Every company small and big alike needs to keep their finances in check all the time, to do so they use various accounting practices and procedures. Companies that regularly keep their accounts and records up-to-date can take effective and timely decisions that lead to success and growth. Hence, it is imperative for every company to have good accounting practices in place.
If companies follow poor accounting practices and procedures it will have adverse effects on their growth and profitability making it difficult to reach their goals. It affects their ability to follow up on receivables and also settle their dues which will impact their cash flows. Poor accounting practices make it difficult to source records and documents which leads to delayed reporting and analysis, statutory obligations become difficult to settle and all this affects the reputation of the company.
In today’s world where the internet is freely accessible, one can easily learn about the best accounting practices prevailing in the market and adopt the same. However, how does one understand if the practice followed by their company is good or poor?
Listed below are 10 poor accounting practices that are followed by companies that can have a negative impact on their business;
1. Improper Expense Tracking System:
Companies incur many expenses on a daily basis, however, at times they are unable to keep a track of all the expenses due to faulty expense tracking systems in place. Such faulty systems tend to ignore or miss out on small bills and payments which over a period of time can add up to a big amount that could have been considered as a business expense and save of some on the tax liability and help the company from paying more tax.
2. Not Keeping Documents, Bills, and Other Records Systematically:
Companies that do not keep their documents and records systematically find it difficult to lay their hands on important details, especially during audits, tax queries, and litigations. Poor handling of source documents wastes a lot of time in retrieval and increases inefficiency and makes it difficult to take timely and informed decisions.
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3. Business and Personal Finances are not Bifurcated Properly:
Though a businessman owns the entire company, he should never consider personal and business funds as the same. Separation of personal and business finances is essential in order to under the inflows and outflows of funds for business-related transactions. Proper classification of expenses helps in better analysis of funds at hand, business expenses and helps companies to deal better with regular business activities.
4. Statutory Obligations have not Complied on Time:
While taking care of business activities, there is always a chance that business owners would miss statutory deadlines like tax fillings, labor-related payments, etc. The reason for this is either they are not well equipped to deal with taxes or they are too occupied, both these cases only lead to penalties, notices, and increased paperwork which ultimately diverts business focus and payment of more taxes and penalties and a bad name for the company.
5. Not Reconciling Books of Accounts and Cash and Bank Books:
It is very important to reconcile all accounts and prepare the bank reconciliation on a monthly basis. Failure to do so, may result in expenses or income going unrecorded and this may lead to incorrect statements and reports which finally leads to incorrect business decisions. Reconciling the bank and cashbook helps to show the right picture of the financial standing of the company. Regular reconciliation of accounts and records gives the company a competitive advantage over others and helps in providing accurate information as and when needed.
6. Not Grouping Ledgers Appropriately:
It is very important to group ledgers for recording assets, liabilities, income, expenses, loans, advances, investments, etc. Proper grouping of ledgers helps in categorizing every leg of the transaction to the proper group which will help companies to maintain their accounts effectively and give a true and fair view in the financial statements that are prepared.
7. Not Tracking Your Work-Force:
Tracking your working staff is a very important business practice. If employees are not monitored regularly, they may take undue advantage of the situation for their personal benefit. Surprise checks on employees, checking their attendance registers, going through their work profile vis-a-viz to the job they are doing are some of the ways to keep a check on the employees. Staying in touch with employees on a regular basis also ensures that you are constantly updated with what is happening and that employees don’t have any issues or are not overburdened and that they are paid accurately.
8. Not Recording Your Inventory:
It is very important for companies to keep a track of their inventory. They need to have a proper record of their raw materials, work-in-progress, finished goods, goods-in-transit, slow moving, and non-moving inventory. The use of proper systems to track inventory makes life easy for all. If companies fail to record their inventories and track them physically it may lead to damages or expiry of inventory which may result in huge losses for the company.
9. Not Taking Professional Help:
Companies need to hire accountants or outsource their finances so that they can focus on business operations. Accounting and bookkeeping are cumbersome but important business tasks and require a professional to do them on a regular basis. Many times, the business owners pile up this work assuming that they can do it in just a day and save some company money. However, in reality, they only tend to finish the task in a hap-hazard manner and miss out on important transactions which finally affects their financials.
10. Not Using the Right Accounting System/ Software:
Using the right accounting system is of prime importance to any organization. Many accounting software and tools are available depending on your business size and business needs. Gone are the days where companies would maintain their accounts manually on excel and maintain huge files on their systems which would take a lot of time to retrieve even a small piece of information. With cloud-based accounting systems, companies can now access their business records at any time and any place. This helps them to make quick investment and business decisions which are otherwise impossible without proper accounting systems in place.
Companies who knowingly or unknowingly follow poor accounting practices can easily change their practices by seeking the right professional help and bring their business back on track.
Diligen is one of the outsourcing service providers who can provide clients with accounting, payroll, taxation, and all other services just like a professional accountant along with in-depth expertise at the best price. We provide seamless and reliable services to our clients who need someone to look into their business transactions with utmost trust and confidentiality. The team of experts at Diligen has experience in different business sectors and helps clients to prepare financials and reports as per the industry’s norms and standards. The professionals at Diligen are always updated with the latest tax reforms to help clients to comply with all their statutory and legal obligations. With Diligen at your service, your accounting becomes our priority.