The dangers of not doing bookkeeping stretch far beyond the financial impact on your business. If you don’t do any bookkeeping, or just for the sake of argument, you do some bookkeeping; you are running your business with blinders on. The absence of a clear understanding of your business’s financial health can seriously affect decision-making regarding hiring, purchasing, and other financially related decisions.
Why do you need to do bookkeeping?
If you stop doing your bookkeeping, you will no longer have a clear picture of your company’s financial health. Think about that for just a moment. How many decisions and business interactions require financial information to proceed?
- Tracking cash flow is near impossible without financial statements and projections. Cash flow is often misunderstood yet is critical to the success of any business. Cash flow issues are one of the most significant challenges small business owners face. 4 out of 5 businesses are likely to fail due to poor cash management.
- Applying for a bank loan or leasing needed equipment is impossible without up-to-date financial statements and a clear set of books. Your financing options will be limited. Lenders are looking for a clear economic history, including cash flow, debt, equity, and tax history,
- The importance of tracking business expenses should not be minimized. Understanding business spending, specifically expenses, can help the business owner monitor and predict costs looming shortly. Business expenses should be tracked through your financial accounting system and reviewed monthly as part of your income statement. Creating the habit of monitoring your costs makes for a clear understanding of your business spending, creates accurate tax-ready financials, and is critical in understanding your business cash flow.
- The challenges of sales tax reporting and payments! Without consistent bookkeeping, you lack a reporting system that will tell you how much you owe for each sale, as well as reports that summarize your sales tax requirements by state and/or jurisdiction. You will need a way to track and separate the sales tax you’re collecting from your customers, so you always have the proper amount set aside to submit when you file your sales tax return. There are now software applications and service providers that will help you track, manage, and pay your sales tax.
Can a business operate if you don’t do any bookkeeping?
We do not believe a business should or could operate without regularly performing bookkeeping tasks. For example, your balance sheet or financial position statement displays a summary of all your business assets, listed individually and with monetary totals. Then, your liabilities are listed separately and with monetary sums. The bottom line of your balance sheet will present your total equity. It would be near impossible to make sound financial decisions without this information. Financial reports provide you with different information that is important to understand how your business is performing. Are you making money but struggling with cash flow? Do you have cash flow, but your liabilities are growing?
Bookkeeping practices can mitigate fraudulent transactions
Fraud is something that most small business owners don’t like to think about and often think, “That can’t happen to me.” However, it happens far more often than business owners would like to admit. In small businesses, fraud results from a lack or absence of controls, which an employee exploits. A critical process that should be examined as part of a fraud review is how bills are approved and paid.
While SMB’s often don’t have proper bookkeeping controls in place, this can quickly be addressed by implementing basic bookkeeping controls, which are easy to execute. Best practices in any business require separating accounting functions so that no one person has control over the entire process. Automated bookkeeping practices such as Expex provide the ability to set access and administrative rights for separating accounting functions so that you can deploy controls within your business.
Employee theft can significantly impact small businesses and not just financially. Fraud and theft impacts all employees, profitability, and company culture. As business owners, we frequently look at our employees like family, creating a blindside and theft opportunity.
The taxman cometh!
We are unaware of any accountant that would welcome you to prepare your annual tax return when you don’t do any bookkeeping for 12 months. Will they do it? Of course, but historical bookkeeping will be both time-consuming and costly.
If your business is audited and you do not have up-to-date books, that audit will be horrendous. IRS audits require detailed financial information and proof of bookkeeping or accounting records and financials, specifically for expenses and deductions. Keeping accurate records with receipts prepares you and your accountant for a successful and stress-less audit.
Avoid an IRS audit
Earlier this month, Inc. Magazine authored an article stating,
The IRS announced in late 2020 that it will increase tax audits of small businesses by 50 percent in 2021. At a time when many small-business owners are still scrambling to find relief from the coronavirus pandemic, this is likely the last news entrepreneurs wanted to hear. Fortunately, even though tax audits sound scary, there are solid strategies businesses can put in place to eliminate tax mistakes and avoid an audit this year. Specifically, good record keeping!
Don’t put yourself and your business in harm’s way. Getting started with understanding your financial reports begins with making sure your reports are current and accurate. You need more than a bookkeeper to perform financial tasks. We want you to be successful, and we know what it takes to do that. Time spent on bookkeeping and financial tasks requires both time and knowledge. Hire Carly, and we will do the bookkeeping for you. Then you can return to spending time on building your business!
About Expex
Expex, based in Schenectady, NY, offers convenient and innovative bookkeeping services to help your business succeed. Our application, Carly, can do everything a traditional bookkeeper does and more. This financial management program expertly delivers bill payments, bank and credit card reconciliation, and financial records consolidation. Call (518) 389-2305 today to get started, or contact us to learn more about Carly.