More money, more problems.
Let’s look at some issues common to business accounting.
What issues can arise when business owners aren't disciplined with their accounting?
There can be a whole plethora of challenges, from mild to complex, that come up when there is a lack of discipline. When financials are not where an ownership wants them to be there can be psychological responses that make it harder to reach goals, loss of efficiency or effectiveness operationally, and even legal, financial, or tax trouble.
An hypothetical example: Start-up Company “TS” makes t-shirts and recently had a design go viral overnight. Enthusiastically they want to capitalize on the sales, so begin more production. However, they had not calculated exact production costs and find themselves in a position where it actually costs more to manufacture. While an extreme example, it is a problem that can subtly affect a business’ success when margins are not carefully considered or known.
A mentor once told me: “You can bankrupt a business growing sales alone”.
What is meant by this is that sales do not equate to profitability per se. We have to grow our assets - cash in this simple example - otherwise there is something catastrophically wrong with the pricing model.
In order to have a successful and viable business, the growth of revenue AND cash are equally necessary. This is why it is very important to know where your money is.
Typical financial discipline issues?
Well, most often accounting falls to the bottom of the barrel and becomes an afterthought, until a financial period ends or taxes season arrives. This creates a situation where there is a whole lot of extra effort that needs to be put forth to go back in time and review prior period information, which may be incomplete or inaccurate.
One of the benefits of keeping your books as current as possible is that it is easier to remember specifics. The farther we go into the past, the harder it may be to ensure accuracy of the business’ financials. Inaccurate financials can be an issue, as well, in limiting opportunities to find credit financing, finding investment, or even taking a company public.
Essentially, accounting and financial data is for the ownership to manage and to understand the health and wellness of the business.
It literally pays to have your finger on the pulse of the business. Sales could be considered the heartbeat of the company and accounting/finance systems are the veins that enable proper distribution of resources. If sales are pumping but the entity is not properly managing that flow then it is quite possible financial health issues arise.
