The Importance of Bookkeeping and the Danger of Not Doing It

When you’re a startup founder, you’ve got a million things to worry about. One minute you’re helping your product team streamline the user experience, the next you’re negotiating with catering companies for your opening night launch party. Understandably, bookkeeping is the last thing on your mind.

So let’s say you never get around to cleaning up your books. Maybe it just slipped your mind or maybe you thought “what’s the worst that could happen?” Spoiler: the worst case scenario is pretty bad for business. Even if you can handle the hefty fines, there are other issues that could spell trouble for your budding business.

You Become Blind To Your Financial Situation

If you eschew bookkeeping in favor of simply watching your bank balance, you’re only getting a tiny glimpse of the financial health of your business. Without ledgers, balance sheets, cash flow statements, and profit-and-loss statements, you won’t be able to spot opportunities or address problems that may arise.

Bookkeeping is necessary to provide a paper trail, which tells you exactly where your money is going and when it’s coming in. Without bookkeeping, you won’t be able to determine your break-even point or properly manage cash flow.

Financing Becomes Nearly Impossible

If your business is growing rapidly, you’ll need access to financing and you’ll probably need it fast. But if you don’t have your books in order, be prepared to hear a lot of “Sorry, we can’t help you.”

Both investors and lenders such as banks require proper financial records in order to finance a venture. Without those records, it’s unlikely that investors or lenders will offer to finance your startup. After all, would you lend money to someone who had no way of showing you that they would be able to pay you back?

You’ll Miss Out on Key Deductions

Handling business expenses sounds simple enough, until you forget to put something on the company card or a shoebox full of receipts goes missing. When mistakes happen, financial transactions often end up improperly categorized or not recorded at all.

Without proper documentation of your expenses, your accountant will have less information to work with at tax time. This means you’ll likely miss out on important business deductions and your tax return will end up being a lot smaller than you’d hoped.

Payroll Become a Nightmare for You (and Your Team)

You might think payroll is fairly straightforward, but just wait until an employee goes on maternity leave, you hire a part-time contractor, or an employee quits abruptly. Any one of these surprises could throw a wrench in your payroll system and make everything more complicated and more costly.

Without a proper bookkeeping system in place, you have no way of knowing if you’ve been paying your employees correctly. Those errors may carry over into year-to-date earnings reflected in the employee’s W-2 form, and lead to a tax nightmare for both you and your employee.

You’ll Make an Enemy of the IRS

Even if you’ve survived without bookkeeping thus far, don’t think that you’re in the clear. If you end up on the IRS radar for unpaid taxes, late taxes, or improper deductions, and you don’t have proper bookkeeping in place, you could end up with some hefty penalties.

In the event that you do owe money to the tax man and you’re unable to pay, a lien may be placed against your business or you might find yourself dealing with a collection agency—both of which can spell disaster for your startup.

When to Wave the White Flag

By now, it’s probably clear that letting the books slide is bad for business and bad for your own stress levels. But how do you know exactly when it’s time to send an SOS and call in a professional? You might want to look for the following red flags:

  • Using hand-written records
  • Relying on manual calculations
  • Not setting aside payroll taxes regularly
  • Bouncing cheques
  • Unreconciled accounts
  • Inconsistent reporting of transactions
  • Trouble with the IRS

The good news is, it’s never too late to get caught up. Whether you’ve let the books slip from the very beginning or you’re just a few weeks behind, a good bookkeeper can get you up to speed and make sure that bad books don’t impact your business.

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