What Happens When You Don’t Use Proper Accounting Methods?

Accounting is the backbone of any successful business, without having a proper hold of your finances, it’s impossible to make sound decisions about your business.

However, many businesses don’t realize the significance of using proper accounting methods and often attempt to “wing it.” In other instances, business owners may feel like they’re doing an adequate job, but the truth is that accountants are highly qualified individuals, and it’s very difficult to perform the role of an accountant without the appropriate background of study and experience.

Neglecting proper accounting methods can have severe repercussions that ripple through every aspect of your business. From inaccurate financial data to legal troubles, the consequences of overlooking sound accounting practices can be seriously detrimental. This is why we urge all business owners to take it seriously.

Why Are Proper Accounting Methods Are Essential to Businesses?

Proper accounting methods serve to take a business forward in a profitable and manageable way.

They provide clarity into your business’s financial health, facilitate decision-making, and help in understanding the true costs and profitability of operations. 

When you maintain full and accurate records, you can effectively allocate resources, identify areas for growth, and demonstrate transparency to stakeholders. All of this is vital if you plan to scale your business. Let’s face it: you started your business to make money, right? Well, proper accounting is what will facilitate that.

What Happens if You Don’t Use Them – Potential Consequences

First, let’s look at what happens when you fail to use proper accounting methods. We won’t sugar-coat it. The repercussions can be serious and sometimes mean the end of your business altogether.

What Are the Impacts on Your Business Operations?

When you fail to use proper accounting methods, your operational efficiency can be severely compromised. 

Without the ability to view accurate financial data, it becomes challenging to monitor your cash flow, track any ongoing or one-off expenses, and allocate departmental budgets effectively. 

This can quickly lead to overspending but without the realization that you’ve dipped into the red. You will also miss easy opportunities for cost savings and fail to identify areas where you’re spending money unnecessarily.

Ultimately, it means an overall lack of control over the financial aspects of your business. It’s like shooting in the dark – you’re blind to your own business’s performance and stability.

What Are the Impacts on Your Financial Health?

Improper accounting practices can result in skewed financial statements that misrepresent the true financial health of your business.

Inaccurate financial reporting can lead to incorrect assessments of profitability, making it difficult to attract investors or secure loans. Moreover, the inability to understand your company’s financial position prevents the ability to plan long-term and puts the sustainability of the business at risk.

For example, you head to a bank to try and secure a loan. They naturally want all your financial records, which you are unable to provide because you haven’t kept them properly. You get turned down for the loan and are unable to take your business forward as a result.

In another scenario, your numbers on the surface could look good, profitable even. Therefore, you spend a large amount on business equipment upgrades. Then, like a house of cards, everything else comes tumbling down because the money was never there for you to spend in the first place. If you’d kept proper accounting records, you would have known that already and held off on the expensive purchases.

What Are Common Accounting Mistakes and Their Consequences?

We think you already know where this is heading, but let’s take a closer look at the consequences of financial mismanagement.

Not Properly Tracking Expenses Can Lead to Overspending

This is one of the most common types of errors in accounting. Failure to diligently track expenses can very easily lead to overspending. In our scenario noted above, you can see that it’s very easy to spend money that you think is available when, in fact, it’s not.

Inaccurate or inadequate expense tracking strains the company’s cash flow and hinders its ability to invest in growth opportunities or cover unexpected or sudden costs. Moreover, it puts your business in a very precarious position. Imagine you suddenly get hit with a large bill, but you are unable to cover it because you already spent the money on something else. What are you going to do in this situation if you have no money?

Misclassifying Transactions Can Result in Inaccurate Tax Filings

Taxes are no joke, and misclassifying transactions, whether intentionally or inadvertently, can lead to inaccurate tax calculations and filings. 

Tax authorities are unforgiving when it comes to mistakes and won’t hesitate to impose penalties or audits, causing not only additional financial strain but also consuming valuable time and resources to find which accounting errors must be corrected.

Not Separating Personal and Business Finances Can Result in Legal Issues

Mixing personal and business finances is a surefire recipe for disaster. There are so many things that can go wrong here when all you needed to do was open a separate bank account for your business’s finances.

Mixing business with pleasure can lead to legal complications, loss of liability protection, and confusion when trying to understand the true financial position of the business. How can you possibly understand the health of your business when it’s muddled up with your personal spending?

Avoiding Bookkeeping Altogether – Lack of Understanding of Your Financial Situation

Burying one’s head in the sand is certainly one tactic to deploy. However, neglecting bookkeeping altogether is a grave mistake. 

If you don’t keep any financial records, how can you possibly hope to run a business successfully? How will you have any idea of your profitability, financial health, and cash flow? How will you do your taxes correctly? Pay employees and invoices properly? What will you show when you try to secure a loan?

While it may seem like an obvious thing to avoid, we’re constantly surprised by the number of businesses that fail to keep financial records. But trust us when we say it never ends well.

Not Using a Professional Can Make It Difficult to Ensure Accuracy

Even if you’re a whiz with numbers, you still have many hats to wear as a business owner. While it can be tempting to save money and deal with the company’s finances yourself, you very likely don’t have the necessary time to dedicate to it. This quickly leads you down the path of inaccuracies and errors in accounting.

These accounting mistakes can accumulate over time, resulting in financial discrepancies that are challenging to solve. 

One mistake may be easily dealt with – if you spot it that this – but if an error is recorded in a journal many times over, this can quickly develop into a monster that you can’t take on your own.

There’s no way around it. Accounting errors must be corrected if you want to avoid incorrect tax filing, penalties, and non-compliance.

Failing To Reconcile Accounts Regularly to Prevent Errors and Fraud

Failure to regularly reconcile accounts opens the door to errors and omissions in accounting and potential fraud. Reconciliation ensures that your company’s records match the actual financial transactions, helping to identify discrepancies and prevent fraudulent activities.

Fraud is getting more and more common, for many organizations, it’s just part of running a business. But the key point here is that you won’t be able to spot fraudulent activity unless you have proper accounting and records that reveal it. 

What Are Solutions for Preventing Mistakes from Happening?

So now we know improper accounting leads businesses on the path to no return; what can you do to ensure that doesn’t happen to your business? Here are our recommended solutions. 

Importance of Consistent Monitoring of Finances

Regularly monitoring financial transactions and statements is essential. Additionally, if you Implement routine checks, you can identify errors early, allowing for timely corrections and preventing larger issues from arising.

How To Properly Ensure Compliance with Regulations

It’s crucial that you stay informed about tax regulations, accounting standards, and financial reporting requirements. Why? Because they change often, and what was correct last year may have changed this year.

Therefore, businesses should dedicate resources to ensure ongoing and up-to-date compliance is maintained throughout all financial aspects of the business. 

This will go a long way to ensure you avoid penalties and legal complications.

Tips for Staying Organized with Your Transactions

Maintaining an organized system for recording and categorizing transactions will streamline the accounting process and pretty much remove the likelihood of errors occurring. 

We recommend using proper accounting software such as Quickbooks, automating accounting and bookkeeping tasks, and establishing standardized procedures. This will help maintain consistency and ensure everything gets paid in a timely manner.

How To Implement Internal Controls

Internal controls are measures put in place to safeguard a company’s assets, prevent fraud, and ensure accurate financial reporting. 

Implementing internal controls, such as segregation of duties and regular audits, can mitigate risks and enhance accountability. If you don’t know which financial controls you need to put in place, an accountant will be able to advise you of this.

How To Ensure Accuracy When It Comes to Financial Reporting?

Ensuring accuracy in financial reporting requires a commitment to detail and precision. It involves regularly reconciling accounts, cross-checking data, and conducting thorough reviews of financial statements before distribution to minimize the chances of errors.

As we’ve already mentioned, proper accounting software will go a long way toward getting this part right. You should also establish processes for dealing with financial data so everyone within your organization understands when and how to provide the information.

Ultimately, though, nothing beats employing the services of a qualified accountant.

To get finances right, you need someone with the right qualifications and expertise. Without it, you can never be sure that your financial records and reports are accurate or compliant.

Benefits of Hiring an Accountant or Bookkeeper

As we have demonstrated, mismanagement of financial records due to a lack of expertise poses significant problems for all types of businesses.

Hiring a qualified accountant or bookkeeper is a great solution because they provide invaluable support in maintaining accurate records, ensuring compliance with tax regulations, and generating reliable financial reports. Additionally, their expertise can help steer the business toward financial success.

However, we understand that hiring a full-time accountant is a costly investment for a business and not always a practical choice. For example, many smaller businesses don’t have the need for a full-time accountant, remote businesses likely don’t have the office space, and startups can lack the funding to hire an individual and provide all the expected benefits.

The answer lies in virtual accounting. At EvolveCFO, we understand the issues that businesses face with hiring an accountant. That’s why we provide professional accounting services on an outsourced basis.

What does this mean for you?

You get access to the financial expertise and experience as and when you need it at an affordable price. EvolveCFO has several pricing plans to suit your needs with a range of add-on services to make it truly bespoke for your business.

There are no lengthy contracts, and you’re welcome to scale up or down the level of service whenever you choose.

Our accountants use cloud-based software to enable you to have access to the information whenever you need it.

In short, we offer a practical and cost-effective accounting solution that works for all types of businesses. Why struggle to perform accounting yourself when we can do it for you?

If you’re interested in learning more about EvolveCFO, we welcome you to get in touch and have a chat with our friendly team. We’ll help you decide which level of service is best for you and start you on the path of getting your finances straight.