It’s Monday morning; you’ve got your coffee in hand, and you got a great nights sleep last night. You get into the office early, and today you are determined to get to your accounting.
You settle into your chair and pull your accounting documents up on your computer. Just as you get started on your first task, your phone rings. One fire leads to another, and by the end of the day, you are no closer to getting your accounting straightened out.
Small business bookkeeping is one of the major stressors on small business owners. Not keeping your books accurate can eventually cost you more in the end.
To understand the cost of sloppy bookkeeping on your small business, you first need to understand bookkeeping basics.
Small Business Bookkeeping Basics
Bookkeeping is the process of keeping a record of a business’s financial transactions. This includes preparing financial statements, paying vendors and sending invoices.
Although the line between bookkeeping and accounting is slowly diminishing, there is a difference. Bookkeeping is seen as the recording of financial records, while accounting is the analysis of those records.
Whether you are a multi-million dollar business with thousands of employees or a small business starting out, accounting is an essential good business practice.
Single Vs. Double Entry Bookkeeping
Single entry bookkeeping is similar to what you do with your personal check register. You record when you take money from your account, as well as when you deposit money into your account.
Using this type of business bookkeeping will only work if you do not have a high volume of transactions.
Double entry bookkeeping is for businesses who have a high volume of transactions. The higher volume of transactions, the more complex bookkeeping will become.
For each transaction, two entries are made.A credit will be made to one account, and a debit to another. Checks and balances play a key roll in this type of bookkeeping.
Understand Equity, Liability, and Assets
Understanding these three are essential in understanding how to balance your books.
Assets are things owned by your company, such as inventory, equipment, or accounts receivable. Liabilities are debts or things owed by your company. This could include payments due to vendors or your mortgage.
Equity is known as the value in the difference between assets and liabilities.
Causes of Sloppy Bookkeeping
Small business owners wear many hats and it keeps them busy. As the saying goes, there just isn’t enough time in the day to get everything done. One of the first things to suffer is business bookkeeping.
Accounting can get complicated. It is essential to stay organized with both accounts receivable and payable. You aren’t in business to provide a service for free, and neither are your vendors.
Not staying organized can cause you to fall behind on bills or make double payments. It can also lead to incorrect or high aging reports (which means you aren’t getting paid).
It’s important to remain diligent, and make deposits when money comes in. Making a special trip to the bank may take time out of your day, but it will help keep your finances on track.
Waiting to deposit funds will create for more work once the funds are deposited. If a customer pays in June for services provided in May, but you don’t deposit it until July, you can’t close out that account for two months.
It’s also important to record all assets on your balance sheet. Not keeping record will create a mess when trying to reconcile accounts.
Whether its duplicated customers, vendors or financial accounts, having more than one causes more effort to remain organized.
If a vendor has two accounts in your system you could view the incorrect account that says its paid in full, when in reality you do have a balance with that vendor.
This can lead to damaged vendor relationships, late fees, and an incorrect accounts aging report.
The same goes for your customers (accounts receivables) and financial accounts. Having incorrect or incomplete information can cause you to make wrong decisions.
What is the Cost For Your Business?
Having disorganized and incorrect bookkeeping can cause a lot of stress. You already have enough stress as a small business owner.
In addition to stress, sloppy bookkeeping can cost your business a lot of money.
Increased Chance of Audit
Not having your bookkeeping organized, or done correctly, can lead to taxes being turned in late. This can cause a red flag to the IRS, which means you are vulnerable to being audited.
Not only can audits lead to fees and penalties, but they are time-consuming and costly. The IRS will request documentation for many different things, and if you aren’t organized in your bookkeeping, it can be a nightmare.
Late Fees and Over Draft Fees
Falling behind on bookkeeping typically leads to falling behind on bills. Paying bills late not only damages your reputation as a business, but can lead to late fees.
Zalmi Duchman estimates that since hiring a bookkeeper, his business has saved upwards of $1,000 per quarter on late fees.
Bookkeeping helps you stay on top of what you have in the bank. Not knowing how much money you have in the bank can cause you to overdraw your account. Not only will your bank not be happy with you, but you may incur fees this way as well.
Loss of the Big Picture
Your bookkeeping gives you a snapshot of your business’ financial health. Without having your records organized and up to date, it’s hard to determine the health of your company.
If you don’t know where your company is at financially, it’s hard to prepare for the future. You won’t be able to make key decisions that your company needs to grow.
Expensive to Fix
Once your bookkeeping is far behind (or done incorrectly), it can be a costly issue to fix. Not only are messy books complicated to fix, but it also is a time-consuming task.
If you are struggling to stay on top of your bookkeeping, it’s time to call in a professional. It will be worth your investment.
Balancing the Books
If you find yourself at the bottom of the deep hole of chaotic small business bookkeeping, it’s time to recruit some help from the professionals. Let us help you and your small business get back on track. Contact us today!