Poor bookkeeping can hurt a business in a variety of ways, even when a company is profitable. In addition to missed opportunities caused by a lack of accurate records, a business can increase its costs or run into legal problems. Understanding how bad accounting practices can hurt your business will help you take steps to avoid a lack of proper financial record-keeping.
Poor bookkeeping can cause you to pay your debts late, resulting in increased interest rates, loss of credit, less-favorable payment terms with vendors and suppliers, and damage to your credit scores and reports. In addition to keeping accurate records, it’s important that your bookkeeper track your cash flow to make sure you know when your receivables will arrive, when your bills must be paid and how much cash and credit you must keep available to pay your bills.
If you don’t pay your bills on time, pay the wrong amounts, bounce checks or miss payments entirely, you might lose access to your vendors and suppliers. If you don’t have what you need to make your product or provide your service, you lose sales. Even a temporary slowdown in your production and ability to deliver goods can cause long-term damage as your customers and clients find other businesses to fill their needs. Once they use a new company, customers might not come back to you.
Inaccurate bookkeeping can lead to legal problems, primarily in the areas of unpaid or late taxes and improper deductions. In addition, if you don’t have the funds to pay creditors, you might be sued, have a lien placed against your business or have a collection agency set loose on your company. If your bookkeeper is not familiar with tax policies, arrange for a tax expert to help plan your annual accounting procedures to ensure you properly handle your income, sales and payroll taxes and correctly deduct expenses.
You might decline opportunities to expand your business, increase your marketing or reduce debt because you think you have less money than you really do. For example, if you purchase $2,000 worth of supplies in January, you won’t have to pay that amount in January if you put it on a credit card. If you pay your balance each month, you will pay your credit card company $2,000 in February. If you record the $2,000 purchase as an expense in January and the $2,000 card payment as an expense in February, your records will show that you have $4,000 in expenses, when you actually only have half that cost.
Accurate financial reports let you see how you departments, products, distribution channels and your overall business are performing on a regular basis. Budgets, ledgers, balance sheets, cash flow statements, receivables and payables aging reports, and profit-and-loss statements all help you spot opportunities and address problems in a timely fashion. Without accurate bookkeeping, you lose your ability to run your business with maximum efficiency.