Imagine having a clear financial roadmap at your fingertips. It would give you the confidence to make the best decisions for growth of your business. Keeping your books up to date gives you the understanding of your cashflow (where it is coming from and where it is going), helps to create a common sense budget, and assist in managing that cashflow better. Bookkeeping is important for helping you maintain accurate financial records. Many businesses still fail to implement this vital process. There are really more than ten reasons why recognizing that bookkeeping should not be regarded as unimportant, but I will cover only ten at this time.
1. Bookkeeping Helps You Budget
When income and expenses are properly categorized, it makes it easier to review financial statements, income, and expenses. A budget creates a financial roadmap for your business. With a budget, you can plan for future expenses and the anticipated financial resources that would cover those expenses.
2. Tax Preparation
All businesses are required by law to do bookkeeping to maintain accurate financial records for tax purposes, as stipulated by the Internal Revenue Service (IRS). While the law does not dictate a specific bookkeeping method, businesses must keep records of their income, expenses, and payroll to substantiate tax returns to avoid penalties, fees, and potential audits. This legal obligation ensures compliance, protects businesses from legal trouble, and provides a foundation for financial planning and strategic decision making.
Hurrying at the end of the year or beginning of the next year to find all your paperwork can cause a lot of anxiety. Bookkeeping for your business organizes everything for your tax preparation in advance. If you are a business owner or self-employed, you are required to file a tax return for your business if you earn at least $600 in the year to have Social Security and Medicare taxes set aside for your future. This is non-nogotiable even if you anticipate getting a refund when you file your personal taxes at the same time. Since a large part of your income comes from your business, it is crucial to know how much the business earned first before the remaining individual part of the tax return can be completed.
3. Organization
Bookkeeping is the organization of financial information. Keeping your financial records organized makes it easier to locate and provide to appropriate parties.
Being organized is a skill every business owner should have. You should be able to find information regarding your business at any time. Certain parties require mandatory documents in regards to your company’s financial records – the IRS, employees, customers, investors, and lenders. Being able to provide the necessary paperwork requested by these parties is essential to the ongoing operation of your business. If you do not provide records requested by the IRS, that could potentially mean penalties and fees. If you don’t provide records requested by investors or lenders, that could stop or slow down cash flow or hinder approval of a loan. Being unorganized with your books could even cause relationships with these parties to be compromised or terminated completely.
4. Analysis
Bookkeeping is beneficial as it helps with business analysis. It is a tool used by owners and management to analyze business performance. Financial statements (Balance Sheet, Income Statement, and Statement of Cash Flows) are generated after bookkeeping is completed. They should be created on a regular basis and used for analysis. While looking over financial statements, you can track your cash inflows and outflows. Bookkeeping gives you information on which business activities are producing and which are not producing. This type of analysis allows to focus on your company’s strengths and improve on its weaknesses.
5. Better Decision Making
With analysis comes better decision making. In order to make the best decisions possible, you need to have access to all available information. Bookkeeping is the foundation in providing this information. You cannot expect to make profitable financial business decisions without current financial data about your business.
6. Planning Purposes
Bookkeeping provides the past financial performance of your company. You need to have a good understanding of the past, in order to plan for the future. Bookkeeping will give you a clear picture of what exactly is working and what is not working.
Bookkeeping not only helps with planning for strategic purposes but also plays a major role in tax planning. It gives your CPA (if you need a CPA) or your tax preparer the needed information to properly categorize revenues and expenses on tax forms. With bookkeeping in order, your CPA or tax preparer can structure certain expenses to be more favorable for your business. For example, if you have regular meetings with clients at restaurants and pay for their meal, this can be deducted as a tax expense for your business. CPA’s do not do bookkeeping. If you need a CPA based on your business structure or the size of your business warrants having a CPA, they can give you better financial advice and strategies after you present them with concise and finished bookkeeping.
7. Easy Reporting to Investors
Investors want to know the financial performance of your business to be able to want to quantify the value of their investment. Financial statements alot this information. The balance sheet, income statement, and cash flow statement all provide the value of your business. Bookkeeping allows investors to have present and accessible information. Investors will be able to make well- informed decisions in their ownership of the business, which is one of the purposes of bookkeeping. Prospective investors are more likely to invest in your business, too, when you have organized financial information.
8. Financial Management
Bookkeeping is important because it allows you to take control of your business’s finances. Bookkeeping paints a clear picture of how you spend money. You can see outstanding invoices owed by you to your vendors or your customers to you. You will benefit from paying your bills on time and receiving payment for your products or services on time. This fine balance of cash inflow and outflow is one of the main ingredients that will keep your business going.
9. Peace of Mind
Disorganized books can weigh heavy on your mind causing stress. With all of the other factors of running a business, your bookkeeping should not be keeping you up at night. When your books are up to date, you can rest easy knowing that your company’s financial information is organized and complete. You will find your mind at ease freeing you up to focus on other aspects of your business.
10. Track Profit and Growth
Bookkeeping is central because it shows your business’s profitability. The income statement is one of the financial statements that is prepared by your bookkeeper. By looking at the income statement, you can see if your business is profiting or not. You need these facts to know if your company is growing, not growing, or possibly even incurring a loss.
Over time, bookkeeping supplies months and years of data. With this data, you can observe trends and gain a greater understanding of your business cycles and compare results over periods of time.
