8 Reasons Why Businesses Fail without Proper Accounting Procedures

04/03/2014

Even the best idea in the world or the best product of its kind may not be enough to save a business that doesn’t have a good accounting strategy in place. Here are 8 reasons why businesses fail when they don’t make enough time for crunching the numbers and balancing the books.

1. They don’t have a business plan. Without a detailed business plan, there’s no way to see whether your business is heading in the right direction or to identify what is going wrong. Not having a proper business plan in place for your business is like driving a car with a blindfold on.

2. They don’t monitor cash flow. Running out of cash is one of the quickest ways to go out of business unless you’re able to reschedule your payments to creditors. Businesses that don’t keep a proper track of who owes them money and who they owe money to, are the most likely to fail on this count.

3. They don’t keep proper accounting records. If you don’t keep your business, you can be fined by HMRC. You should be thinking of your accounting records as a business tool to help you manage the business, not just something you have to keep for the taxman.

4. They don’t understand how profits work. When working out your business profit margins, it’s important to take into account all the fixed costs as well as variable costs that will affect your pricing. If you’ve only looked at the gross profit margin, you’ll find your business making a lot less than expected.

5.They don’t follow up on outstanding invoices. Businesses that don’t ensure their customers honour their terms of payment can find themselves with a pile of bad debts instead of healthy profits. It’s vital to chase up any outstanding invoices to keep your cash flow healthy. If your debtors are in financial trouble themselves, don’t extend any credit arrangements until you’ve received payment first.

6. They waste money. There are few businesses that wouldn’t benefit from a regular cost-cutting review. If your profit margins are tight, wasting precious financial resources by maintaining an oversized office or paying high salaries incommensurate with the work being done could lead your business to collapse.

7. They don’t study the market or their competitors. Your business may be surviving now but if you’re not analysing market trends and keeping an eye on the competition, your business could get left behind. Good accounting is not just about knowing your own numbers but seeing how they stack up against your closest business rivals.

8. They don’t seek external support. While professional fees for accountants, business consultants or tax advisors may seem high, the money they can save your business in the long run should make the initial outlay worthwhile. Every company can benefit from professional assistance with their business accounts, and those that think they’ll save money by doing it themselves may find it costs them dear.

Without the right accounting procedures in place, your business could be headed for financial ruin. Don’t stick your head in the sand and hope the situation will improve, as it’s unlikely to without professional advice.