We love straightening out messy books.
When a client comes to us and needs us to clean up their accounting files we get a certain satisfaction from putting everything in the right place and giving the owner a clearer picture of their company. Unfortunately, the client who tried to save some money by doing the books themselves realizes that poor bookkeeping increases their accounting expenses exponentially.
So it got me thinking: how could they have known that their bookkeeping costs go beyond just the hourly rate they pay their bookkeeper? So we came up with our list.
Symptoms of Poor Bookkeeping and How It Can Cost you Big Money
Incorrect cash balances: We’re surprised how often clients don’t have accurate cash balances on their books because they been reconciled regularly, leading to costly overdraft and embarrassing bounced checks.
December whiplash: Often when we look at client’s financial trends we see huge profits or losses in December a.k.a. “the December whiplash effect.” Typically, the CPA does all the year-end and “clean-up” entries to client’s books in the month of December. It costs the clients money because they really don’t know their true YTD profit/loss until after the year is closed– not to mention the large bill from the CPA for their time trying to make sense out of the numbers. Owners should have these entries matched to the time period in which they occurred.
Open door for fraud: We’re surprised how many owners give their bookkeepers cart blanche access to their bank accounts, including the ability to write online checks and make purchases on their behalf. While this may be a great convenience for the owner, it is also a huge risk which could cost them thousands or hundreds of thousands of dollars of losses. Simple steps like limiting access, opening and reviewing all bank statements for unusual transactions and separating duties are ways the business owner can protect themselves and their companies.
Over-inflated profits: One of the clean-up entries that CPAs make at the end of the year is grossing up payroll. A common mistake is to enter net payroll as wages, so you never really know what you’ve paid your people and your tax liability until the end of the year.
Monkey-in-the middle: You know the scenario—you have a CPA and a bookkeeper. The CPA has questions and you have to go to the bookkeeper for answers. Or, worse, they have some serious differences of opinions on how you should handle a type of transaction leaving you to figure out who is right. Where’s the profit drain in all of this? You are stuck in the middle, spending your time away from the business, and the CPA and bookkeeper are running up bills while they debate.
Flat financials: Every financial transaction is rich with data, but few bookkeepers know how to extract it. Without details of product or customer profitability, you are probably leaving money on the table, whether it is in lost profits or opportunity costs of missed revenues. Having a knowledgeable person doing your books that can give you these types of details can help you get the laser-focused reporting you need to identify and capitalize on opportunities to improve your bottom line.
Surprise- surprise: Poor bookkeeping has also led to many a cash flow surprise. Unbilled (or late-billed) invoices, vendor bills that got lost and surface just when you are in the middle of a cash flow crunch, can cause havoc when you are trying to make payroll.
Constant owner intervention: “High maintenance” bookkeepers, i.e. ones that need constant supervision or review of their work, cost business owners a lot of money. From extra hours of pay due to inefficiencies, to the time it takes the owner away from managing and growing the business, an unskilled bookkeeper ‘s costs often are a multiple of their wages.
Forget it– I’ll just do it myself. A common response for when people don’t want to invest in outsourcing their accounting. While this may seem like a cost-saving measure, when you think about it, it really isn’t. Whether the owner doesn’t see the opportunity cost of not investing that time to manage and grow the business, to the errors and large “clean-up” bill they get from their accountant at year end, to the saddling of a non-financial office manager with bookkeeping, the money saved by keeping bookkeeping in the wrong hands quickly dwindles when all the other factors are taken into consideration.
Does any of this sound familiar to you? Sometimes it is worth it to talk to professionals. Even though they may seem like they are “expensive” when you factor in the costs of poor bookkeeping, they may seem like a bargain after all!