If you surveyed business owners for their feelings about accounting, you’ll likely get a mixed bag of responses. While some embrace the financial world and use it as a learning tool, others dread it and think of it as a necessary evil, and then there are those who are just too terrified to check on their finances altogether. Love it or hate it, your business can’t live, let alone thrive, without a good accounting backbone so it’s important to put a solid system in place that you can trust.
Like your physical backbone, your business’s bookkeeping records need to be in good shape for you to be healthy. At the very best, using the wrong solution to manage your business’s books will create unnecessary barriers to growth that cost you time and money… At the worst, a mistake like this can riddle your business with crippling financial inconsistencies and a backlog of compliance afflictions.
Many businesses re-evaluate when they find that day-to-day bookkeeping and financial reporting is taking up too much time. However, before that realization tends to hit there are a few other omens that signify larger problems with the ways you’re keeping track of your financial accounts:
6 red flag accounting scenarios your business shouldn’t overlook
1. Problems getting the data you need to assess performance:
When you run a business you usually have a general notion of how things are going, but trusting your pure instinct is never enough, nor is it smart. To regularly gut check those good vibes business leaders should turn to the numbers. A huge sign your system is flawed can be clear right away when you start asking these pointed questions but can’t get a solid answer from your financial reporting.
The right accounting or bookkeeping process should make it easy to interpret financial data without having to mine through irrelevant minutiae. At a glance, your accounting system should give you an idea of whether your business is heading on an ideal path or not and, from there, you should be able to dig in on any areas that require further thought.
“indinero’s software is unlike anything else. It’s the only accounting solution where you can look through and everything is always up to date and easy to interpret so we can access the information we need.”
– Wade Foster, co-founder & CEO of Zapier
2. Inaccurate or outdated financial reports:
In some ways, your accounting is a bit like a plant. You need to tend to and prune it regularly to keep it blooming. If you aren’t giving your accounting adequate attention, the information you get from it will be equally inadequate. But you don’t ask your desk succulents to tell you about the financial health of your business (if you do, please start a YouTube channel about it).
A quick side note: An estimated 90 percent of small businesses are unable to produce reliable financial information. You don’t need to be a statistician to tell that this indicates a pretty large, gaping hole in knowledge at the vast majority of startups.
As mentioned in #1, your financial records should be the records you turn to for reassurance. One could even argue that getting false or deceptive information can be even worse than nothing at all. When your books aren’t accurate or up-to-date it’s a sign they’re being mismanaged and that’s dangerous for every part of your business.
3. Profit margins that don’t line up with revenue generation:
When growing or starting a new business, you’ll often be operating at a loss. After all, you’re almost entirely in the spending mode of the “spend money to make money” mentality. From a tax perspective, this is great because without profit you won’t have the income to pay taxes on each year or be responsible for estimated quarterly taxes either.
At any stage, companies dedicate a lot of energy on client acquisition and retention to accumulate revenue. The other half of this growth is spending wisely so that you get as close as you can to a favorable profit margin. It’s important to be familiar with your profit margins because these tell you what funds you have available to reinvest into your business.
As your revenue grows this should be a time to build expansion plans into your budget such as hiring, exploring new territories, and enhancing your product/offering. However, when that revenue growth doesn’t incite a corresponding growth in your profit, those opportunities aren’t as clear.
All of which is to say that seeing upward trends in revenue, but not in profitability can be normal when it’s an expected part of your business’s budget strategy. If this comes as a shock it indicates there may be losses hiding in your financial statements. A lack of good financial data and reporting tools makes this marginal analysis virtually impossible.
4. Potential investors and lenders aren’t interested:
Investors and lenders are most successful when they can confidently assess risk. While many investment opportunities assume a certain level of liability, even the most audacious angels and VCs want to get as close to a sure thing as possible with a business’s potential to give them a worthy return.
Along the same lines banks, creditors, and other lenders have regulations to adhere to that leave their hands tied with whom they can and cannot give loans. When your business’s financial accounts are in a questionable state it makes it hard to judge your liquidity (ability to pay off any short-term liabilities) or the value of equity. If your business is getting traction, but having trouble getting funding, your financials are the first place to look.
5. Concerns about tax compliance issues:
Unless you’re a CPA or work for the IRS, the United States tax code is as mysterious as the contents of a gas station sandwich. While it’s common for business owners to feel somewhat in the dark about the very minuscule details of their tax plan, they should feel confident in the strategy behind it.
The level of complexity fluctuates at different stages of business. At one point, you may feel at ease with your IRS relationship but just one change—such as taking on a new business market—can open a floodgate of varying tax compliance demands. This why getting expert support as early as possible can be a lifesaver… Especially one that has the ability to scale as you grow!
6. Audit anxiety:
Audits happen. This is especially true if there are issues with your tax return, but in any given year your business could be audited for no reason at all. Like visiting the dentist, audits aren’t anyone’s favorite experience, but both are a whole lot better when you’ve exercised good, responsible habits.
Being diligent about organizing your financial documents is your primary line of defense against having an especially bad audit experience. If you haven’t kept accurate records, you won’t have proper proof to argue that you owe less than the IRS claims. In this scenario, an audit can cost you thousands of dollars, minimum.
How to find the right accounting process for your unique business:
As you can probably gather from the red flags listed above, when it comes to picking a back-office provider to manage your finances “eeny, meeny, miny, moe” isn’t going to cut it. This is a considered choice and, as a business leader, you want to find a solution that enhances your growth strategy and empowers you to focus on your business.
Small businesses deserve more than a bookkeeper running QuickBooks out of their basement. And there are many options on the market that will allow you to drive your business with real data and insights. So many, in fact, that it can make your choice all the more confusing which is why we’ve weeded through the options for you:
The Entrepreneur’s Guide to Accounting & Tax Options pulls together all the options out there to help you see and understand your alternatives in one place. You can also fill out the interactive exercises and side-by-side vendor comparisons to decide which solution is right based on your company’s specific requirements.