Why keeping accurate financial records is so important: Part 2

28 May 2019

< back to Knowledge Library

A lot of companies only pay attention to their record keeping at tax time. They treat it as a seasonal thing. A bit like duck shooting. All hit and miss, with things flying all over the place. Chaos ensues as months of neglectful record keeping presents itself as an unholy mess that must be tidied up for the IRD.

As we’ve recently posted, (in part 1) it is your personal responsibility as a director or owner to maintain accurate financial records. A failure to do so could leave you personally liable for your company’s debts.

You could also fail on other fronts if you don’t pay closer attention to your financial records. Without wanting to sound all doomsday, this failure could be catastrophic. On that cheery note, let’s examine further.   

No accurate records, no blooming idea

One of the biggest pitfalls of not keeping accurate financial records is you can lose track of how well your business is performing. Or, not performing. Without up to date records, how can you tell who owes you money? And how can you tell who you owe money to? Don’t forget the biggest questions of all: How much are you owed? How much do YOU owe?

You could be delivering your product or service without knowing when or if you’ve been paid. This affects cashflow. Limited cashflow affects business. Accurate record keeping will alert you to these issues, and other signs of trouble, before it’s too late.

Spending beyond your means

Up to date records will tell you how much you have to spend. Seems pretty obvious, really. But if you fail to regularly maintain your financial records, it becomes too easy to spend money you thought you had…but don’t actually have. This occurs when you have a false idea of how much revenue you’ve generated, and how much profit margin you have to play with as a result.

Here’s an example. In your non-record keeping world, you think your product or service gives you a 30% profit margin. But without keeping records, you can’t keep track of changes over time and expenses which eat into that margin. Instead of having 30% you might only have 10%. Or 5%. Spending money without knowing the true size of your margin is like playing darts in the dark. Accurate records will help you make enlightened spending decisions because you’ll know exactly how much you have at your disposal.

Advice you can take to the bank

Business is booming. It’s time to expand. A business loan will help you put your growth plans in place. So far, so good. But to prove to the lender that your business is in a sound position, you’ll need evidence. In other words, financial records that are accurate and up to date.

This is what they’ll want to see:

  • Debtors (people or businesses that owe you money)
  • Creditors (people or businesses that you owe money to)
  • Sales
  • Purchases and expenses
  • Assets owned by the company
  • Money owed by the company

Without this information as part of your financial records, you’ll struggle to borrow the capital you need. Banks and lenders are tightening the screws. They require your books to be spot on. Getting them into shape after months of neglect will cost you a lot of time and hassle. Regular record keeping won’t.

Time to get those records into shape

Many companies in liquidation have one thing in common: they did not have adequate accounting records. As a result, financial issues plaguing the company were not apparent until it was too late. That’s the peril of treating record keeping as a seasonal activity. Your business could end up as one dead duck. Ask us about keeping your records up to date before you hit the ground with a thud.

HM v2

for more help feel free to reach out. Get in touch with Hamish Mexted