Dangers of Bad Bookkeeping
Written By Geoff Burns
Lets face it. Unless you are a professional bookkeeper, CPA, CFO, or other financial guru, you didn’t get into business just to track transactions and create reports. You are in business to make a profit and live the lifestyle of a business owner. But in order to make a profit and live that lifestyle, you have to track your business through accurate books. It isn’t only smart, but required by law. So what happens if you don’t keep accurate books for your business? Let’s take a look at some common dangers of bad bookkeeping.
Business or Personal
One of the most common dangers of bad bookkeeping is failing to separate personal transactions from business transactions. Assuming you went through the process to officially create your business as a legal entity, you need to separate personal from business. You can loose the protection benefits that the business provides by intermingling funds. This can cause serious implications in the event of an audit or if you ever try to sell the business.
Another danger of bad bookkeeping is failing to track business expenses. Missing receipts and forgotten expenses increase tax liability and may cost the business even more. Along with failing to record these expenses is proof. Keeping your receipts is only half of the battle. You need to be able to recognize the purpose of the expense in order to verify its validity in the operation of the business. That two week trip to Hawaii to meet with investors may be a legitimate business expense, but only if you can show the business purpose. Otherwise, that is called a vacation.
Accounts Receivable (A/R) can be a source of danger for your business. If you don’t sent out invoices in a timely fashion, or fail to follow up on money that is owed to you, it is a recipe for disaster. Cash is king and if you have no cash, you are not the king of the business. In fact, you have no business. If you don’t know who owes you money, when it is owed, or what it is for, you are only hurting your business and making life harder.
Manage Your Books
Failure to understand how to manage your books is a danger of bad bookkeeping. If your books are not accurate, your tax filings may not be accurate, even if you hire a tax preparer. The numbers listed in tax returns are only as good as the data used to create them. And if down the road the tax authority finds your numbers are wrong, you may be liable for back taxes, penalties, and interest.
Not tracking your mileage properly is yet another significant danger of bad bookkeeping. If you are using a personal vehicle for business purposes, you need to track the miles properly. The IRS often believes that business miles are overstated in tax returns. One of the most common examples is the travel from home to work and back. These miles are not deductible, whereas miles drive for work once you reach your workplace can be deductible.
So how do you mitigate your risk for the dangers of bad bookkeeping? What are some ways to get on track and in compliance?
- Take a class or two on basic bookkeeping for your industry
- Utilize a quality bookkeeping software
- Hire a professional bookkeeper to teach you how to use your software
- Hire a professional to clean-up your books
- Consider hiring a professional bookkeeper to reconcile accounts, manage A/R and provide industry specific reports
Where to Go
If you are looking at hiring a bookkeeper or outsourcing your bookkeeping, remember that there are many people out there who claim to be bookkeepers. Not all bookkeepers are the same and each one has a different skill set. A quality bookkeeper may be expensive, but is an investment in your business. Talk to several professional bookkeepers and compare. Ask for a background check or even a credit check. A quality, professional bookkeeper will have no problem with you evaluating them. There are even many bookkeepers that work with only one or two industries. Consider a bookkeeper that is in your niche or at least has experience in your industry.
At the end of the day, the dangers of bad bookkeeping can all be mitigated. How you mitigate those risks depend on your exposure, needs, goals, and skill set. Make sure to evaluate your risks, weaknesses and areas of concern and develop a plan to address them. The investment of time and energy into your business is well worth the peace of mind that accurate books provide.