Bookkeeping Red Flags and What To Do About Them

Bookkeeping is strategically important for every business because financials form the foundation for daily operations and future planning. Identifying and correcting bookkeeping problems allows you to find and fix problems before they escalate so you can move forward with confidence.

Inadequate bookkeeping can lead to serious and wide-ranging consequences including slow or poor decision-making, missed opportunities, inability to forecast and plan effectively, compliance risks, and loss of competitive position. This can destroy morale as well as your company’s ability to function smoothly and grow.

Here are some common business bookkeeping red flags.

Things Take Too Long  

Is that new marketing initiative boosting sales? Are the changes you made in the plant improving productivity? Do you have the cash you need to make a large planned purchase?

Delayed financial reporting restricts your ability to manage operations with the level of agility now required in many industries. It also hampers long-term planning. And if you are late filing payroll or other tax reports, you risk fines and interest charges–cash you could have spent on business development.

Delayed billing and ineffective collections are dangerous because they slow cash flow and can increase bad debt write-offs. Timely invoicing and follow-ups ensure you receive the revenue you earn, as quickly as possible, providing predictable cash flow to pay your monthly bills.

Numbers Do Not Inspire Confidence

Reliably accurate, up-to-date financial information is vital. Yet many business owners say they just don’t feel confident in the numbers they see each month or at year-end. Missing or improperly allocated transactions result in skewed reporting and can cause havoc during an audit.

Do these issues sound familiar?

• Discrepancies cause staff to spend too much time reconciling bank statements contributing to delay. Or, they avoid reconciling altogether, which only exacerbates problems once they are finally discovered.  
• Variances in financial statements from one month to the next require explanation, especially if you spot a trend. Are those fluctuations in revenue, expenses or your profit margin expected, or is there a problem somewhere.

Lack of Documentation

Growing businesses cannot afford to rely on anecdotal stories about “how we do things.” Nor can you grow successfully when key people keep key information in their heads. Documentation is a must because bookkeeping includes a wide range of complex activities. For example, tracking expenses and handling payroll can be particularly challenging. Documentation that describes each process and who is responsible is the only way to ensure consistency, especially if a new hire or temp has to handle the work.

Documentation should also describe internal controls–who is responsible for approving and/or reviewing certain financial transactions or decisions. In smaller companies with limited staff, it can be difficult to assign these roles. However, failure to adopt adequate internal controls is a serious red flag because it leaves your company vulnerable to fraud and theft.

Manual Data Entry

Doing anything by hand that could be automated is a poor use of staff time. Manual data entry opens the door to mistakes and omissions, and it contributes to delay. There are numerous bookkeeping and accounting software options available–be sure to choose one that not only serves you well now but can grow along with your company.

Poor Communication

Documenting your policies and processes ensures consistent communication among all those responsible for doing or reviewing the work. Consistent bookkeeping allows you to produce complete, accurate reports that effectively communicate financial status to department managers and top leaders who need to evaluate progress and make well-informed operational and strategic decisions.

You're Using a Cash Method

Cash basis bookkeeping seems easier, and it might be okay for your household budget, but information is the key to business success. Without accrual accounting that adheres to GAAP standards (Generally Accepted Accounting Principles), you are missing out on the deeper insights that could make a dramatic difference in your company’s future. Read here about transitioning from cash to accrual.  

Grow Your Confidence and Your Business

You cannot proactively manage your business without sound financial management, and that starts with bookkeeping. That’s true whether you’re a small business owner trying to juggle bill paying and recordkeeping with all your other tasks or your company employs several people in your accounting department. Reading this article may well have triggered a few uh-oh moments for you, but the truth is that there are many other potential red flags within the bookkeeping realm.

An experienced professional can help strengthen your company’s financial health by uncovering issues and offering actionable insights and assistance to resolve them.