Why Accurate Accounting is Crucial for Businesses: The Consequences of Getting it Wrong

There are a multitude of consequences that tend to come up when the owners of the business are not on top of what is happening with the finances of the company. We aren't born with the knowledge of how accurate accounting benefits a business and, quite frankly, many new business owners don't appreciate the role accounting plays in the company's success.

Don't feel bad if this is the case with you as, again, we aren't privy to how beneficial accounting can be when we first get into business unless we were professionally trained in accounting before.

For this accounting "lesson", I am just going to come straight out and tell you some of the horror stories I have run into in my accounting career due to inaccurate accounting.

But before I start, if you are already in a pickle with your accounting, feel free to reach out to me as I can help get accurate accounting woven into your business.

I Have No Idea What's Going On With My Accounting

Let's start with the basics...when no accounting is present, it is pretty difficult to quantify how the business is performing.

I get it, putting an accounting system and accountant in place can seem expensive, but the consequences that come about by not having any accounting in place, way outweigh the initial and ongoing accounting costs.

If you knew just how easy it would be to set up your accounting in the first place, you would be kicking yourself if you ended up in any of these situations that come about because of inaccurate accounting.

How easy it is? From a very high level, your bank account tells 99% of the accounting story of your business, so just having an accountant set up your initial accounting system (hopefully QuickBooks Online), connect the bank, and manage the accounting for the transactions coming through the bank, is a major step in the right direction. This alone will give you a wealth of decisional information that you didn't have before.

A consequence of not having accurate accounting is that when there is no information available to understand something, we tend to freeze and do nothing. This is exactly what I have seen with my clients that have been in this position. They don't know what to do and their only gauge as to how to financially run the business is if there is money in the bank account. It's just not conducive to success.

Obviously, this is no way to run a business so my suggestion is to get some type of software in place where your bank transactions are running through and, an accountant preferably, managing the information.

The Consequences Of Being Everything

I have talked about this in other blogs, but entrepreneurs tend to try and wear multiple hats with one being hat being that of the accountant. Point blank, I do not suggest trying to do your accounting yourself if you are not trained in the field. It's like me trying to run your business when I have no idea what it's about.

Just think if you didn't have to focus on something that drains you, as accounting does for most people, and you were able to use that energy to put towards building your business?

It should be a no brainer! The benefits that will come from you clearing your plate of this tedious job will be much more than the cost of having accurate accounting.

Horror Stories Of Getting It Wrong

Over the last 32 years of my accounting career, I have had to clean up dozens of accounting messes and most all of them stemmed from either no accounting being done from the beginning, or someone that was not qualified, doing the accounting.

Back in 2005, I was hired as a subcontractor to compile the international accounting of a very large company. By using forensic accounting techniques, I was able to build all accounting records from scratch in both the U.S. Dollar and the foreign currency of the international entities, and eventually file 120 sets of tax returns and financial statements for 15 different countries dating back several years. This project took two years.

The problems created by simply not having the accounting set up for small international subsidiaries were millions of dollars in costs along with the Controller, of a major company, on the hook to go to jail in several of these countries. The estimated cost of getting it wrong was about $5M and several people's jobs.

One of the worst cases I have dealt with was with a start-up company in the CBD market located in Denver, CO. This company's CEO (non-accountant) tried to do the accounting for two years and turned their ability to get investors, into heaps of unsuccessful attempts.

Even though they were making a ton of money, investors wouldn't touch them because their accounting was so inaccurate.

Again, a company is in an emergency situation and is frantically trying to find someone to come in and fix everything when they should have had it right from the start. That is when I took on the project of overhauling all of the accounting since the inception of the company and getting the books to place where investors could trust what was being told to them.

The "highlight" consequence of this Wild Wild West company was when we had guns drawn on us because debt, that was never put on the Balance Sheet, was being collected on in an ugly way.

Not only did the company miss the chance to get investors in the door to build the business, but they were also not paying, off Balance Sheet debts and putting all employees at risk.

As the CFO of that company, I was never presented any of this information that was done off to the side. I found myself in a consequence that I never would have experienced if the business had started with ethical accounting practices from the beginning. Lesson learned.

Many of my clients have ended up with major tax consequences because of their lack of accounting. They either never filed their taxes because there was no accounting to back up a tax return, or their tax returns were wrong because the accounting had been done wrong.

One case in particular was with a chain of retail stores. For three years, this owner paid a bookkeeper a few thousand dollars per year to run all of the accounting. This was a multi-million dollar operation and the transaction load, let alone the fact that she had a bookkeeper, was too much to create any kind of accuracy.

Long story short, this client ended up having close to $500K in back taxes owed which eventually forced the owner to sell the business in order to pay off the taxes owed. Sadly, she put in all that work only to have to sell, solely due to not putting focus into her accounting at the beginning of the business.

Another big area that I find myself in, because of lack luster accounting, is fraud. When the proper controls are not in place and no one is "watching", the crooks will come out to play.

Over the course of my career, I have found tens of millions of dollars in fraud activity all perpetrated by, outside of the villian, the simple fact that there was no qualified accountant managing the information.

These big fraud hits to the bottom line will take out a business quickly, so avoid this consequence by having the finances of the business being monitored by an accountant.

Just Have Accurate Accounting

There have been many more experiences that I could go off on, but I believe you see the trend, accounting is important!

Because most of us think in the short term, we tend to think about the upfront costs and not about what these potentially large consequences could be.

With that said, if you want to budget out what your fractional accounting cost should be, I use 2-3% of gross income as a yearly cost target. This figure really helps a business scale up its accounting while still keeping the costs manageable.

Golden Pathway Accounting

Managing Director Golden Pathway Accounting