Starting a business can feel a lot like jumping from speeding car. It is a mixture of a leap of faith, timing, finesse and a lot of luck wrapped into one. Understandably, dealing with accounting is usually not high on many founders’ to-do lists. Part of being in the startup grind is really a matter of how many roles you can fill as the founder until you’re able to start scaling your team, accounting being one of them. The problem though is no one starts a business to become an accountant, which means accounting usually gets pushed to the back burner. So to help you steer clear of all of the fallen startups before you here are 5 reminders of why you need to stay on top of the books.
Bad bookkeeping can be illegal.
Bad bookkeeping or cooking your books can land you in some hot water, especially if you are bringing in outside investors. The majority of startups dream of closing their first seed round of venture capital, but before you start making your elevator pitch to anyone and everyone you should know that most operating agreements contain ironclad consequences for bad bookkeeping, including dissolving or liquidating the company or handing over majority shares to a business partner or shareholders.
Bad bookkeeping can lose an audit.
Small business owners in cash-intensive businesses are an easy target for IRS auditors. Experience shows that those who receive primarily cash are less likely to accurately report all of their taxable income. So the IRS has developed a guide for their agents to use when auditing cash-intensive businesses, explaining in detail how to interview business owners and noting various indicators of unreported income.
Also if deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. So to protect yourself keep your books in order and have the proper documentation for your deduction(s).
Bad bookkeeping clouds your judgment.
When you don’t know what’s right or wrong with your company, you’ll never know how to change it. That’s why accurate accounting is so important—understanding where your money comes from and where it goes in detail can carry you a long way. Lack of timely info about your cash flow can spell the difference between success and failure.
How else would you know if you could afford more staff or replace a piece of equipment if your finances are not up to date? With a concise picture you will be able to decide where to allocate your resources for the biggest ROI.
Bad bookkeeping can destroy staff & client relationships.
It may seem like no big deal to let some bookkeeping details slide. But when you lose control of your books, you can also have a negative impact on those you love most: your staff and clients.
It’s hard enough finding the right team members let alone keeping them. So it is key to make sure that your staff is being paid on time and that the proper payroll tax withholdings are being accounted for. Simple mistakes here can cost you in the long run with higher turnover.
I don’t know one company that is not driven by paying customers and if you’re service oriented sending invoices is the lifeblood of your cash flow. Proper invoicing is a huge part of keeping your books in order. Most businesses have a good grasp on getting paid; however, not having accounting safety nets in place could lead to an embarrassing mistake of late invoicing, duplicate invoicing or worse, not invoicing at all. This can be a detrimental mistake not only to your reputation but also to keeping your doors open.
Bad bookkeeping is hard to recover from.
Typically 40 percent of the time we spend with new clients goes toward fixing bad bookkeeping. That is because there is a compounding effect that comes with letting your books slide. Each month transactions will continue to accumulate. As a business owner you must go through a paradigm shift; most taxpayers treat their taxes as a once a year event whereas a business owner needs to treat them as a year round process.
As we’ve established above, there are many set backs that are associated with bad bookkeeping but turning things around might not be easy and will take a commitment to create new habits.
Know your limits.
Knowing your limits and being able to identify where your time is best spent in your business is a valuable asset as an entrepreneur. If you don’t have the time to dedicate to learning proper bookkeeping, then it’s time to outsource. You’ll notice this will effectively reduce errors and increase your available time to run your business.
[box type=”alert” border=”full” icon=”none”]Zach Olson is the Founder & CEO of TaxAlli.com. At Tax Alli, we pair you with real life accountants and use cloud software to make small business accounting awesome. So you can do what you love while we handle the rest.[/box]
Mario Schulzke is the Founder of ideamensch, which he started a decade ago to learn from entrepreneurs and give them a platform for their ideas.