Good bookkeeping practices can provide a key platform for company growth.
While poor bookkeeping practices might be limiting the full potential of your business.
Business owners regularly postpone setting-up proper bookkeeping systems with strong internal controls. Focusing on generating sales and positive customer experiences are often the priorities.
However, poor bookkeeping practices can cost owners and managers more than they might think. We have identified four potential consequences in this article: BIR audits, inventory issues, inaccurate pricing models and bouncing checks.
Identify the issues in your business early and resolve them without delay – don’t limit your business!
More frequent BIR audits
Bad bookkeeping practices can expose your business to various risks related to BIR audits. If you do not maintain proper records or bookkeeping controls, your business is much more likely to fall on the wrong side of the BIR.
Under RMO 19-2015, a business can be audited by the BIR in three ways: (1) normal tax audit (which covers all taxes); (2) Value Added Tax audit and (3) Letter of Notice (generally based on discrepancies found by the BIR system).
If you don’t have proper bookkeeping records or processes in place, your business could face all of these three audits in the same year. If that’s not enough for you to be alarmed, there’s more: the BIR, under certain cases, is allowed to audit your business every year without reprieve.
Late or incorrect filings of taxes may be subjected to civil penalties, interest per annum, compromise penalties and surcharges.
If an overstatement of expenses or under-declaration of income is 30% or more, it could be used by BIR as evidence of fraud. Cases involving fraud can be subject to a 50% surcharge instead of the normal 25% surcharge.
Aside from penalties, RMO 19-2015 states that your business can also be subjected to a temporary closure of not less than 5 days.
After all of the above, is there really a need to provide more reasons to keep your books in order? We will anyway!
You may lose control of competitive pricing
Without proper bookkeeping within your company, it will be very hard for you to price your products or services accurately and competitively. Two undesirable outcomes could arise – either (1) you are charging higher than what your competitors charge and lose out on sales or (2) you are charging much less than your competitors and lose out on profits.
Proper bookkeeping practices are the basis for developing accurate product or service pricing models.
Let’s examine how sale prices should be considered.
The general format of an income statement goes as follows:
Less: Cost of Sales ( the cost of producing/cost of raw materials)
Equals: Gross Profit
Less: Other Expenses
Equals: Net Profit
By using this format for pricing product and services, it is easier for a business to understand the effects on any price adjustments. Let’s say you have the following (very simplified) figures:
Less: Cost of Sales (40%)
Equals: Gross Profit (60%)
Less: Other Expenses (10%)
Equals: Net Profit (50%)
Suppose a competitor sells their products or services at a lower price. In order to compete, you realise that you will need to reduce your selling price by 10%. The question arises whether or not you can afford to do so? Based on the above calculations, which should be grounded on the information in your accounting books, you will at least be fully informed when making the decision knowing that your net profit will also decrease to 40%.
If you don’t have the ability to understand your profit margins and product or service price points, you will find it harder to generate competitive pricing within your market. This could lead to a decrease in (a) your existing customer base and (b) your potential to attract new customers.
So stay competitive. If you are a business operating in the Philippines, make sure to invest in professional accounting and bookkeeping services and ensure that you are not pricing yourself out of the market!
If your accounting and bookkeeping processes are performing poorly, it will be very difficult to retain control over your inventory.
Having a shortage in inventory can result in lost sales. Not knowing what is in your inventory can also result in lost sales! You might think that you don’t have enough items in stock, when in fact, you do. The opportunity to increase sales is lost!
On the other hand, if you stock too much inventory, you incur the cost of stocking items that you might not need at the time. You also risk perishable items going out of date or seasonal items going out of fashion.
Poor stocktaking processes could also do damage to the reputation of your business. Why? An example from industry – you see in your records that you have 100 pieces of PVC pipes. You promised to deliver 100 PVC pipes to a client the next day, only to find out, when you commence loading, that you only have 60 pipes. A poor accounting and bookkeeping system = an unhappy client!
Good bookkeeping enables regular and accurate inventory counts. Make sure you know what stock your business is (or isn’t!) carrying at all times.
If you are not organized with your bookkeeping records, you will struggle to understand how much cash the business is actually generating. If you issued checks with a total value of more than what the company has in the bank, you could be violating the Anti-Bouncing Checks Law.
Under the Anti-Bouncing Checks law, the check issuer might be penalized with an amount not less than the face value of the check but not exceeding (1) twice the value of the check and (2) P200,000.
Banks also charge penalties for checks drawn against insufficient funds. If for example, you have a bounced check amounting to a certain value, you can incur charges based on the number of days for which there are insufficient funds.
It is always important to ensure you are aware of any additional charges or fees that your bank can apply against your account.
Having a history of bouncing checks will also make it harder to get approved for business loans. Financial institutions in the Philippines have a centralized way of checking credit ratings for companies. So, a bad credit rating with one bank is likely to be known by other banks as well.
Suppliers are another category of stakeholder to be considered on the subject of bouncing checks. It can be much harder to secure helpful payment terms when your credit rating is in question. Suppliers may only agree to deliver to your business on a cash basis – a potential nightmare for accounting and finance processes and protocols, not to mention ease of doing business!
A bookkeeper for your business in the Philippines
Is your bookkeeping system causing issues for your business? We can help.
CloudCfo provides trusted and professional accounting, finance and bookkeeping services for companies in the Philippines. Our team of experts, led by Certified Professional Accountants, can help identify the issues within your bookkeeping processes, develop robust protocols and controls in line with your business model and set up your business with processes that enable real growth.
It is all performed through the use of online accounting software, cloud technology and smart solutions.
We are process orientated, output focused and tech enabled!