Impact of Poor Bookkeeping on Business Performance
How incorrect Bookkeeping can diminish the Performance of a Business?
Poor bookkeeping is likely to hurt your business in a number of ways regardless of whether the business is profitable or not. Besides the missed opportunities, your business can incur more running expenses or plunge you into a legal situation. Knowledge of bad accounting practices can help you make the right decision in a bid to avoid improper financial record keeping. There are a number of factors which can be impacted due to ineffective bookkeeping.
Poor bookkeeping can have negative effects on how one conducts their business. For instance, you may find yourself paying your debts late, leading to higher interest rates, fewer payment terms, loss of credit and interference with your credit score or reports. To avoid all these, your bookkeeper should track all your cash flow as a way of managing your transactions easier for you. Effective reporting and cash management are all part of effective bookkeeping. Speak to your bookkeeper or review your bookkeeping services to ascertain what value the process is adding to the growth of your business.
Lack of Sales and Profits
Poor management of your business can make you lose access to good suppliers and vendors. Consequently, you may start losing sales as well. On top of that, a slowdown to your business may turn away your clients and customers who might end up looking elsewhere to meet their requirements. Other than feedback, customer relationship, and effective customer management your financial numbers are a huge indicator of your business performance. Increased churn rate, reduced payments, or an increase in a high number of low-value customers can tell you a lot about your business and its performance. Determine at the very beginning if all your business needs is a bookkeeper or a hybrid accountant who can help take care of your bookkeeping, accounting, and advisory services, as all three are highly interdependent.
Improper bookkeeping is a recipe for legal problems, especially where unpaid or late filing of your tax returns and inaccurate deductions are involved. Furthermore, lack of enough funds to pay your creditors can culminate into your business being pursued legally, with a legal claim against your company or debt collectors set loose on your business. Should you hire a bookkeeper without enough knowledge pertaining to tax policies, look for an expert in matters to do with tax to lend a hand in planning your yearly accounting procedures, make sure your bookkeeper communicated regularly with the tax accountant. This way, you will be able to have full control of your income, payroll taxes, and sales, as well as deducting expenses correctly.
Chances are, you may end up declining opportunities that can help you expand your business, improve your marketing and reduce debt on the assumption that you don’t have enough money. Take this example; supposing you buy £2000 worth of goods in the month of January, you will not have to settle the payment in the same month if it’s put on your credit card. Should you pay the balance every month, it is obvious that your credit card company will earn £2000 from you in February. Recording £2000 under your expenses in January and £2000 card payment as of February’s expense, your record will indicate that you have a total of £4000 in expenses. In actual sense, you will be having only half the total cost. This shows how important it is to have an eye on your cash flow as well as your accounting to be able to make proper decisions.
Reduced Decision-Making Opportunities
Keeping accurate financial reports allows you to monitor your departments, distribution channels, products and overall performance of your business on a regular basis. Balance sheets, budgets, cash flow statements, ledgers, receivables, payables ageing reports and statements on profits/loss all play a very significant role when it comes to spotting opportunities as well as addressing problems in a timely manner. All these are attributed to accurate bookkeeping as a way of running your business efficiently.
12 Helpful Tips to Enhance Bookkeeping
- Personal and Business Expenses
There are certain changes that business owners need to make in regard to sole proprietary business bookkeeping. These changes involve the use of credit cards for either personal or business needs. Such situations are common where personal expenses are recorded in the accounting software. However, this is a common mistake in bookkeeping software, resulting in problems when it comes to categorizing Personal and Business Expenses. To solve such a problem, you will have to open a new bank account and use it for your business expenses.
- Bank Reconciliation
As modern business income and expenses become digital (using NEFT, PayPal and others), every business owner is required to carry out bank reconciliation of the income, expenses, and other related transaction regularly. This tip is quite helpful in bookkeeping for business owners.
- Frequent Monitoring of Accounts Receivables from Customers/Clients
There are two categories of sales; the accrual and cash sales. In the case of accrual, business owners need to pay their attention at money receivables from their customers even if it means following them for debt recovery.
- Shift to Cloud Accounting Software
Shifting to cloud accounting software for your bookkeeping can help you in keeping abreast with real-time updates on your accounts through your web browser or mobile apps.
- Monitor All Slow-Moving Goods
There’s a need to monitor all the slow-moving goods. This is because the slow-moving inventories may bring some accounting issues, especially in bookkeeping due to expiry or damages. As such business owners have the obligation of accounting their inventories physically and then recording the results in their cloud accounting software.
- Use Online Banking
It is always a good idea to operate another bank account under your business name. This bank should have the functions for online banking to help you access vital information on transactions in real-time.
- Keep Records of the Petty Cash Expenses
Some business experience problems arising from keeping their petty cash records. This is due to the assumption that petty cash involves a small amount of money but without a proper record, there are risks of fraud. Hence, there’s a need to have accurate records of petty cash as one way of ensuring that your bookkeeping is on the right track.
- Use Suitable Accrual or Cash Method
The first decision that a company should make is to choose a suitable accounting method. This can be an accrual or cash method. Whichever method you settle on, make sure it works well for you in relation to bookkeeping. Speak to an Accounting Firm or your Accountant, if you do not have one look for an accounting firm nearby or a suitable online accountant, either ways speak to a specialist to figure out the most suitable option for you and why?
- Avoid Cash Expenses
This tip is helpful especially when it comes to the drawback resulting from cash expenses. These drawbacks include audit trail, lesser documentation for accounting, changes in the overlook of the expenses, and changes in the theft of liquid cash and so on. To overcome such problems, you can use chequebooks, debit or credit cards and any other useful method that can assist you in keeping track of expenses.
- Grouping Ledgers in the Right Way
Ledger grouping is essential in recording fixed assets, loans, capital accounts, and advances. Once the ledgers are grouped accordingly, it will make bookkeeping easier and effective for your business.
- Record Sales and Loans
Small companies can acquire funds from sales or from loans. That is why it is necessary to have a record of such funds raised from loans or sales. If you don’t do so, it is likely that someday you may be forced to pay needless income tax. Seek advice from a tax accountant to design the most tax-effective methodology for your business.
- Reminders of Deadlines
Business owners have the responsibility of keeping track of their payment deadlines. These payments can be payrolls, advance tax payment, labor expenses and much more. Therefore, it is important to have a record of reminders of deadlines to avoid the shortage of funds. You can achieve this goal by syncing HMRC’s deadlines with your own business calendar.
An effective bookkeeper working in collaboration with your Accountants and Tax Accountants, or a hybrid Accounting firm which can cover all of these needs without the need to go to separate individuals, can make a huge impact on the performance and growth of your business. A large number of businesses believe bookkeeping to be a data entry process and end up selecting unqualified people to do the work, regretting the decision in the long term. Make sure to set up a strong foundation from the beginning to avoid future growth and performance management problems.
Bookkeeping basics for Startups
Bookkeeping is the practice of systematically recording day-to-day financial transactions along with maintaining and organizing key financial accounts of the company such as sales, purchases, assets, liabilities, and inventory. It also involves storage and retrieval of all the financial transactions happening within the company.
In the modern era, companies are increasingly using bookkeeping software to ensure they maintain accurate bookkeeping practices. Efficient bookkeeping is only possible when one has enough knowledge about key accounting and bookkeeping terminologies and has the basic knowledge to decipher income statements, balance sheets and statements of profits and losses.
Bookkeeping can be very daunting and nerve-racking for startups, as most of the startups lack the necessary funds to hire an accountant in the initial phase, and due to this, startup owners are bound to meet their firm’s bookkeeping needs by personally taking this huge responsibility, however, every problem comes with a matching solution, and business owners can take on this challenge by learning the basics and importance of bookkeeping practices.
What is the importance of bookkeeping?
Businesses are required to retain an accurate track of all the financial documents and records for a long period of time. The financial information you record and store can be used for future references, either for legal, financial, organizational or tax obligations.
The books you keep are necessary for making well-informed business decisions whilst managing the finances and operations of the company. Without having sufficient knowledge about your business’s financial position and resources, you will always be unable to meet your desired business goals and objectives. Moreover, it is most likely that you will engage in poor decision making due to lack of information, that can later lead to the downfall of your business.
Seeking advice from expert bookkeepers can mean having the correct trackers, chart of accounts and processes in place to utilize your bookkeeping to the maximum possible limit.
How does financial bookkeeping help your business?
Bookkeeping will help your business identify the strong and weak areas of your business, that is the areas that are generating the most profits and those which are only adding up to losses. Thus, with the availability of such information businesses can work on cost-cutting methods, pricing reviews, and downsizing where required.
You need to know where you are heading and how much fuel you will be needing to reach your destination, efficient bookkeeping ensures that you are generating enough cash to keep your business afloat. It helps you identify which product is boosting your sales and also helps you discover the market trends, which in result can be very useful in spotting potential opportunities for the growth of your business.
What are the basic steps involved in a typical bookkeeping process?
Hiring an accountant is the best option that startup owners can avail to fulfil their bookkeeping obligations.
However, if you think your finances are not enough for you to afford an accountant or even if your budget allows you to hire one, but comes at the cost of disrupting your finance allocation in other areas of the business, then you should start doing bookkeeping on a regular basis yourself, by simply following these 4 basic steps:
1. Start collecting all of the financial documents and receipts such as your company’s bank statements, cheque records, receipts for purchases, bills from vendors and customer invoices.
2. After the collection, enter the figures and information from the financial documents into your company’s journal and ledgers.
3. Complete the required end of period procedures, balance your accounts and review all of the entries again.
4. After the reconciliation of your accounts, you may close the books for that accounting period.
Which accounting method will serve your company’s bookkeeping needs better, Cash or Accrual Accounting?
Before you proceed with choosing an optimal accounting method for your business, you should first confirm the nature of your business and the payment method for the services you will be providing. If you have a startup, with you as its sole handler, you might want to consider cash accounting as your ideal accounting system.
In cash accounting, you are required to record all financial transactions whenever the cash changes hands either before, during or after a transaction. You may consider switching to accrual accounting once you have built a strong team and have successfully passed the startup stage of your business growth cycle. Cash accounting is less time-intensive than accrual-based accounting.
However, you might want to consider accrual accounting if your business involves the offering of credit to customers or seeking credit from vendors or suppliers. You are required to record the transaction immediately in an accrual system, without waiting for the cash to change hands.
Bookkeeping if done correctly from day one can add tremendous value when building and measuring financial KPI’s. If you think bookkeeping is not adding value to your business you are not using your financial information to grow your business and in return are losing a huge potential opportunity.
Clear House Accountants are expert accountants and bookkeepers in London, being hybrid specialists we can build your financial systems so they provide value at each stage of your business cycle. We have in house experts who can cater to the regular compliance requirements for your business, or can design bespoke solutions using our IFIT framework, specific to your business problems. Contact us to learn more.
General Bookkeeping FAQ’s
Bookkeepers are responsible for the effective setup and management of the bookkeeping of an organization, which entails but is not limited to the effective setup of the chart of accounts and recording of transactional data in an organized way which corresponds to the relevant accounting and tax standards.
Yes, It is much better to select a hybrid accountant that can cater to your bookkeeping and accounting needs reducing the need for duplication of work and communication errors.
Effective bookkeeping can help you stay compliant, make important decisions using accurate data and track performance effectively.
Yes you can but make sure you are aware of key terminologies and the basic double-entry concepts, alternatively, you can use good bookkeeping software to make things easier.
This can vary depending on the bookkeeper’s qualifications, skills, and experience. Try and see the value a bookkeeper adds before making a decision on price alone. Charges can be hourly, fixed or based on a per-transaction basis.
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants, and has over 10+ years of experience in practice and across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. It was this dexterity that led him to be Enterprise Nation’s Top 50 Advisors.
Jibran is fueled by his passion for helping businesses. He unequivocally believes that as business advisors and accountants for our clients, it is our responsibility to work with them as business partners. As specialists, it is our duty to help our clients navigate through the complexities of constant change and the implications that come with it.
Over the past decade, innovative disruptions have changed the way businesses work, everything from cloud software, innovative business models, to AI and machine learning, have impacted how businesses operate, grow, and expand.
Jibran recognized the need to manage these disruptions sustainably, early on and shaped Clear House Accountants to not just be compliance specialists, but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.
Jibran developed his prime role as the Managing Director to build Clear House’s capabilities so it can add value for their clients. He is of firm belief that this can be done through consistent high-level training, building the right tools, and creating roadmaps to help businesses cope with prospective disruptions. He envisages that every client that comes on board, is provided maximum value through onboarding, ongoing services and the right mix of tools to help them become the best in the world.