What is bookkeeping and why is it important?
As a small business owner, it can be challenging to stay on top of your books while successfully running and growing your business. As you hire employees and gain more customers, tracking business expenses and making sure they’re accurate becomes more complex and time-consuming.
What exactly is bookkeeping?
Bookkeeping is the process of recording the financial transactions of your business in a consistent way that organizes your sales, purchases, payments, and receipts. The financial data recorded in the bookkeeping process is then used in accounting to produce financial reports that measure the health of your business. In other words, bookkeeping tracks transactions whereas accounting are the process of summarizing, interpreting, and communicating this data to make critical business decisions. With accurate bookkeeping, you’ll have valuable information like how your business is performing, if you’re making a profit, which marketing campaigns are successful, and more.
Here are the five major reasons bookkeeping is so important to your small business:
Analyze Spending and Improve Budgeting
One of the main benefits of proper bookkeeping is that it allows business owners to seamlessly analyze expenses, and make any necessary adjustments to their budget. Conversely, by examining financial statements you can determine which products or services are generating the most revenue and make adjustments to increase profit.
Manage Cash Flow
According to recent research, 29% of startup businesses fail due to cash flow issues. For business owners, having sufficient funds is critical for managing operational expenses, and equipping their business for growth. When you’re on top of bookkeeping, you can easily track payables and receivables and ensure you have enough money to pay your bills.
A Smoother Tax Season
Tax season is a stressful time for small business owners, but it doesn’t have to be. Proper bookkeeping throughout the year helps you identify and organize the information you need to file your income tax returns ahead of time. Instead of sifting through a pile of documents to get the information you need, bookkeeping ensures that this information is at your fingertips. That means less stress for you and more time that can be spent on your business.
You’re Prepared for an Audit
In the unlikely event, your small business is audited by the IRS (only 2.5% of small businesses are audited), having accurate and up-to-date records will ensure a smoother audit process. And the sooner you can get back to running your business, the better.
If you’re worried about audit activity, good bookkeeping is your best defense. With organized, clear-cut books, you can easily answer any questions the IRS may have about expenses, income, losses, tax deductions, tax returns and more.
It’s Easier to Secure Loans from Banks and Other Creditors
As your business grows, you may choose to secure a loan from a bank or creditor. You will have an easier time securing capital when you can clearly outline past performance. Banks and other lenders need to be assured that you have a solid history and a good handle on your business’ finances.
Additionally, if you are interested in selling your business, good financial records demonstrate the value of your business to prospective buyers. Not to mention helping you determine your company’s valuation based on past performance.
Good bookkeeping is integral to your business’ success. If you find yourself overwhelmed by your books, you’re not alone. Partnering with us can save you time, money, and stress. Call or click to set up a discovery call to see how we can help.