Consequences of bad bookkeeping in a business
One of the challenges businesses face is bad bookkeeping. Bookkeeping includes the processes of recording, analyzing, and arranging business transactions. It also involves maintaining an organization’s business transactions such as sales, purchases, payments, earnings, and receipts. Small, medium, and large businesses need to make use of complete and accurate bookkeeping data, ensuring that they regularly get updated.
In other words, as opposed to carrying out transactions without keeping records, businesses must learn to properly keep their books. This will help the proper filing of annual returns, for tax requirements, to obtain funding, and so on. While there is a range of benefits of proper bookkeeping, poor bookkeeping practices can birth a range of challenges. It can cause mismanagement of your finances thereby putting your entire business at risk.
Consequences of bad bookkeeping
The processes in bookkeeping require that you are careful and meticulous. Inputting inaccurate data or engaging in a wrong analysis amidst all other wrong practices, can put your finances at risk in many ways. They include the following:
1. Increasing debts
One of the best things about having proper records is that you can track all your income and expenditure. It also means that before your debt dependence gets out of hand, you can already see a progression and can nip it in the bud. Also, the availability of correct data and accurate records helps in sorting out any form of discrepancies between employees, clients, and vendors. Hence, negligence of crucial financial records can birth problems for a business and may derail its operations.
2. Wastage of time and money correcting mistakes
By attempting to correct mistakes initially created by bad bookkeeping, you can get drawn into several other situations that may waste your time. In most cases, these situations can consume much of your financial resources. Bad bookkeeping or a complete failure to keep financial records may leave a company overexposed to situations. These situations may include tax non-compliance, under or overvaluation of its worth and so much more. Worse off, mistakes caused by bad bookkeeping could be very costly to fix.
3. Legal / Statutory Challenges
You and your company can get caught up in a myriad of legal problems as a result of poor bookkeeping. This is even more so when there are other stakeholders like investors, debtors, creditors, employees, customers, and so on, involved in the affairs of the business. Your company may get penalized for tax evasion or late payment of tax. This may have occurred as a result of your company’s nonchalance to record keeping.
4. Poor Decision making
One of the benefits of bookkeeping is that it aids in making good financial decisions. It is impossible to make quality decisions for your business without adequate record-keeping. You have to keep a record of your company’s financial status or a clear picture of its financial position. How will you be able to identify financial strengths or shortages as well as business opportunities? Consistently neglecting proper record-keeping could make a company more reactive than proactive. It may ultimately erode the business’s capacity to make the right choices.
5. Loss of profit
Bad bookkeeping can cost your company a lot of funds and this may significantly affect the production, sales, and profits. Failure to accurately treat the financial obligations of your business’ stakeholders can also mar your company’s integrity and credibility. You may even end up losing clients to other competitors in the field simply because you failed to be on top of your business’s financial position.
How do you control bad bookkeeping?
Errors from bad bookkeeping can be devastating, costly, and time-taking, but they can be avoided. To save yourself from unnecessary pain of errors in bookkeeping, you can consider the following brief points:
Update your accounting records periodically
To avoid errors of omission or inclusion of inaccurate data, you need to regularly update the records of business transactions. You also need to update other valuable financial information regularly.
Save receipts and other valuable documents
One way to ensure that all records are accurately kept is to ensure that you always keep a copy of receipts and bank statements. You can keep them as proof or for easy reference. Never throw away any important document; hang on to important receipts for at least 24 months.
Separate personal and business funds
Another common mistake small businesses make is mixing their records with the financial records of their business. At the end of the day, the lines are too blurred and it is either the company that is taking on more of the owner’s funds or vice versa. Associating your funds with your business funds can lead to the misappropriation of finances. Never have one account for both personal and business funds.
Use software or seek help from experts
Technological advances have made things quicker and more efficient now. Managing records by hand can be thorough. However, you should rely on software applications because they are more efficient. Better still, one can outsource the service to expert companies or individuals. These experts can take on the task while you focus on the core operations of your business.
These are some of the ways to mitigate bad bookkeeping of your SME’s financial records.