It’s a stereotype, but it’s an accurate one. On the shelf in a closet of so many small businesses sits a shoebox. All of your financial paperwork goes into the shoebox until tax time. At tax time, you freak out, dig through the shoebox frantically hoping to find some reason to pay fewer taxes.
This might be fine for a sole proprietorship in the first quarter of doing business, but it’s not a long-term bookkeeping solution. Shoebox accounting is, but its very nature, procrastination accounting. Whether you realize it or not, that approach to accounting is going to cost you money.
Here are some of the ways shoebox accounting chips away at your profits:
- Cash flow troubles. All small businesses have ups and downs for cash flow. Having a real accounting system helps you overcome those downs by letting you know who owes you money and where expenses can be cut.
- Billing. Sometimes, clients don’t pay on time. Sometimes, they don’t pay at all, and they fall off your radar. Shoebox accounting necessarily creates the possibility of unpaid invoices.
- End-of-year costs. Shoebox accounting saves you money today because you don’t have to hire an accountant. Unfortuantely, your accountant will have to work twice as hard (and bill twice as month) at the end of the tax year.
- Risk of audit. There is no guarantee your small business will be audited. However, do you really want to sit across your kitchen table with an IRS agent digging through a shoebox?
- Data insecurity. If there’s a fire, that shoebox is going up with it – along with all of your records. That means lost customer data, lost Accounts Receivable information and loss of tax records.
- Trouble getting financing. Maybe you have a new product line you’d like to introduce, but don’t have the funding. You’re much more likely to get a small business loan if you have a solid accounting system that shows the health of your business. Shoeboxes don’t usually impress loan officers.
Sure, it can be a hassle to switch to an accounting package, but not doing so is probably already costing you money.