Does bad bookkeeping bring you out in cold sweats?
Do your business books deliver accurate, relevant, and vital information in a timely manner?
Are your business books an essential aid to the control of your business, or do they leave you puzzled and with more questions than answers?
So how bad is bad bookkeeping for your business? In this article we cover bookkeeping and how scary horror stories can be avoided.
Bookkeeping, a definition
The Institute of Certified Bookkeepers (What is Bookkeeping – ICB) describe bookkeeping as follows:
“Bookkeeping is integrated business system management.”The Institute of Certified Bookkeepers
I define bookkeeping as the foundation of financial control for any business. Good bookkeeping is vital, whereas bad bookkeeping is:
- Time consuming
It is important to understand the difference between a Bookkeeper, a Management Accountant, and a Financial Accountant.
- A bookkeeper primarily records transactions.
- A management accountant analyses and reports to provide stakeholders with relevant and timely management information to aid planning, control and decision making.
- A financial accountant is engaged in the provision of statutory financial statements.
There is commonly overlap between the roles. At the yearend, the financial accountant will appreciate a good set of books and high-quality management accounts to aid the completion of financial statements. At one client of mine, the external auditor looked at the management accounts being produced and exclaimed ‘those management accounts are awesome!”
Time is Money
In my view the role of a bookkeeper is frequently undervalued. Many business owners view the role as a necessary evil. The negative financial impact of a bad bookkeeper regularly applies when business owners choose bookkeepers on cost alone. Choosing a ‘cheap’ bookkeeper can be a false economy. Cost should be considered in tandem with the quality of the service, not in isolation. Time is also a key factor in the equation. A good bookkeeper will be efficient and cost effective. I have seen SME businesses with multiple ‘bookkeepers’ none of whom had the skills, knowledge or experience required.
Another occurrence is the business owner taking on the responsibility themselves, despite limited time and experience. Firefighting in this way should be avoided at all costs. At the very least engage a competent and experienced bookkeeper to set up the system for you. Then delegate it as soon as possible. Firefighting is using time and energy that would be best utilised elsewhere in your business.
Completing your own books is a huge waste of resource. How much is that costing you in time and lost opportunity? How much of an impact is that having on your business growth and your personal life? Life is too short, and your time is too precious.
The Core of Bookkeeping
At its core bookkeeping is recording every transaction in the books of prime entry via a double entry bookkeeping system.
Historically the books of prime entry were manual books and ledgers, but today bookkeeping is accounting software based. Behind the user interface the software processes the double entries, which means some of the skill and understanding of bookkeeping is hidden. This only becomes a problem when the bookkeeper does not understand the double entry behind each transaction. Multiply that by a few hundred transactions every week and suddenly it all gets confusing and overwhelming. Add in any bespoke idiosyncrasies of your business model and bang, it becomes chaos.
Apart from experience, knowledge, and skill there are certain personal qualities that are required to be a bookkeeper and those are:
An experienced and skilled bookkeeper with the right personality traits will deliver accurate, consistent, complete, and timely bookkeeping records to your accountant. They will protect your business as though it were their own and ultimately save you time and money, as well as headaches.
Bad Bookkeeping is Scary
So back to the original question, how bad is bad bookkeeping? Well, I have seen some real-life horror stories, including ‘bookkeepers’ who have:
- Paid the quarterly VAT liability twice whilst not paying the PAYE.
- Mismanaged suppliers by issuing duplicate payments whilst other suppliers cut off supplies due to non-payment.
- Incurred excessive bank charges by routinely issuing same day payments.
- Incorrectly posting bank payments and omitted the input tax (VAT) from the VAT Returns, therefore increasing the VAT liability.
- Incorrectly posting inter-company transfers to include output tax (VAT), therefore increasing the VAT liability.
- Failed to issue sales invoices to customers where goods/services have been shipped/supplied.
- Failed to monitor customer credit limits despite paying for and having access to monitoring systems.
- Posting nominal ledger transactions to the sales or purchase ledger.
There are the direct costs of duplicate payments, excessive bank charges and VAT errors. In addition, there are indirect costs incurred, for example when suppliers withdraw credit terms and stop supplying due to non-payment.
Contact me to review your bookkeeping and I will ensure you do not have any hidden horrors in your bookkeeping.