Bookkeeping provides organized, detailed, and transparent financial records for businesses. It provides a map of the company’s monetary situation that business owners can use to find paths to success. This is why accurate bookkeeping is essential. If a company’s accounts have missing or incorrect information, its leaders won’t be able to make the best possible decisions. In addition, seemingly small financial decisions can have a snowball effect, building into a larger issue through time and development. Some businesses, like law firms, can face serious consequences because of bad bookkeeping, including liability for poor client and case management.
Here are a few consequences of poor bookkeeping that can have ripple effects throughout your organization along with steps to overcome bad bookkeeping habits.
1. Sudden Financial Loss
An essential part of bookkeeping is tracking a company’s expenses. Company leaders need to know how much money they are spending to set goals for profitability. These leaders also use bookkeeping records to set budgets for different teams.
If there are missing or incorrect expense records, the company might spend more than it realizes. This can lead to overspending because management thinks they are still within budget. If spending mistakes go unnoticed, the company might experience a financial loss at the end of the month or quarter — whenever it does its financial records.
Small bookkeeping mistakes can add up and have a significant effect on a company’s profits. At the very least, errors create internal confusion about budget reports, but they can also lead to falsities in public financial statements, creating serious ramifications for investor confidence and regulator attention.
2. Compliance Issues
Businesses have to follow strict reporting guidelines to stay compliant with the Internal Revenue Service (IRS) and other federal organizations. Unreported income is a form of tax fraud that can lead to penalties and fines by the IRS. If a company can’t keep track of its profits and report them accurately, then it is committing fraud — even if it is unintentional.
Poor bookkeeping can impact employees too. If companies can’t keep up with what they pay their employees and contractors, they could issue incorrect W-2 and 1099 Forms. This creates extra work for teams that now have to ask their employers to reissue these tax forms with the correct information.
3. Misguided Decision-Making
Companies rely on accurate bookkeeping data to make decisions throughout the workday. They check multiple key performance indicators (KPIs) to make sure the business is on track. When one of these metrics is off, they investigate what is going wrong and why.
For example, before approving an extra operating expense, a department head will look at the current monthly spending to make sure they can afford it. When evaluating which marketing channels to invest in, business leaders will calculate the return on investment (ROI) based on what the company spent to bring in new customers.
Bookkeeping errors can cause companies to make faulty assumptions which lead to incorrect decisions. They could experience poor resource allocation, misguided strategic planning, and confusion between teams because of bad reporting.
4. Strained Business Relationships
Poor records can lead to poor payment practices within an organization. A company could lose invoices or forget to record them, causing missed payments. The vendors, creditors, and referral partners then have to contact the organization and remind them of the bills that are due.
Everyone makes mistakes, so the occasional missed invoice will be forgiven if it is eventually paid. However, if poor bookkeeping becomes a pattern, a company can develop a bad reputation for not paying vendors on time. This could prevent partners from working with the company in the future.
5. Missed Growth Opportunities
Good bookkeeping can provide a clear picture of a company’s health and performance, which allows business leaders to make decisions for growth. Without clear financial records and benchmarks, a company could miss out on potentially beneficial opportunities to expand, bring in new customers, or increase sales.
For example, if a company over-records its expenses, a department head might not take advantage of a promotional strategy or try a new software tool due to the assumption about their lack of funds.
Poor bookkeeping also takes time. Companies will spend more time trying to get organized and correct their recording mistakes, which gives leaders less time to brainstorm ways for the business to grow.
6. Reputational Harm
Bad bookkeeping can have direct and indirect consequences for a company. Directly, the company risks IRS fines and late payment fees from vendors. Indirectly, the business risks its reputation.
- Vendors will be wary of working with a firm that doesn’t pay on time.
- Job candidates will worry about working for a company that has poor payment practices.
- Investors will be concerned or even suspicious of a company that seeks funding from them.
- Even customers might be put off by an organization if it is known for money mismanagement.
It is much easier to develop healthy bookkeeping habits than to rebuild your damaged reputation. Once people lose faith in your organization, there’s no guarantee they will ever trust it again.
How To Optimize Your Bookkeeping Practices
Bookkeeping doesn’t have to be an arduous part of business management. Your goal is to optimize your processes to make recording expenses and income easy. The more you streamline your operations, the less overwhelmed you will get whenever you need to audit your books.
You don’t have to get stuck with a pile of invoices and receipts at the end of the month. These good habits can help.
As you implement these bookkeeping best practices within your business, keep an eye on their impact on your business. Notice how your teams better control costs and are less likely to go over budget. See how much easier it is to make decisions or review financial reports. You might even watch your revenue grow now that you are making accurate business decisions. These infrastructure changes can benefit your business in several ways while also lowering your stress levels over managing your books.
Create a Bookkeeping Schedule
Start by creating dedicated times to keep your books up-to-date. The more frequently you do this, the less stressful these bookkeeping meetings will be. It’s easier to go through a week’s worth of invoices and receipts compared to a month's or quarter’s worth of records. Schedule an ongoing appointment to review your books, with larger quarterly check-ins to audit your work.
This bookkeeping schedule doesn’t need to be managed by one team. Every department can follow this best practice and balance their books on a weekly or monthly basis. Consider creating a checklist for each team to follow to make sure every department follows the same format. You can also schedule regular training sessions to go over bookkeeping best practices on a department level.
Outsource Your Services
If these tasks continue to be onerous obstacles within your company, you can outsource your bookkeeping to an expert instead. Bookkeeping firms specialize in managing accurate records and will happily take this chore off of your hands.
As you look into bookkeeping firms, see if there are any available that concentrate on your industry. For example, if you have a law practice, you can find specialized accounting services for law firms. This ensures that you are working with a vendor who understands the subtleties of cash flow and expenses in legal practice, along with industry requirements like IOLTA compliance and privacy needs.
In addition to bookkeeping, you can choose to outsource a broader range of financial activities, even the strategic oversight of a Chief Financial Officer (CFO). Hiring an outside CFO has many benefits for small companies that can’t afford to fill such a position in-house. A fractional CFO service can work as needed to help your firm grow and overcome challenges as they arise, without the need to have a full-time executive on your payroll.
Implement Software Solutions
Another option to streamline the bookkeeping in your business is to invest in modern accounting technology. Software tools can automatically record expenses and compile them into reports. Some of these tools make it easier to send invoices and pay bills that are due. When the majority of your books are in one place, you can quickly audit, organize, and review each record.
This is another instance where industry-specific software can help. For example, law firm accounting software comes with dedicated features that can help lawyers keep track of clients and record the hours worked for each one. This is a better option than trying to force a generic bookkeeping tool to meet your needs.
Bad bookkeeping can ruin your company’s reputation. Eliminating bad habits by following these steps can protect your business, your employees, and your clients in the long run.