Why Bad Bookkeeping Can Hinder Your Business Success

“[Accounting] isn’t all you have to do in business. But you have to do it.” ‐ Dave Ramsey ‐

Maintaining your books is like cleaning the bathroom: The longer you wait, the uglier it gets. Also like a dirty bathroom – especially if it is open to your customers – bad or no bookkeeping can put you out of business. Here is why:

  1. Better decision making. Well‐prepared monthly financial statements allow you real‐time information on income and expenses that will help you make better‐informed decisions about when and how to expand, hire, order more supplies, or adjust the throttle on sales and marketing.
  2. Improved cash flow. The number one reason why businesses are closed is lack of cash flow. Budgeting for the future is critical to making sure that the cash is set aside so that commitments can be met. Good bookkeeping is a key ingredient to budgeting and cash flow.
  3. Tax savings. The best way to save taxes is through quality tax planning before the tax year has ended. Poor bookkeeping creates financial chaos, which inhibits tax planning and could lead to missed write‐offs.
  4. Corporate veil. The corporate veil is what protects a business owner’s personal assets as separate from those of the business in case of a law suit. The corporate veil is critical for asset protection because it limits which assets are at risk. Comingling assets between personal and business accounts – or between one business and another – can negate the protection of the corporate veil and substantially increase your at‐risk assets. Faithfully keeping a separate checkbook and financial records for each business helps maintain the corporate veil by preventing the comingling of assets.
  5. Audit protection. Well‐kept financial records are critical if you are audited by the IRS. Properly keeping the books will help substantiate your write‐offs and reduce your risk in the case of an audit. As with lawsuits, comingled assets and bad or nonexistent records will cost you in an IRS audit.
  6. Sanity protection. When your books are a mess you know it. It lingers over you day and night, creates stress, and consumes mental and emotional energy which could otherwise be spent thinking and planning proactively.

What to do about it:

1. Open a separate checking account for each business, and be strict about only depositing to and withdrawing from each account for that business. Don’t deposit business checks into your personal account or vice‐versa. Don’t pay expenses that pertain to one business from the account of another or from your personal account, and don’t use the business to pay for personal expenses. Being diligent to keep expenses and deposits in their correct accounts will help keep your finances clean and organized.

  1. Decide who is going to do the books. Regardless of who you choose to do the books, assign someone. Even if that someone is you, there needs to be some accountability to getting the books done and done well. Otherwise it will be procrastinated and delayed until you have a mess that will stymie your ability to profit and grow your business.
  2. Just do it! As the famous saying goes, “He who has the better accountant wins.” OK, maybe that’s not a famous saying, but it is true. The business that has a better understanding of its margins, fixed costs, and cash flow will be able to make better long‐term plans and short‐term decisions, and will be better positioned than its competitors for lasting success.

For more information on how Basinger CPA can help you improve your business with stronger financial organization and reporting, call us at 435.200.5828, or leave us a message on any of our social media pages.

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