Business owner! A severely underestimated threat to your Business….

Sadly, one of the most common, and easily preventable, causes for businesses to get into deep trouble, up and to closing the business forever, is ‘bad bookkeeping’. And with this I do not mean the business that put a totally incompetent employee behind their QuickBooks, because ‘the software looks so simple’… No, this is about bad bookkeeping because the person that entered the data was given too much power.

It happens a lot. I went over the list of the last 50 businesses I dealt with in the last 6 years, and 5 of them had to suddenly replace their bookkeeper. One of these businesses closed down, and another came very close to closing… That is 10% of businesses I was exposed to within 6 years! 

Remember, the most common culprit in company theft (after the owner), is the CFO, and then the Bookkeeper. Some people steal because they can do that easily. Sometimes there is not even malicious intent, but a bookkeeper that was promoted above the level competency. For example, I have seen cases where the business had gone through a period of significant growth and the owner was finally making some well deserved higher income and reduced working hours. During all those years, the same bookkeeper was present, who maybe had had a small raise, but who was now managing the books of a company with ten times the size and at least four times the complexity. 

And then someone else than the bookkeeper opens that envelope from the IRS that states that the company is behind on payroll taxes. The owner is informed and has almost a heart attack once he or she sees the amount owed, grown by penalties and steep interest rates. Or maybe the CPA is the one who smells something funny when looking at the balance sheet. Whatever the reason the what is basically malpractice in bookkeeping is discovered, the shock is usually immense:

There are feelings of betrayal, funds missing, invoices that were never paid (or send out) and the overall realization that the numbers have been wrong. Anger: ‘why did I not know this?’.

Yes, that is a good question: Why did you not know this? How often do you as the owner read both the P&L AND the Balance sheet? Do you truly understand what these numbers mean? 

And almost as important, why did you not put a very simple strategy in place that would have prevented this mess? 

The rule is simple: The person that enters the data CAN NOT be the same person as the one who does the reconciliation. It is that simple. Yes, you might be a small company, and yes, the person who does your books is more than capable of doing the reconciliation. But allowing the same person to do the data entry to do the reconciliation is like putting your wallet on the chair next to you in the bar you visit. Nobody is supposed to take it for themselves, but in some way, you are asking for it. 

If your business is too small, hire an outside bookkeeper part time, it might be less than $50 a month to have this person to just do the reconciliation. But if something is wrong, this person will discover it.

What do you think is more rational: paying $50 a month, or taking a 10% risk that you lose thousands, maybe tens of thousands of dollars within the next 6 years?