Safeguarding for Businesses: Avoiding Financial Mistakes that Pose Legal Risks

Sound financial management is nothing short of vital for the success and stability of any business, particularly emerging businesses attempting to navigate a harsh economic climate. However, certain financial mistakes can inadvertently expose entrepreneurs to the risk of legal repercussions – that could cripple a business, harm prospects or even lead to punitive measures.

A comprehensive understanding of financial health and necessary legal compliance can help businesses avoid unnecessary risks and consequences. With this in mind, what are some of the more common forms of mistakes that businesses might encounter?

Improper Record-Keeping

One of the fundamental financial mistakes that can lead to legal risk comes in the form of improper record-keeping. Inadequate documentation, and disorganised financial records, can together lead to major compliance issues.

This is particularly the case when it comes to tax compliance, as poor record-keeping might lead to incorrect tax filings and debt to HMRC. HMRC audits would uncover the discrepancy with relative ease and could see the business sanctioned heavily as a result. There are myriad other reasons for which robust record-keeping is advised, including the satisfaction of investors and partners – who may have civil grievances where investment money is not correctly recorded.

Breaches of Contract

Failing to fulfil contractual obligations can lead to serious legal disputes and profound financial liability, even for smaller businesses. Contracts are much more easily breached than one might anticipate, too; duty of care is an implicit term in every contract made, and failure to uphold that duty of care could see a business liable for professional negligence.

There are, of course, many ways in which a contract can be breached, each of which brings its distinct form of regulatory or civil challenge. These are specific to industry, business and even individual contracts, but make judicious following of existing frameworks crucial for ongoing success.

Mishandling of Funds

Any form of fraudulent business activity can form the death knell for a given enterprise, but the most damning of these in the realm of financial errors comes in the form of mishandling company funds. There are a number of legal precedents for this, the most well-known of which is ‘embezzlement’ – the misappropriation of funds for personal gain.

Embezzlement might involve an individual siphoning off additional profits without recording them, or ‘borrowing’ money to scalp interest from it. Either way, there are many reasons why this can lead to negative consequences for the business in general – including a negative PR angle that could impact longevity.

Ultimately, commingling personal and business finances, diverting funds for personal use, or otherwise failing to maintain proper accounting controls can lead to legal disputes, financial liabilities, and potential accusations of fraud.

To overcome these different financial mistakes, and mitigate legal risk in the process, businesses should prioritise sound financial management practices. This might involve the hiring of a third party to examine financial systems and audit processes, but should also involve a top-down shake-up of company culture – fostering a culture of transparency and ethical financial practice.