Vlad Rusz is a CPA at Centaur Digital Corp, helping busy business owners efficiently manage their accounting systems.
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If you run a small business, bookkeeping is a time-consuming task that can be easily outsourced without significantly impacting daily operations. Your accountant might balk at this concept, but you can run a successful business without day-to-day bookkeeping. However, you still need bookkeeping, and this task should be handled by a professional.
Good bookkeeping provides a host of benefits that often go unnoticed unless something breaks down. In an effort to encourage clear, competent bookkeeping, let’s consider five possible negative effects of poor bookkeeping on a small business.
1. Missed Tax Deductions
A primary motivation for small-business owners to secure bookkeeping services is so that they can file their taxes. Without using a double-entry accounting system, there is no quick and reliable way to spot and correct errors. This can result in inaccuracies in your tax return and likely missed tax deductions as well. Choosing to skimp on the bookkeeping fees may mean you end up paying the difference—or more—in taxes.
2. Poor Pricing
If your business has low margins, lack of clarity around costs may result in pricing products or services below cost. While most small-business owners can intuit how much they should charge, having a source of truth for all business expenses can help validate inklings with actual information. Bigger businesses specifically need good bookkeeping to maximize profits.
3. Cash Shortage
While bookkeeping typically deals with historical numbers, it can provide helpful context for budgeting and financial projections. Sometimes, trying to intuit monthly expenses can be difficult, making the rough calculation prone to underestimation, which can lead to future cash shortages. Ensure you have in place a reliable bookkeeping system and/or an effective budgeting system to avoid cash shortages in your business.
4. Lender Problems
Robust bookkeeping can be useful internally, but larger issues and discrepancies may be revealed when financial data is shared externally, such as with the government for taxes, lenders for loans or potential buyers. When trying to secure a business loan, a lender will typically require financial documents. Further, the expectation is that these documents align with your tax return. And while it’s possible to get a loan without bookkeeping, in my observation, you are likely to pay a higher interest rate and be limited in how much you can borrow.
5. Lower Valuation
If you are trying to sell your small business, buyers will want clear, accurate financial documents on which to base their valuation. Without proper bookkeeping, it may be more likely that the business will sell at a lower amount. To help maximize potential profits from the sale of your business, ensure your bookkeeping is accurate and up to date.
While a small-business owner can successfully run a business with minimal or no bookkeeping, the costs of doing so may not be explicitly evident. Given its low-cost nature and the prevalence of automation, bookkeeping is a service that most small businesses can outsource affordably. The benefits of a good bookkeeping system might be subtle, especially when it’s running smoothly, but having a clear, simple system in place means that you, as a small-business owner, can avoid unforeseen issues such as missed tax deductions, poor pricing and cash shortages, among others.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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