We live in an unreliable world. Some unreliable things are simply frustrating. For example, an unreliable car may make you late for work, or an unreliable oven can be the difference between gooey gourmet cookies and bricks even your dog won’t eat. Some things, such as a company having an unreliable bookkeeping system, can have detrimental consequences. Keep reading to find out the risks associated with such a system.
Potential Misrepresentation of Financial Position and Costly Audits
The most common risk is the potential to understate or overstate the actual financial position of your business. Without accurate accounting records, you won't know whether you are in a positive or negative cash-flow situation. This can spell disaster for businesses that rely on accurate and up-to-date financial information to inform their decisions.
Inaccurate accounts may also prevent investors from accurately assessing the health of your business and could even lead to costly audits if mistakes are discovered during regulatory checks.
Vulnerability to Penalties and Irreversible Reputation Damage
An unreliable bookkeeping system has many obvious financial implications, but a perhaps overlooked legal risk is non-compliance with data privacy and security laws.
The bookkeeping system must adhere to federal regulations if it collects and manages customers' or employees' personal information. [Federal regulations include] the Health Insurance Portability and Accountability Act (HIPAA), the Gramm-Leach-Bliley Act (GLBA), and other state data breach notification laws.
Failure to adequately protect personal data and comply with regulations leaves a business vulnerable to penalties and fines. Legal implications aside, if an unreliable bookkeeping system does result in a breach of personal data security, the damage to your brand and reputation may be irreversible.
Financial Turmoil
Imagine bookkeeping as the driving force behind a business' ride to success. If the system is unreliable, it's like driving a car with a faulty engine—you might break down in unexpected places, dragging your business into dark alleyways of financial turmoil.
Mis-recorded transactions, undetected discrepancies, and overlooked financial anomalies can misrepresent the business's profitability, skewing strategic decisions. Worse still, it can disregard compliance requirements, inviting regulatory scrutiny and sanctions. Therefore, robust, accurate, and dependable bookkeeping is the essential engine oil that keeps the business journey smooth and trouble-free.
Vulnerability to Internal Fraud
Ignoring secure bookkeeping and accounting best practices leaves businesses vulnerable to internal fraud, [which] can bring even a thriving small business to its knees. While we all want to place immense trust in our teams, the reality is that any small business is susceptible to these kinds of losses—especially in times of economic uncertainty or financial hardship.
The absence of sound policies, like checks and balances or separation of duties, creates an environment where fraudulent activities can go undetected. The key to mitigating this risk is crafting vigilant bookkeeping and internal control policies or bringing in external accounting professionals for additional oversight.
A Longer Road to Success, Less Efficiency, and Increased Odds of Failure
The biggest risk, by far, is the risk introduced when you run your business based on gut feelings or the balance in your bank account. Your gut may be directionally correct, but you need [more] detailed data to build a clear path forward for your business. Reliable bookkeeping is the cornerstone of usable financial data in a business.
When the bookkeeping is reliable, you have access to high-quality data that you can use to make strategic decisions in your business. You gain the ability to understand product/service cost and profitability fully. When you know where you're the most profitable, it's easy to decide where to grow.
Without that data, you're just guessing. You're flying blind and hoping for the best. It's not that you can't succeed that way. You actually can if your margins are high enough. It'll take longer, be much less efficient, and exponentially increase the odds of failure.
This is a crowdsourced article. Contributors' statements do not necessarily reflect the opinion of this website, other people, businesses, or other contributors.
