The Dangers of Doing Your Own Bookkeeping
We see it all the time. Business owners who decide it will be more cost effective to do their own bookkeeping. We do understand that starting a business is tough. It’s normal to try to keep overhead costs low when you’re starting out in business.
Most startup businesses are operating on a shoestring budget, and cash flow is often tight at first. It seems almost unfathomable to pay an experienced bookkeeper to manage your bookkeeping and cash flow needs – especially when you can easily do it yourself, right? Wrong.
This is precisely where so many small businesses and startups go awry.
The reason you decided to start a business.
There are probably a number of reasons why you’ve decided to run your own business and it’s likely one of those reasons is to make money.
So, if making money is the main objective of going into business, it concerns us when we see so many business not properly managing and monitoring their business’s numbers. Business owners often fumble their way through the bookkeeping task themselves despite not really understanding what they’re doing.
It can come as a nasty surprise to some business owners who discover they’ve been doing their own bookkeeping and have, inadvertently, lodged Business Activity Statements (BAS’s) that are incorrect. GST is actually more complex than you think!
What’s more, business owners are taken aback when they discover they have an annual tax bill they were quite under-prepared for. Inaccurate bookkeeping results in misleading financial reports and a missed opportunity to proactively address tax planning.
Too many business owners believe they can save money by taking care of the bookkeeping themselves; when this critical function should be delegated to a bookkeeping professional.
Do you know what causes Australian small business to fail? It’s poor financial management and a lack of accurate bookkeeping, over and above anything else. So, if you want to defy the alarming fail-rate of Australian small businesses, then hiring a bookkeeper will give your business the best chance of success.
Here are just a few reasons why you shouldn’t attempt to do your bookkeeping, no matter how small your business is.
Bookkeeping is a waste of your time
Don’t underestimate the time involved in small business bookkeeping. It’s often more intense and time consuming than you think. Especially if you don’t really know what you’re doing.
During the business startup phase, the volume of bookkeeping might seem so low that you think it’s easier to do it yourself. You might also believe that cloud accounting software such as Xero and MYOB are going to do most of the heavy lifting for you. Yes, accounting software will certainly help and we absolutely recommend that you use it, but just be mindful that it’s not the be-all and end-all.
As your business gets busier, every hour spent on bookkeeping is time not spent on the rest of the business. How do you value your time? What’s your hourly rate? What revenue could you be generating within your business if you weren’t tied down with bookkeeping? Your time spent on marketing activities, for example, will bring in more revenue than bookkeeping ever will.
Eventually, the time you spend on bookkeeping becomes a cost to the business because it’s time you’re unable to dedicate to what you do best within your business i.e. performing valuable tasks that generate work both now and in the future.
And unless you’re a qualified bookkeeper, it’s unlikely you’re bookkeeping will be done efficiently. The cost of your time will almost certainly exceed the cost of engaging a professional bookkeeper. This doesn’t even factor in the cost of potential costly mistakes you might make!
Bookkeeping always costs more when you do it yourself
Speaking of costly mistakes, let’s outline how bookkeeping can cost you so much more when it’s not handled by a professional bookkeeper:
- Expensive accounting or bookkeeping fees incurred to rectify incorrect bookkeeping, business activity statements (BAS) and payroll errors
- Incorrect tax and compliance calculations including GST, PAYGW, Fuel Tax Credits, income tax, employee superannuation. Inadvertent under and overpayments of tax can have an adverse affect on business cash flow. Not to mention trigger an ATO audit.
- Potential ATO audit activity. If you need professional accounting and legal support during an audit, be assured that this will cost you a pretty penny. Much more than what a bookkeeper would have cost!
- A cash flow crunch. Cash flow is the lifeblood of any business; you don’t want to misjudge this.
- Information lag and lack of accurate financial reports and financial Key Performance Indicators (KPI’s).
DIY Bookkeeping makes for bad business decisions
Bookkeeping is not a task undertaken solely for BAS and tax compliance purposes. While that’s a key reason to have impeccable financial records, the most important purpose of bookkeeping is to provide you with valuable information so that you can make strategic business decisions.
Your bookkeeping data should always be accurate and up-to-date to enable cash flow forecasting, budgeting, and ‘what -if’ analysis. Real-time bookkeeping data can help you predict the best time for larger purchases or when you should aim to be saving cash during predicted slower months or seasonality. If you’re planning a growth phase, it can also give you an indication of what stresses might be placed on resources. Does your DIY bookkeeping currently give you this detailed information? More to the point, could you trust it?
Great business decisions are what keep you ahead of your competition. We live in a data-driven era, and those business owners who are equipped with the right financial information at the right time are the ones who make great business decisions. And these businesses are always the most successful because they truly know their numbers.
DIY Bookkeeping won’t impress the bank
In light of the recent Banking Royal Commission, banks are making business lending and self-employed loans tougher and tougher.
Sure, there are still low-doc loan options if you’re willing to pay through the nose at higher rates of interest. But why not put yourself in a position to secure business loans and home loans at the competitive interest rates currently available?
To do this though, your lender will want to see your business’s financial statements. With accurate, up-to-date bookkeeping prepared by a professional bookkeeper, you’ll be able to produce a perfect set of financial statements for the bank with the click of a mouse.
However, if you choose the DIY bookkeeping route beware; in our combined 30 years of working with small businesses we have very rarely seen a perfect set of financial statements produced by a DIY-bookkeeper.
With messy business figures and a balance sheet that sets off alarm bells at all corners of the bank, you can be guaranteed your new home, investment property or luxury car is further out of reach than you think.
Invest in your business. Hire a bookkeeper.
Many small business owners tend to avoid engaging the services of a professional bookkeeper because of the perceived ‘cost’. But really, you should view a professional bookkeeper as an investment in your business.
Naturally there will be some aspects of the bookkeeping process that you can manage, such as customer invoicing and perhaps data entry of supplier invoices and inventory management. And there’s certainly nothing stopping you learning about the features and functionality of your chosen accounting software to ensure your business is maximising its potential. In fact, we encourage our clients to know their accounting system inside out. You can learn more about our Xero Courses here.
If you really do insist on taking the DIY bookkeeping route, just remember: you can’t afford to be a bad bookkeeper. As the saying goes ‘If you think it’s expensive to hire a professional, wait until you hire an amateur’.
If you’d like to learn more about outsourcing your business bookkeeping function, or you’d like to better know your numbers, you can contact our Ninjas on (03) 9743 2021 or contact us here.