How to fix bad bookkeeping (and what happens if you ignore your books for too long)
Bookkeeping is one of the easiest tasks to put off.
For many entrepreneurs, it’s tedious, difficult to understand, and time consuming.
It’s tempting to add it to your “worry about later” pile, but if you neglect your bookkeeping, you’ll just create more problems for yourself.
Accurate financial reports help you see how all parts of your business are performing. They help you spot opportunities to address problems and inefficiencies. Without them, it’s like steering your business with your eyes closed.
Sadly, countless business owners are doing just that. They try to keep all their numbers in their head, but it usually costs them unnecessary time and stress.
We’ve talked about the benefits of hiring a bookkeeper, but in this article we’d like to cover what happens if you don’t take your bookkeeping seriously.
1. You Can’t Make Smart Decisions
The biggest problem you’ll face if you don’t reconcile accounts and produce the necessary reports is a general lack of information. Without the right information, you won’t be able to make smart decisions to run and grow your business.
For instance, before you hire another employee, it’s important to ensure you can actually afford the expense. If you don’t have a cash flow forecast, you won’t know for sure if you’re safe to hire. You risk hiring someone that creates a burden on your cash flow.
This is especially true for businesses who hire contractors for individual projects or to manage specific accounts. You need to know the per project or per account cost so you can hire people to handle the work without losing money.
The same problem applies to buying/renting tools and investing cash on marketing. Without an accurate picture of your financial situation, it’s impossible to tell if you’re growing or creating more problems.
If you’re at a point where it’s time to expand, poor or absent financial information will make growth harder and more prone to risk than it should be. Unpaid invoices means less cash to invest in growth tactics. Unclear cash flow forces you to behave more conservatively than you need.
2. You Will Lose Money
There’s no doubt that if you neglect your bookkeeping, you’ll lose money, whether business is good or bad at the moment. If you don’t understand where your money comes from and where it’s going, a portion of it will leak away somewhere.
If you’re like most businesses, your customers and clients aren’t breaking down your door in order to pay. So you won’t know who owes you money and when it’s due unless you track your receivables.
Some customers don’t pay until they absolutely have to. Other customers simply don’t know they have to pay because they never received an invoice. In either case, a lack of proper records means less income for you. It also creates the possibility that you’ll allocate payments or debts to the wrong customers or vendors, which creates relationship issues.
Your expenses are another area where it’s easy to lose money if you neglect your bookkeeping. It’s impossible to control costs without up-to-date information.
For instance, imagine if you were to create reports a few times a year. It would take months before you realized you were paying for something that isn’t necessary (like a software tool, perhaps, that quietly charges you a subscription every month).
If you don’t create reports at all, you would pay for unnecessary things until you noticed them on a credit card statement one day – if at all.
Slow leaks like that can kill businesses. You may not think $50/month is a big deal, but it adds up over time – especially if you have multiple leaks – and impairs your growth.
3. You’ll Make Payroll Errors
Payroll deserves its own category because it’s so serious.
Your employees are the frontline of your business. Without them, you wouldn’t be able to operate, so they deserve to be paid first and on time every single pay period. You can pay at any interval you like, but you must stick to the schedule.
Good bookkeeping ensures your employees’ pay benefits (leave, retirement contributions, etc.) are tracked and distributed properly each cycle. If you don’t manage payroll closely, you could:
- Have to rush payments to employees, costing expensive fees.
- Overpay employees who may not report the overage.
- Fail to collect or over collect taxes.
- Be unable to pay yourself so everyone else gets paid.
Not to mention, payroll errors affect your relationship with your team. If they can’t depend on a regular paycheck, it won’t be long before they start looking for work elsewhere. If they become suspicious of your errors, there’s a chance they could extract compensation other ways by taking resources, materials, or time.
In addition, failing to pay the proper payroll taxes to the government can result in fines, garnished bank accounts, and even jail time. In the U.S., payroll debt is one of the few debts – along with student loans – that can’t be forgiven if you file bankruptcy.
4. You Can’t Raise Money
At some point you may want to get financing from a bank, whether a one-time loan or a line of credit. But without good records, banks won’t trust you.
Banks essentially use your own records to determine whether to award you credit (which is why misrepresenting yourself to a bank is a crime). Poor or absent records hurt you in two ways:
- The bank can’t make a decision because you can’t give them data to evaluate.
- Since you don’t keep records, the bank assumes you’re bad with money.
These problems are even greater if you need fast financing to secure an opportunity or fix a mistake. Banks will laugh if you ask for money right away without good documentation to show you’re good to pay it back.
Even if you manage to convince a bank to give you some credit, the terms will be poor. Your payments and interest rate will be higher than you deserve. Plus, poor bookkeeping creates a very real possibility that you’ll make late payments or miss payments entirely.
You might be thinking, “This doesn’t apply to me. I don’t take on debt.” You may not use credit, but you might take on an investor one day like we did.
Raising capital is a complex process. That investor will want to see all of your financial data dating back years before they make their decision. If you can’t show them well-managed books, they certainly won’t invest.
5. You may incur tax penalties and fines
Your accountant won’t have much to work with come tax season if you don’t have a year’s worth of financial data to give him or her.
Preparing taxes without reports is possible, but it’s time consuming, and your accountant will charge a premium for it. Some accountants outright refuse to work with clients who don’t keep a semblance of proper records.
Additionally, poor records greatly increase your risk of tax errors. You might under or over report your expenses. If the tax man doesn’t agree with your figures, you may have to pay penalties and interest. There’s also the possibility you’ll pay more tax than you should.
For example, you might have to scramble to get your books cleaned up before the tax deadline to avoid late filing fees. This could also mean added fees to your accountant and bookkeeper to help with the urgent last-minute clean-up.
In addition, if in the scramble to get your books complete, you might not have time to reconcile your accounts. This could result in giving the wrong revenue and profit numbers on your tax forms.
Don’t Neglect Your Bookkeeping – Outsource It
Admittedly, bookkeeping is challenging. It takes a unique skill set and a willingness to sweat over small details – qualities many business owners and leaders don’t have. For some, it’s an issue of time. You may not have enough hours in the day to get to your books.
This is why bookkeeping is one of the most common tasks businesses choose to outsource.
But the longer you ignore your bookkeeping, the bigger the inevitable problems become.
The solution? Outsource it. There’s no shame in outsourcing tasks you aren’t suited for. In fact, if you can’t manage your own bookkeeping, it’s smarter to have someone else do it.
If you find a quality bookkeeper and work to get the most value out of the relationship, you’ll be able to leverage the power of sound financial reporting to make good decisions and protect yourself from unnecessary expenses.