A recent Stanford study reviewed the aftermath of the Enron collapse and the repercussions to Enron’s accounting firm’s former clients. The primary trend they identified was when former clients issued accounting restatements or revisions because of less-than-accurate bookkeeping; there was an increase in the salary demands at the affected companies.
The takeaway is that risky or sloppy financial reporting can drive up a company’s labor costs. Labor is usually one of a company’s biggest cost centers. The Stanford researchers report detailed that a company with “significantly above-average-quality reporting can cut the cost of wages, taxes, benefits, and other employee-related expenses by $3 million.” This applies to larger institutions, but the same formula would apply to companies with less revenue and head count.
Many small businesses do their books or hire inexperienced staff to cut costs. While this may seem like a cash saving in the short term, the long-term results can add up to a substantial amount.
Sloppy bookkeeping can lead to several hidden costs:
1. Penalties and Fines: Inaccurate financial records can lead to incorrect tax filings, resulting in penalties and fines from tax authorities.
2. Lost Time: Correcting bookkeeping errors can be time-consuming. This is time that could have been spent on other aspects of the business.
3. Poor Decision Making: Inaccurate financial data can lead to poor business decisions. For example, you might invest in a new product line based on incorrect profit margins, leading to financial losses.
4. Cash Flow Issues: If you’re not accurately tracking income and expenses, you could run into cash flow problems. This could potentially lead to the need for emergency financing, which often comes with high interest rates.
5. Audit Risks: Sloppy bookkeeping increases the risk of an audit. If audited, you could face additional fines and penalties, not to mention the stress and time involved in the audit process.
6. Damage to Business Reputation: If your business consistently makes financial errors, it could damage your reputation with vendors, customers, and financial institutions.
7. Loss of Opportunities: Without accurate financial data, you may miss out on opportunities for growth or investment.
8. Overpayment: Without accurate tracking of expenses, you may end up overpaying vendors or not taking advantage of available discounts or tax deductions.
In the long run, investing in solid bookkeeping practices or hiring a professional can end up maximizing profits.