How Does a Small Business Fail With Lack of a Proper Accounting System?

An accounting system is how a business plans its operating budget and tracks its expenditures and receivables, or income. An accounting system also may handle payroll, taxes and other business accounts, including workers’ compensation, health-care coverage and other benefits. Functions of accounting can be handled in house or contracted out to a certified public accountant. Failure to properly manage an accounting system can result in financial disaster for a small business.

Budget Planning

Even small businesses must plan their budgets to ensure the operation stays on track. The budget process involves assessing all of the financial needs of a business and creating a financial road map to make sure bills are paid, employees get paychecks and the business stays on course with its earning and income projections. Businesses that fail to institute a proper accounting system run the risk of underestimating earnings, which can ultimately lead to business failure.

Accounts Payable

Accounts payable are the bills a business pays to cover its assorted operating costs. Without a proper accounting system in place, accounts may be paid late or not paid at all, which can result in a variety of problems. A business can see product delivery stop, utilities turned off, insurance coverage dropped or other catastrophic outcomes. Any one of these problems has the potential to severely impact a business’s productivity and viability.

Accounts Receivable
Just as important as understanding where your money is going is understanding where your money is coming from. A proper accounting system tracks sales and income and ensures that clients and customers are paying as expected. A company that allows unpaid accounts to go uncollected and provides services or delivers products without compensation puts itself at financial risk. For a small business with thin profit margins, losing money in this manner can present a significant financial deficit that could potentially bankrupt the operation.

Tax Preparation

A small business in-house accounting professional can handle tax preparation for the company, or she can work in conjunction with an outside tax preparer. Regardless of how it’s handled, proper accounting measures used throughout the year can help ensure all tax obligations are being fulfilled. This is accomplished through detailed financial record keeping. A company that fails to properly handle tax payments runs the risk of tax penalties and fines that can become significant and damaging to a business’s operation.

If you don’t have a proper accounting system in place, you will have a hard time learning if your company is being financially defrauded in any way. An unscrupulous employee could take advantage of lax accounting procedures to slowly siphon money from your business, and the result could be financial insolvency and business failure. Understanding how to develop and read balance sheets, cash flow charts and other financial documents will both organize and protect your business.