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The High Cost of Poor Bookkeeping Systems

In a small business setting, it is far too common for paperwork and bookkeeping systems to fall to the bottom of the priority list. Business owners and managers often get caught up in the activities of each day: employee management, customer support, product development, marketing, and more. While these responsibilities are important, failing to keep up with bookkeeping and accounting can lead to big issues in the future.

How often do you have stacks of receipts or invoices that pile up on your desk? These piles of paperwork can be daunting, often resulting in the choice to push off the task until tomorrow. One day leads to another… before you know it, you are months down the road with a daunting project of sorting through all of the transactions that have moved through your business.

DIY Bookkeeping Won’t Save You Money

Often, small business owners will choose DIY bookkeeping as a way to save money. If you are working on a tight budget, then the cost of paying for a bookkeeper or accountant might feel like it is out of your budget. But the truth is that DIY often results in a disastrous outcome – especially if you don’t have formal training in bookkeeping.

The only time it makes sense to choose DIY bookkeeping is if you have the time and skills to ensure accuracy in your records. If you fail to keep the system current, or you are inaccurate in the data entry and calculations, then it will cost you quite a bit of money in the long run.

Bad Bookkeeping Systems Will Cost You Time and Money

Whether you have an outdated system, your books are a mess, or you aren’t doing anything with bookkeeping, now is the time to implement a system that works for the unique needs of your company. The truth is that inaccurate bookkeeping will cost you a lot of money – now and years down the road.

Here are some of the most common ways that you will pay unexpected costs due to poor DIY bookkeeping practices:

  • Mistakes: A few small mistakes here and there shouldn’t be an issue, right? Wrong! When profits or expenses are miscalculated, it has a domino effect on your financial reports, tax estimates, and overall calculations. Typos and errors start small in the beginning, but the snowball effect results in a messy problem several months or years down the road.
  • Incorrect Tax Calculations: Inaccurate bookkeeping systems will have a direct impact on your tax calculations. If you overestimate your profits and don’t calculate all of the expenses for the year, then it means that you are likely overpaying in taxes. Why pay more than necessary? On the other hand, underestimating taxes leads to issues with the IRS and could potentially result in files if you are audited.
  • Categorization Problems: It is important that all expenses and profits are calculated correctly. Claiming deductions that aren’t appropriate for your business could cost you a lot of money in back-taxes and fines when your books are audited by the IRS. Additionally, you need to ensure that all assets are categorized correctly based on income sources and profits.
  • Skipping Reconciliations: Just because you are entering and updating transactions as they are moving through your bank account, doesn’t mean that you are staying current with your bookkeeping systems. It is also important to maintain regular reconciliations, which is a step that is often missed when business owners choose DIY bookkeeping.
  • Misleading Financial Reports: When making big decisions for your company, it is essential that you look at the big picture. How much cash is available to reinvest in the business? How much debt are you carrying at any given time? Accurate bookkeeping reports show a real-time snapshot to give you a clear financial picture of your company. If you are making mistakes or behind with your bookkeeping entries, then these reports will be inaccurate. This misinformation can be dangerous in the way it affects your business cash flow. For example, you might choose to spend money on an unnecessary expense, not realizing that there aren’t sufficient funds to cover the upcoming overhead costs.
  • Higher Risk of Audits: One common mistake with DIY bookkeeping systems is that things don’t add up when the IRS is looking at your tax filings. Missing deadlines or having deductions that don’t make sense could increase the likelihood of an audit. If the IRS sees any red flags, then you could be facing an audit. It’s essential that your books are accurate so you can defend the numbers, otherwise, you could be facing expensive penalties and fees due to the irregularities found in the audit. Working with an experienced accounting team is one of the best things you can do to avoid an audit.
  • Miss Potential Tax Deductions: As a small business owner, you should take advantage of the benefit of maximizing tax deductions whenever possible. If you are spending money on business costs, then those expenses can be factored into the calculations when it is time to pay your taxes. A few missing receipts here and there can add up over the year, resulting in a situation where you are over-paying on your tax bill because you didn’t account for all of the expenses during the year.
  • Late Invoicing: When you complete the work for a client, it is essential to follow-through with a timely invoice. But a poor bookkeeping system makes it hard to keep things straight. If you don’t know which clients have outstanding bills and how much is owed, then it decreases the likelihood that you will be consistent in following through to get the funds that are due. Not only will it take longer for you to get paid, but you are likely missing out on money that should have been received. Too often, invoices are miscalculated or overlooked altogether because of DIY bookkeeping.
  • Late Fees and Overdraft Costs: If you are inconsistent with payments and you don’t pay attention to the account balances, then it is likely that you will run into issues with overdraft penalties and late fees. These small costs can add up to hundreds of dollars each year in avoidable expenses. They cut into your profit margin and also require additional time and effort to correct the problem.
  • Interest Costs and Cashflow Issues: Another way you are overpaying is because of the interest costs that are calculated on balances due. Whether you have a business loan or you use a credit card for business costs, the interest can add up over time. While it can make sense to use credit for building your business, don’t let poor cash flow habits make it difficult for you to pay off the money that is owed. Having an effective bookkeeping system gives you the benefit of staying ahead of the payments, which can help to reduce interest costs over time.
  • Payroll Errors: It’s no surprise that payroll errors result in employee dissatisfaction. Sometimes, DIY bookkeeping can cause delayed paycheck delivery or miscalculations that need to be fixed. Your employees will be unhappy if they aren’t being paid enough. At the same time, it costs your company money if you need to recalculate the paychecks and fix the errors. Additionally, you could be overpaying if the payroll calculations are too high.
  • Investors and Loans: When you are ready to take your business efforts to the next level, you need to have access to money through business loans or private investors. The problem is that a poor bookkeeping system doesn’t look good in the loan application process. Inaccurate financial records show your business in the wrong light, which will have a negative impact on your ability to get the financing that is needed.

Add up the costs listed above, and it is likely that you are losing out on thousands of dollars every year by choosing a DIY approach for your bookkeeping systems. When you consider the cost of investing in bookkeeping and accounting services, you will see that it is well worth the cost of these professional services.

Avoid Expensive Problems

The bottom line: DIY bookkeeping can be both time-consuming and expensive. If you don’t have the right system in place, then it will likely cost you a lot of money in the future to fix the problems and implement an effective bookkeeping system.

The best solution is to hire professional services right away. The sooner you start working with a bookkeeping and accounting team, the better success you will have with your financial tracking and recordkeeping. Get the right system in place so your business is ready for growth and expansion when the timing is right.

At Easier Accounting, we specialize in small business bookkeeping. Our team is here to assist with the financial details of your company so that you can focus on other tasks to help your business grow. Whether you need assistance with payroll, tax advice, or general bookkeeping services, we are here to help. Call us today to discuss the available services: (888) 620-0770.