If you are not a trained accountant, you may run into trouble by trying to do your own accounting. Here are 3 serious consequences of bad accounting.
When first starting a small business, it may be difficult to turn a profit and so expenses need to be watched closely. New business owners often forgo the help of CPA firms to keep costs down, opting to handle the task themselves. With all the responsibilities a business owner has, it is easy for them to overlook a lot of important accounting details, especially if they have limited experience in the field.
However, even minor accounting mistakes can have serious consequences. Business owners are often unaware of what is at risk when they bring their accounting in-house. Below are three of the more severe ramifications that can come from bad accounting.
Tax laws are complex and change frequently. Whether it is a significant change like the one seen for the 2018 tax year or simple ones on the local level, keeping up-to-date with how to file taxes after each change is a challenge. It’s during these times that business owners are most likely to make mistakes when filing.
If incorrect information is discovered on a business’s taxes, then business owners could face expensive fees or penalty fines. If the IRS performs an audit, the business will probably face even more taxes than they had originally expected. It is rare for businesses to get out of an audit. The IRS selects cases carefully to make sure they are not wasting money.
Bad Business Decisions
A business will fail if it is not financially sound, and accounting is how a business monitors its performance. It can tell business owners where they are spending too much money if they are turning a profit, if there are theft issues, or help them determine when to hire employees. Put simply, accounting informs all major business decisions. When it is done improperly, business owners make ill-informed decisions that may ultimately cause their business to fail.
Issues with Cash Flow
Cash flow is the amount of money that moves in and out of a business on a monthly basis. Most startups fail because of cash flow issues, so business owners need to take monitoring it seriously. Businesses that do not use good accounting practices will not know if there is enough cash coming in to cover costs like payroll, office supplies, or utility bills. If they rely heavily on credit cards to cover these costs, they will face high-interest rates and may find themselves in overwhelming debt down the road.
The Bottom Line
Entrepreneurs are talented in a variety of areas. They are often highly skilled at customer acquisition and sales. However, unless they are trained, professional accountants, they may run into trouble if they try to do their own accounting.
A CPA is a valuable resource for both new and established businesses. They are well-versed in the latest tax laws and can quickly identify any financial issues a business may have on the horizon. With the help of a CPA, businesses can develop a solid growth strategy and ensure their future success.