24 hours a day just aren’t enough for small business owners! When they aren’t actually on the job, handling everyday tasks of procuring, supplying, manufacturing, communicating, and hiring, they are busy brainstorming and strategizing. It’s no wonder that in all this chaos, streamlining and maintaining accounting records often take the backseat. While this might not seem like a big problem at first, if a company fails to catch up on its bookkeeping, it could summon major concerns for the business—concerns that would cost it financially and socially.
The Cost of Ignoring Bookkeeping
Let’s look at how ignoring bookkeeping can snowball into big problems for a small business.
1. Operational Cost
Business operations run smoothly when payments and receivables are timely, employees are doing their job, equipment is running, and you know what you can deliver. Outdated business records could disrupt this flow.
Financial Blindspot Can Dry Your Cash: To make money, you need money. And this money comes from a smooth, uninterrupted cash flow. Without tracking inflows and outflows, or updates on invoices and their status, cash may become stuck with clients, creating a financial blind spot. You will never know if you overspent, leaving your business out of cash to pay employees and suppliers.
Inefficient Operations: With outdated books of accounts, you won’t be able to estimate the future cash needs, leading to late bill payments. Vendors might pause work, employee absenteeism could increase, and the risk of internal theft could increase.
Solution: Allocate one day of the month for checking and updating monthly books and invoice status and paying taxes, bills, vendors, and employees. Timely payments and monthly reconciliations will keep you on budget and smooth business operations.
2. Financing Cost
High Cost of Obtaining Business Financing: A need for money may arise anytime, maybe in the form of seasonal demand where you need to hire gig workers or an unexpected cost, such as the breakdown of equipment. Businesses need to have a line of credit to meet these unexpected needs. Lenders will ask for books of accounts and use of money to lend it. And if your books are a mess, loans may not be cheap.
High Cost of Cleaning Up Books: Besides the lost financial opportunities and operational problems, updating your books of accounts later can also be expensive in itself. Hiring a competent accountant is a costly endeavour, and if there are months’ worth of records to be sorted and recorded, the cost will increase further. It’s cheaper and easier to hire someone to do your bookkeeping regularly than pay additional charges later.
3. Tax Cost
When your books of accounts are not up to date and receipts are all stashed up in a box, taxes can be a bigger nightmare than they already are.
Paying Higher Taxes: Doing taxes is not an annual event but a yearlong recurring activity. Businesses pay various types of taxes, including corporate tax, goods and services tax (GST), and income tax of employees. They are also eligible for multiple tax credits and deductions, such as business expenses, input tax credits, and more. To claim these deductions, you need a detailed ledger of your business expenses and supporting receipts.
While it is true that you need not submit the receipts when filing taxes, they will be required if the Canada Revenue Agency (CRA) asks for supporting documents. And note that the CRA doesn’t come asking for receipts of the past year. It asks for receipts dating back three or four years. Since bookkeeping was ignored at the time, tracing expenses becomes difficult. Moreover, lost and damaged receipts with no backup result in wasted tax deductions.
Penalties and Interest: As discussed before, tax is an ongoing expense for businesses. Advance tax has to be paid by the 15th of March, June, September, and December. Outdated bookkeeping can result in incorrect advance tax filings, potentially leading to interest on late tax payments.
Also, all Canadian businesses have to register for GST and start collecting it once their revenue reaches $30,000 in a quarter or in four previous consecutive quarters. If you ignore bookkeeping, you will not realize when you hit the threshold and face a penalty for late GST filing.
Increased Risk of Audit: Businesses with numerous cash transactions and misaligned expenses and revenues are on the CRA’s radar for audit. So, if you are paying higher taxes or missing advance tax deadlines frequently, it may choose your business for audit. A CRA audit is a nightmare even for organized companies. For someone lacking bookkeeping, it spells a huge tax liability and administrative burden of preparing for audits.
Solution: Bookkeeping is time-consuming but also vital. You can outsource this task and bring significant tax savings.
4. Opportunity Cost
Bookkeeping is time-consuming, but ignoring it can significantly reduce productivity. Imagine reconciling 12 months of bank statements and trying to recall a $100 transaction from eight months ago. Had those reconciliations been made monthly, receipts organized, and ledgers updated weekly, it would cost you only an hour a week. And if you use accounting software, it could happen in real time. Ignoring bookkeeping till the last minute robs you of your time, which could have been spent on other urgent and essential matters.
An opportunity can arise at any time, and a business must be prepared to seize it, with sufficient capacity, finance, and time. However, if your business is struggling to manage the existing workload and meet current expenses, you risk losing the opportunity to a competitor with the bandwidth to capitalize on it.
Solution: Consider outsourcing your bookkeeping to professionals. They can automate most tasks and provide you with updated, accurate information about your business operations, enabling you to capitalize on opportunities as they arise.
Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with Bookkeeping Needs
A professional bookkeeper can help you automate some of the reporting, reconcile bank statements, organize and record receipts, and follow up on any late payments or receipts. At Edelkoort Smethurst CPAs LLP, our accountants and bookkeepers can provide services such as preparing books of accounts and financial statements and filing taxes. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best accounting and bookkeeping expertise, contact us online or by telephone at 905-517-2297.