I’ve personally experienced, and heard too many stories about, nightmare bookkeepers. At a minimum they cause enormous headaches for company owners. At worst they can lead to company failure.
Far too many entrepreneurs hire nightmare bookkeepers. Why is that?
- We don’t want to pay for “overhead”
- We think we can do it ourselves – yes, YOU might be your own nightmare!
- We have a friend, or relative, or employee who says they can take care of it for cheap
- We’re thankful to have that task off our plates and don’t pay enough attention because the other 152 things we have to do are far more interesting
- For many entrepreneurs, it’s a foreign language they’d rather not learn, so they don’t even know what questions to ask.
The Scary Consequences of Nightmare Bookkeepers
Here is a long list of things that can go wrong with your business because of incompetent or unscrupulous bookkeepers.
- Embezzlement – if owners are blind to money coming in and out, it’s easy for a bad bookkeeper to send money to their personal account
- Padded payroll – one employee doing my bookkeeping paid herself a lot extra; she quit when my wife started looking closely at the books
- Federal tax penalties – bookkeepers may underpay or not pay federal employer taxes due, either through incompetence or through trying to “help” manage cash flow. The IRS cares more about this error than anything else.
- State sales tax penalties – bookkeepers similarly may underpay or not pay state sales taxes due, and this can lead to penalties and surprise cash drains
- Damaged credit – incompetent or unmonitored bookkeepers may screw up payments to critical suppliers, which can not only lower your business credit score but also destroy essential supplier relationships
- Surprise cash crises – an employee bookkeeper of mine double entered a big deposit, and suddenly the non-profit I was running was overdrawn (I blame myself, not her)
- Poor cash flow – if customer receivables and payments aren’t entered correctly and timely, your incoming cash can stop unexpectedly – this led to a sudden mass layoff at my first job (a lying VP Sales booked fake sales and spent fraudulent commissions on cocaine)
- Underestimated expenses – when the “little things” aren’t recorded you have no idea how much your business is actually spending
- Overpaid taxes – again, when “little things” aren’t recorded or “big things” aren’t properly recorded, you could end up sending too much precious cash to the government
- Failing an audit – while tax audits aren’t common, poor record keeping by a nightmare bookkeeper can lead to terrible outcomes
- Poor decision making – if your financial reports are wrong, incomplete or out of date you will likely make poor choices, such as who to pay when cash is tight (if penalties and interest aren’t recorded), whether you should increase spending on marketing and sales, which high profit products you should promote, and how you should price products and services
- Wasted time – bookkeeping mistakes can go undetected for quite some time, and just like most things it’s far easier to fix problems sooner than later, so you can waste both time and money fixing old bookkeeping problems.
How To Avoid Or Detect A Nightmare Bookkeeper
Here are five steps to consider if you want to avoid the nightmare.
Get Your Bookkeeper To Take A Free Competence Test
The American Institute of Professional Bookkeepers wants to encourage a high level of competence, and of course, to increase their own membership. They’ve designed a free test that business owners can give to prospective bookkeepers. Have your current or future bookkeeper take the test and show you the results.
And if you are your own bookkeeper… can you pass the test??
Show Interest in Learning About The Books
Competent and honest bookkeepers will eagerly show off their knowledge when you start asking questions. But if they are defensive, or uncooperative, or secretive, that is a huge red flag.
And even if they are honest, it’s worth spending your time and a bit of money on them to teach yourself about this stuff, a little bit at a time. Most businesses hit the wall at some point if their owners don’t understand what their numbers mean.
Get Your Accountant And Bookkeeper Cooperating
Yes, your accountant gets paid much more than your bookkeeper. But they need to talk regularly, and an hour of your accountant’s time per month checking up on your bookkeeper’s work is cheap insurance. Plus, it will make tax time so much easier and less expensive if the regular bookkeeping entries don’t need frantic fixing during tax season.
Improve Your Financial Controls
Talk to your accountant or some other trusted financial expert and have them start setting up what are called “financial controls.” Separate financial duties such as writing checks, depositing checks, reconciling bank accounts, generating and analyzing financial reports. When different, unrelated individuals are checking each other’s work it’s much harder to embezzle.
Consider An Online Bookkeeping Service
The internet has enabled lots of businesses to be unconstrained by geography, and bookkeeping is one of those. There are a ton of options, ranging from large companies with lots of venture capital to single person operations.
Here is a useful review site we found. Keep in mind that review sites often get affiliate fees for customer referrals – meaning there may be some conflicts of interest at work – so make sure you do your homework after reading the reviews!
Remember: nightmare bookkeepers can cost you your business. It just might be worth it to pay a bit more and sleep well at night!