Bookkeeping is a necessary function when it comes to any business. Without the books, you have no numbers and without the numbers, you have no point of reference; you can’t even complete basic tasks such as submitting tax returns. So what happens when you have bad bookkeeping practices in place? Well to be frank, your business suffers. To prove it, here are 16 ways that bad bookkeeping hurts your business. Avoid these and you will be the superhero that your business needs.
- Missed Expenses: The goal with every tax return is to maximize your expenses so that you are reducing taxes owed. Miss even one and it can have a tremendous impact. Year in and year out, it astonishes me how many expenses small business owner neglect to claim. I can think of about 20 right now that most people miss (queue another article).
- Late Filing: If you don’t file on time, you will pay interest and penalties and they start the day after the due date. As if the added costs weren’t bad enough, a late filing is an automatic red flag for the CRA (or IRS for our American friends) that brings on a potential audit.
- No Paper Trail: If you don’t have your receipts organized then it becomes difficult to claim expenses. On top of that, if you make a claim and don’t have that important paper to back it up, you will be denied your claim and you be fined a hefty amount.
- No Information with Receipts: Having receipts is one thing. Having the correct supporting information is another. avingHaving In many cases, a receipt alone does not constitute proving a business expense. Every expense has to be reasonable and must be for business. If you have receipts for taxis, meals or entertainment (to name a few), you must indicate on the backs of the receipts details like the client you are meeting, the times and the reason for the meeting. Should you be audited, you can prove that that taxi ride and that dinner was indeed a business expense.
- 16 Ways Bad Bookkeeping Hurts BusinessNot Separating Personal from Business Accounts: This can make life difficult during an audit. Don’t like the word difficult? How about stressful? Or unpleasant? Regardless of what is makes your life, it is much easier to prove and reconcile accounts when the ins and outs of the businesses cash are running through their own unique accounts.
- Not Keeping Old Records: Financial records must be kept for 6 years. Here is an example of why. Should you be a business that didn’t file HST as you were below the income threshold in previous years, but now you charge HST, your accountant will want to check those past returns. The more information you have the more armed you are.
- Not Tracking Labor: Have a system to track labor is crucial to good business. Every minute costs you money. When you have staff that signs in early or signs out late, those minutes add up in a year. You also want to be prepared should you have to do your own labor audit. You need numbers and you can’t get them if you don’t track them.
- Mistakes in Payroll: Make sure that your staff are being paid on time and that the proper deductions are being taken off. Simple mistakes here cost you money as well as good employees which can have a long turn negative effect on your business.
- Lack of Bookkeeping Knowledge: You need to know the different guidelines and rules to manage your books properly. Knowledge of compliance keeps money inside your business by minimizing errors and lost time.
- Late Invoicing: If you invoice late, this sets a particular standard and tone for your business. A good business sends out invoices quickly or routinely. Cash in the account is better than cash left on the table.
- Forgetting to Charge HST: For our fellow Canadian business owners, you must charge HST when your annual sales exceed $30,000. If you forget or you charge it on only a portion, you will need to reconcile your invoices otherwise you risk being audited. Even if you are not, it is money out of your pocket come time for remittance.
- Not Updating the Books Regularly: If you are not updating your books regularly, then you are unable to make proper business decisions as the numbers are not current and relevant. How do you if you can afford more staff or replace a piece of equipment if your finances are not up to date? A successful business has accurate and up to date information. Not to mention lost revenue from lost time when you have to catch up on missed bookkeeping.
- Not Counting Inventory Regularly: Inventory needs to be counted regularly. Overstocking or under stocking cause your business to lose money. If you are not tracing your inventory then you are not tracking your cost of goods sold which play a huge role in your businesses profitability.
- Improper Logging of Vehicle Expenses: If you use your vehicle in business, you need to keep a log of the km driven. This is an expense that is often overstated and the CRA/IRS knows this. That is why they pay such close attention to it. It is not a business expense if you are driving to and from work. Not knowing the rules and not having accurate numbers can increase your chances of loss during an audit.
- Having your Accountant Organize your Records: Accountants are expensive so the last thing you want to do is use up their time to organize your records. Make sure your records are up to date and nicely organized so that you can give them only what they need. This will save you a great deal of money.
- Not Knowing your Limits: If you are the DIY type and you don’t have the time to dedicate to proper bookkeeping, then you need to know when to outsource. If you can’t learn things like the necessary guideline and rules or how to manage your data systems then spending a little for help will save you a lot in the long run. You will effectively reduce errors and increase your available time to run your business.
In the end, good bookkeeping will be the difference between a successful business and an unsuccessful business, especially in terms of longevity. Combatting many of these pitfalls can come in the form of staying diligent, organized and up to date.
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