10 Reasons Why Your Business Will Fail without Good Bookkeeping
Businesses can only thrive when they have outstanding bookkeeping. Good bookkeeping is the basis of a systematic cash management program tailored to specific business needs. It also makes sure that the rest of the business is running smoothly because cash is available, and documentation is done correctly.
Without good bookkeeping a business will fail.
Don’t believe me? Here are the reasons that any business will fail without good bookkeeping:
- A cash crisis is guaranteed
- Credit lines will be reduced and terminated
- Vendor relationships will be destroyed
- Client relationships will be ruined
- Constant chaos will haunt the company
- The IRS will become a nightmare
- Investors will sue and rebel
- The best employees will leave
- An owner’s health will deteriorate
- All hope will be lost
I’ve shown this list to a few people and they think I’m being harsh. What do you think? Read my explanations and then decide…
A cash crisis is guaranteed
If a company doesn’t have good bookkeeping, it:
- Won’t have a good idea of how much cash comes in and how much goes out each month.
- Won’t know is what owed and when it is due.
- Will lose track of ongoing purchases. They’ll keep paying for goods or services that should have been cancelled months or even years ago.
- Will not collect all the money that is owed by clients.
Eventually the company will come up short on funds to pay for something critical. It won’t have reserves or credit lines to deal with the shortfall. It will be a surprise, and they will have a cash crisis.
A cash crisis is the beginning of the end as each area of the business is impacted, and the company won’t survive.
Credit lines will be reduced and terminated
If a company doesn’t have good bookkeeping, it will eventually miss paying a key bill or credit line either because it’s forgotten or because the company is in the middle of the cash crisis we just talked about.
Credit lines are built on two things: Paying bills now and the ability to pay future bills.
Most credit lines have a clause in them that allows the bank or credit card company to reduce a credit line at their discretion. The first time a company payment is late their credit line may not be reduced but pay late a couple of times and watch the credit lines fall.
There is a ripple effect since the financial institutions all use the same credit scoring agencies to track you. Paying late to one bank means that all banks will know about the late payment.
If a company depends on credit lines, it won’t survive if they are cut.
Vendor relationships will be destroyed
Bad bookkeeping means not knowing when or how much to pay key vendors. These are the vendors that trust businesses and give them. They give their best pricing. They deliver on-time. They are everything a good vendor can be.
Really solid vendor relationships can take years to establish. They can be lost within a couple of months of messing with the payment arrangements you worked hard to establish. Companies don’t survive significant supply interruptions or turmoil.
Client relationships will be ruined
How do you like it when you get the wrong billing from your key vendors? Or billed twice? Or not billed at all and then being told you are late for not paying a bill you never received?
All of these happen when companies don’t have good bookkeeping. Even the best client relationship will take a hit if billing isn’t done properly. Enough mistakes and customers start looking somewhere else.
Goodbye customers, goodbye business.
Constant chaos will haunt the company
Are credit lines messed up? Working with banks is the only way to fix things.
Vendor relationships ruined? Think of the time spent trying to find new vendors.
Client relationships destroyed? Start scrambling for new clients.
Businesses with bad bookkeeping always have internal chaos at some level. I’m not talking about the creative kind of chaos where you can move quickly and make things happen. I am talking about pull-your-hair-out, everything-is-a-fire drill, and all-panic-all-the-time chaos.
A business owner may survive the chaos, but the business certainly won’t.
The IRS will become a nightmare
Good bookkeeping includes filing taxes on time, every time. Many companies that end up in tax trouble get there because they couldn’t file taxes. Their bookkeeping wasn’t up to date.
If there’s an audit, then bookkeeping and records are the protection that filings were accurate. If they’re not, then the back taxes, penalties, and fines can shut down a business.
Did I mention the federal tax liens? Even if a company has a corporate structure, the IRS can pierce the corporate veil and attach the liens to a business owner’s personal property, such as a house.
Good luck keeping a business running with the IRS on its back.
Investors will sue and rebel
What about business owners that borrow money privately, raise capital from investors, or have business partnerships who are not active in the business? A business in financial trouble, for any reason, at best will cost the owner heartache and sorrow. A business that fails and has bad bookkeeping faces a lot worse. Possibly lawsuits. The worst case: jail.
I personally know someone who’s finance partner kept terrible records of the funds the finance partner borrowed from investors on behalf of the company. When the business folded, investors sued. Investigators investigated. The finance business partner? Was arrested and cut a deal. My friend who never touch the bookkeeping and never worked with investors? He ended up in jail because the partner through him under a bus.
The bookkeeper won’t go to jail. The company owner will, and the company won’t survive.
The best employees will leave
Why would good employees put up with the chaos of a poorly run company? If a company has even one or two of problems caused by poor bookkeeping, the employees will know it.
In today’s work environment, people are more and more sensitive to quality of life, starting with doing what they enjoy. When work becomes an experience that isn’t positive, the best employees leave. They can get another job.
The other employees? Second rate ones may stick around, decreasing productivity and increasing cash management problems. Without good employees a company won’t survive.
The owner’s health will deteriorate
Everything described above causes stress. Stress can cause or worsen mental health problems, anxiety, heart disease, high blood pressure, heart attacks, strokes, weight gain, diabetes, headaches, ulcers, or heartburn; it can accelerate aging and even bring on premature death.
Yes, all of this because of poor bookkeeping and the results I’ve described here. I’ve seen it over and over.
Bookkeeping that causes business problems literally can be the death of you.
All hope will be lost
Business owners with significant issues caused by poor bookkeeping can literally lose all hope. This leads to inaction. Even the smallest improvement becomes difficult to implement.
This is perhaps the saddest situation I have seen. Spouses tell me about their husband or wife being happy and loving their business. How creativity and positive feelings used to flow because of the business and their spouses are no longer the same.
At that point, why would anyone want their business to survive? Why not just let it go and start over?
Now do you believe me?
When I say without good bookkeeping your business won’t survive, I’m serious.
Of course, I am talking about worst-case scenarios and it can take years to get as bad as business failure. But each reason for failure that I mentioned was based on experiencing these situations with my clients.
This is the bottom line and a positive message:
“Your business has a much better chance of long-term success and thriving if you have proper bookkeeping and financial records.”
It’s Not Too Late
If you know someone in a situation like I’ve described, they shouldn’t give up hope- it is not too late. I helped a business owner who was literally weeks away from bankruptcy turn his business around in a couple of months. He cleaned up the books and moved forward from there. These are the steps he took:
1. The bookkeeping put was in order, and he implemented a proper chart of accounts
2. He learned to recognize how to increase the cash that came into the company, how much would come in, and when he could expect it in the bank.
3. We found quick fixes and he made some small changes very quickly. This helped him gain momentum
4. We looked for bigger fixes, prioritized them, and then he started implementing them
5. We created a cash flow forecast and management tool which he taught his bookkeeper to maintain
6. We created and used a cash management dashboard and he started tracking the key cash management indicators
There are turn-around opportunities for most companies following these simple steps.
Did you notice that it all started with good bookkeeping?
Does your bookkeeping help your business grow?
Does your bookkeeping help your business grow? If not, it might be time for a new bookkeeper or a new bookkeeping service. If you need a recommendation for one, let me know. Be careful, not all bookkeepers are created equally and it’s not a always a simple “you get what you pay for” situation.
Maybe I’ll write a “How to Hire a Good Bookkeepr” article one day, but until I do, just contact me if you want a recommendation. I don’t do bookkeeping for the businesses that I work with, but I do help hire new bookkeeprs and direct their work, so I know a few good ones and I’d be glad to make a recommendation.
I’d love to hear any thoughts you have on this topic or any other cash management ideas. Do you have any good bookkeeping stories that show how good bookkeeping has helped you? If not, you probably have some bookkeeping nightmares that you can tell me about!
Is there a cash management topic you’d like to learn about? Contact me at [email protected] to introduce yourself, share ideas, or ask me questions about managing your business’ cash.
David Safeer help businesses implement cash management systems that create business breakthroughs. He founded The Cash Management Project in November 2018, to help businesses manage and maximize their cash resources. David writes, teaches, and works with diverse companies around the world.
Thinking globally, one business at a time.
