3 Common Problems of Bad Bookkeeping and their Solutions
Over my several years of experience helping small businesses with their accounting and taxes, I realized there was an alarming rate of neglect regarding bookkeeping. Some small businesses don’t have bookkeeping at all. Some have it, but they do bad bookkeeping throughout the year. In this article, I will be sharing three common problems of poor bookkeeping and their solutions. See below.
Cash flow problems
This is the number one problem emanating from bad bookkeeping or the lack of it. The financial health of your business largely hinges on excellent cash flow management. But without bookkeeping, cash flows are usually in perpetual shambles.
Good cash flow management ensures that you pay contractors on time. It also helps you monitor how your customers are paying you. Without this, you will struggle to know whether all your clients or credit customers have paid you on time. If you can’t control this, you may run out of stock unexpectedly, which can harm your business.
Overall, bookkeeping ensures that you understand and optimize money that comes in and goes out of the business. When you do this well, you can determine whether you are running a positive or negative cash flow. A negative cash flow means you are losing more money and a positive cash flow means more money is coming into your business.
Lack of business strategy
Sometimes I do live videos on my Instagram and YouTube pages, screaming, and airing my frustrations with small business owners who have poor bookkeeping practices. I scream because I know that, as soon as you get bookkeeping wrong, you have lost your company’s strategy. How?
Without consistent or professional bookkeeping, you simply don’t know your numbers. You don’t know how much money your business is making. You don’t know how much it is paying to various suppliers and service providers. You also don’t know which one of your products or services is bringing you the most revenue.
Therefore, without the above information, it is impossible to strategize. You won’t know which products or services need to get an increased marketing budget. You won’t tell if a product or service is making you more losses. You will not even know if your customers need you to introduce a new product or service.
This can easily get you out of business because your competition is busy doing bookkeeping, analyzing all the numbers, and creating new strategies to satisfy the customer.
Missing tax deadlines and filing errors
This is the third problem of bad bookkeeping or a lack of it. Now, this can result in penalties from the IRS and possible tax audits. All these two consequences are bad for your business because you may be kept under the IRS’ radar for some time. I have helped many people who had tax issues, so I can tell you that being under the IRS’ radar is not exactly an ideal situation for a small business.
Nevertheless, how do you miss tax deadlines and file taxes with errors because of bad bookkeeping?
Without proper bookkeeping, your records are incomplete. This leads to you struggling to file your tax return on time. You will find yourself rushing to gather all records for the past year before preparing your return. This takes a lot of time, which can easily result in late filing of taxes.
More so, as you rush to prepare your return, it is possible to make mistakes. If you submit returns with mistakes, they may be rejected by the IRS. In some cases, you will be audited.
And finally, saving money on taxes when your returns are rushed and have errors is impossible. You won’t be able to claim all deductions and tax credits without proper records.
How to solve bad bookkeeping practices?
You should use a monthly budget. A budget is an essential tool that every business should have. It guides how you spend your money and tells you how much you expect for a given period.
You should start practicing good bookkeeping so that you accurately track your expenses and income – as outlined in your budget. For example, promptly record all outward payments, including the money you pay yourself and your employees. You should also record all incoming cash flows so that nothing remains unaccounted for.
If you had bookkeeping before and made some errors, go back and check it out. Find out common errors such as omitting some transactions and details in some invoices.
You can also create a workplace culture ensuring that all employees contribute towards excellent bookkeeping standards. Some small businesses tend to send various employees to purchase a few supplies. There is no specific individual who does that.
For example, if a client comes through to the office for a quick meeting, today it could be the receptionist who takes the company card and buys coffee at the nearby coffee shop.
If the same happens in the next week, the CEO’s PA could run this errand. In the end, you have many people in the company who can handle unrecorded receipts in a single week. That is why a workplace culture that supports bookkeeping is essential. Each employee handling anything that affects the company’s finances should stop by the bookkeeper’s desk before proceeding with anything.
If you own a small business and need bookkeeping, contact my office now to get your monthly bookkeeping in order. We also prepare tax returns for small businesses, go to this LINK to find out more.
Frequently Asked Questions
- What happens when there is poor bookkeeping?
Poor bookkeeping messes up the company’s numbers or finances. There will not be clear records to create financial statements so that we can track and analyze a company’s financials. Without all this, the company also struggles to create new strategies and file tax returns on time or accurately.
- How do I fix messy bookkeeping?
This should start by analyzing your current bookkeeping. See if the process is clear and standardized. You should also check for past errors, for example, duplicate entries or categories as well as errors of omission and more. Once this is established, restart your bookkeeping, this time, following some standard operating procedures. You can also consult an accountant before you set up your new bookkeeping.
- What could be the possible outcomes of sloppy bookkeeping?
Sloppy bookkeeping may drag you into filing incorrect tax returns, resulting in penalties from the IRS. However, in the worst case, bad bookkeeping can lead your business into bankruptcy..
- Why do businesses fail to keep books of accounts?
A lot of small business owners are complacent when it comes to keeping proper books of accounts. This is the last thing they think about because they think focusing on selling or producing a selling product is the main function of running a business. But a business is not completely protected if its numbers are being ignored.
