Thanks for the A2A!

There are a lot of drawbacks if you don’t have an accounting system, and/or if you have one but it’s ineffective/inefficient. Here are just a few to get started:

1. The information you have when you go to prepare your tax return in the Spring will be inaccurate and/or require a lot of time to put together for the tax preparer. This is very much a garbage-in-garbage-out type process, which can lead to problems with the IRS and state tax authorities, or paying too much in taxes.
2. You won’t have the information at your fingertips that is necessary to make effective operational and strategic decisions. What product or service has the highest margin? Who are my most profitable customers? Which areas can I cut costs? These (and many more) are all questions that you need to have access to with minimal effort to be effective in running a business.
3. It could be difficult to get funding. If you don’t have accurate and complete financial information to make decisions on, neither does a lender whom you are asking to take a calculated risk on your business.
4. It could depress the value of your business if you’re looking to be acquired. Much like #3, a business appraiser will most likely place a lower multiple on your business if you have inefficient, ineffective, or nonexistent accounting processes. Plus, they won’t have good information to make their judgments on.

There are more reasons why it’s a necessity to have a good accounting system in place, but this list is a good start. Accounting is a complex and broad topic, so if a business owner is not experienced in putting these processes in place and managing them, they should outsource this function to an experienced professional.