear picture of your firm’s financial status.
If your bookkeeping is not accurate, all the information you need will be of poor quality, leading to poor decisions that waste your precious time and energy.
Poor bookkeeping can be costly, time-consuming, and even more devastating than you think. But the good thing is that it can be improved. To leave your poor bookkeeping practices behind, read the following points and learn about:
5 Ways You Can Improve Bookkeeping
Save All Valuable Financial Documents
The best way to improve bookkeeping is to ensure the fundamentals are managed correctly. Store all important financial documents like receipts and statements so you can use them as a reference during reconciliations.
This will prepare the base for bookkeeping and ensure it is accurate. Make sure you never toss any valuable finance-related documents in the bin and store them for at least 24 months.
Keep Different Accounts for Personal & Business Transactions
A big reason why bookkeeping goes wrong is that you might use your business accounts for personal expenses. This can result in discrepancies in financials, requiring extra effort and time to filter records and obtain the required information.
Always keep separate accounts for your personal and business expenses.
Frequently Update Accounting
Regularly updating accounting records (weekly or monthly) ensures there is no room left for inconsistency. Updating records as soon as a transaction occurs puts you on the right path for managing accounting work efficiently, streamlining further accounting processes, and preparing solid, reliable data you can use confidently.
Use the Right Bookkeeping System
If you are using traditional bookkeeping methods, like spreadsheets, and find them time-consuming or prone to errors, consider switching to sophisticated bookkeeping software.
Many software applications on the market can fit your requirements and budget. Cloud-based bookkeeping and accounting systems are fast and affordable, enabling you to view your financial information in real-time and enhance transparency and accountability.
Take Professional Support
Business owners dealing with bookkeeping problems due to a lack of knowledge, expertise, or time can outsource bookkeeping services to a trusted firm. Bookkeeping and accounting chores are cumbersome and require long hours of your accounting staff, leaving them with less or no time for strategic work like forecasting and budgeting. By seeking professional support, you can rest assured that your accounting is in responsible hands and your in-house team has enough time for tasks that add value to your business.
How Can Finsmart Accounting Help You with Bookkeeping?
Many business owners around the globe struggle to overcome challenges arising from poor bookkeeping. Finsmart Accounting is a leading, globally trusted bookkeeping service provider at your service to streamline your accounting workflow, optimize processes, and reduce costs while ensuring your confidential data remains protected.
India Business Head
Mrs. Dipali Phadke is a qualified Chartered Accountant with more than 20+ years of experience in the field of Accounting, Taxation and Payroll. She is the backbone of Company’s Operations and heads India Business at Finsmart Accounting
