Keeping your books in good order isn’t something a small business owner should do solely as a tax-savings strategy. It is true that small business owners miss billions of dollars of deductions each year due to messy books which often don’t include a complete detail of all expenses (yes, those $5 receipts you’re missing add up). Keeping good books can also prevent small business owners from losing their sanity and opening themselves up to potential legal liability over commingling your funds. Here are four reasons for small businesses to maintain a separate bank account and an accurate set of books:
1. Legal Protection. Most importantly, maintaining a separate bank account substantiates legal protection for small business owners (the corporate veil you hear about is not a wedding choice), one of the primary reasons for forming a new corporation. Keeping separate accounts helps recognize the company is its own distinct entity. Commingling personal and business funds can create huge problems as well. Commingling of funds means that one is treating the business’s money as their own. If a small business owner commingles funds, they could lose the liability protection due to what is known as “piercing the corporate veil”. If one treats their business’s money the same as their own, then they risk the exposure of their personal assets.
2. Better business decisions. Put quite simply, there is no way to make consistent, sound business decisions if your business records are a mess. Having a process to ensure better bookkeeping, expense tracking, and budgeting leads to quality decision making. There is no business model where one can be successful with messy accounting records. Thriving small businesses are making decisions they know will impact their top and bottom lines.
3. Taxes. There is no way that a small business owner can have an accurate tax return if they don’t keep good records. There are really no ways to benefit by having inaccurate taxes. The two scenarios if their taxes are not accurate is that they either overpaid their taxes or underpaid them. Either scenario puts a small business owner in a bad position….
If they over paid their taxes, they obviously have less money than they otherwise would have had. Enough said.
However, if they underpaid their taxes, they open themselves up to potential liability. While chances of an audit are not a high as some would have you think, as a small business owner the potential is higher. Small business owners inevitably claim deductions which lead to higher audit risk. The expenses a small business owner faces with an audit can be staggering. Not only are they on the hook for the underpayment, penalties, and interest, but they also most likely will need representation. This means that they will need to pay for a specialized CPA and potentially even a lawyer.
In either scenario, the small business owner would have been substantially better off by just keeping accurate records in the first place.
4. One word: Sanity. Talk to a new small business owner and you would think that bookkeeping is akin to quantum physics. Most small business owners describe accounting as cumbersome and unnecessary. If I had a nickel for every time I heard, “I just do this for the tax man”, I would have a lot of nickels. In fact, proper bookkeeping not only saves time and money in the long run but is also one of the keys to growth and profitability growth. When the books are disorganized, one will feel constant stress to take care of it, and this ultimately can cause a small business’s undoing.
I will give you a bonus reason – messy accounting records decreases your businesses value. At some point, you will wish to exit your business. Whether that means selling it to a stranger or passing it down to a child, everyone will exit their business at some point. When potential buyers walk into a business and start finding accounting and recordkeeping issues, they usually walk away. The ones that stay, only do because they sense a deal, one that they can take advantage of. Keeping messy records will decrease the value of your business between 20-50%.
My name is Matt Krieger, and I am the founder of Krieger Analytics, a CFO advisory partner for small businesses and franchisors. I am also the owner and franchisor of a concept called Monkey Bizness, in Denver, Colorado.
As a small business owner with a background in finance and strategy, I realized the benefits that a CFO could bring to smaller organizations. Most franchisors and small business owners don’t have a need (or budget) for a full-time CFO. To better fit my clients, Krieger Analytics is a part-time resource. While most think of CFO’s being involved in finance and accounting (we are), I am also involved in much more. I partner with my clients by coaching them on strategy, gaining clarity on their business, building efficient and effective processes, and making confident business decisions. Conversations are free, so don’t hesitate to reach out to me at [email protected].