Understand these 10 consequences of bad accounting practices and how to avoid them to reduce costs.
LONG BEACH, California, USA, May 2, 2022 /EINPresswire.com/ — If a company has financial problems, inadequate accounting may be to blame. A poorly managed or inefficient accounting process causes errors, which negatively impact the business. Learn about some of the common problems resulting from poor bookkeeping and the solutions to improve financial practices while minimizing accounting fees.
Consequences of sloppy books
If a business doesn’t manage its general ledger properly, it can struggle to run its day-to-day operations or face irreversible setbacks. The most common signs that poor bookkeeping is causing problems are:
1. Cash flow problems
If the business does not accurately track expenses and accounts payable, it will experience cash flow problems. He may be unable to make payments on time, incur late or overdraft fees, and have other cash flow problems that hinder business growth.
2. Missing tax deadlines
When a business’s financial records are not up to date, they will have difficulty filing their tax returns. They may miss filing deadlines or make costly mistakes in rushing to file their taxes. Serious consequences for missing tax deadlines can range from costly penalties to IRS audits.
3. Not knowing the financial health of the company
It is impossible to know the financial health of a company without precise figures. It is essential to have a detailed account of the operating costs of each department, the revenue a company brings in and from where, and the operational costs per dollar of revenue.
Outdated, sloppy, and inaccurate accounting reports prevent business owners and company executives from accurately understanding the financial health of the business.
4. Lack of financial strategy
A business will not reach its potential without a solid financial strategy in place. If they don’t track relevant information through accounting, they can’t create long-term financial goals or benchmarks to achieve.
Accurate weekly, monthly, quarterly, and annual financial reports are necessary to develop a financial strategy that benefits and grows a business.
5. Billing errors
Proper invoicing requires accurate pricing, time tracking, and payment collection. Charging customers the wrong price or failing to track late payments without effective and organized accounting practices negatively affects results and customer relationships.
6. Not in control of expenses
Business expenses must be tracked and approved for reimbursement. If there is no system in place to organize expense receipts or allocate funds to cover costs, there will be no clear picture of company spending habits. Overspending can quickly spiral out of control and reduce income.
7. Cannot make strategic pricing decisions
If a business does not accurately track employee time or business expenses, it cannot fully understand costs or profit margins. Not having a clear picture of these critical expenses can prevent business owners from developing a pricing strategy that maximizes profits. Having poor pricing models eventually leads to cash flow complications.
8. The risk of fraud increases
Without accounting policies in place, a business is at risk of internal fraud. Employees who are not controlled by accounting control or separation of powers can take advantage of their position and embezzle funds.
9. Lose Money in Fees
If the books are out of order, a business will likely lose money through fines and penalties, such as overdraft fees, penalties for exceeding the minimum balance required, or late fees from suppliers and other financial institutions. It could also face tax penalties for misrepresentation, record keeping issues or non-compliance.
10. Workplace culture suffers
A poorly managed office does little to boost employee morale or encourage efficient work in other departments. Workers may feel frustrated with time-consuming issues resulting from bookkeeping issues. Cash flow difficulties can lead to late employee payments or the inability to hire needed staff.
Companies are not the only victims of poor accounting practices. Even large cities have lost millions of dollars due to inadequate accounting. Take the example of the Philadelphia Inquirer where the city made accounting errors totaling $924 million in fiscal year 2017 alone.
Fortunately, steps can be taken to correct bad accounting practices.
Sloppy accounting can lead to serious consequences such as an audit, bankruptcy, stoppage of services or permanent closure of your business. If you are concerned about accounting practices, consider one of the following solutions.
The company may already employ a part-time accountant or other staff with accounting or financial experience. Consider developing a new full-time accountant role for an existing employee. Hiring internally allows you to choose from candidates who are already reliable and familiar with company practices, which reduces the risk of accounting fraud and creates a faster transition to the position.
Hiring internally can also reduce costs, as time and resources won’t be spent on outside advertisements, interviewing candidates, or thoroughly researching their references. However, there are still overhead costs, including health insurance and other benefits.
If there is already a full-time accountant, consider adding another to the team. The second pair of eyes can detect errors, help prevent fraud and take over the position in the event of turnover.
Use a CPA
A certified public accountant (CPA) must meet rigorous education, experience, and examination requirements to obtain their license. They also adhere to a professional code of conduct which requires maintaining objectivity and integrity while working with clients. A CPA can provide a company with auditing services and accounting advice and explain the tax effects of business decisions.
Most CPAs focus on advanced accounting practices and may not be interested in managing bookkeeping needs. The hourly rate for CPAs is also considerably higher than standard bookkeeping rates because they have a higher level of education and experience.
Outsource your needs
Outsourced accounting services allow a company to focus its resources where they are needed most. The business only pays the outsourced accounting or bookkeeping company for the services it provides, which lowers the cost of bookkeeping services.
The business will also save money on overhead, because it won’t have any additional expenses associated with hiring a full-time employee, such as health insurance or pension contributions. He can also call on the outsourcing company for experienced advice.