Bookkeeping is important for helping you maintain accurate financial records. Yet, many businesses fail to implement this integral process.
In fact, “poor accounting” is one of the top reasons businesses fail. Without bookkeeping or accounting, you are blindly driving your business.
Still not convinced that your focus needs to be on bookkeeping? Below are 10 reasons why bookkeeping is important.
1. Tax Preparation
Every year, millions of business owners are scrambling through their desk, taking a highlighter to bank statements and searching for receipts to capture business expenses. Sound familiar? Even more will show up at their CPA’s office with boxes and bags of “stuff” hoping we can magically turn that stuff into a tax return. The fact is, this approach is costing you money.
First, in that you are likely missing out on capturing deductible expenses because you’ve forgotten or just can’t locate the supporting documentation. And second in that you’re overpaying your tax professional when you bring in your stuff during tax season. We’re letting the secret out that you will be charged more to get your documents in order during tax season than you would if that work was done during the 4th quarter. Now is the time to begin working with you CPA to get ready for tax filing season.
The tax filing process can be made more efficient by simply having a bookkeeping function within your company. With a bookkeeping process in place, you can have financial information ready for tax time. Instead of scrambling for receipts or invoices, all of your financial information is organized on one central system.
Bookkeeping is important because it helps you budget. When income and expenses are properly organized, it makes it easier to review financial resources and expenses.
A budget creates a financial roadmap for your business. With a budget, you can plan for future expenses and the anticipated resources that would cover those expenses.
Being organized is a skill every business owner should have. You should be able to find information regarding your business at any time.
There are a few parties that are interested in your company’s financial records – the IRS, employees, customers, investors, and lenders. Being able to provide the information requested by these parties are vital to your ongoing operation. If you don’t provide records requested the IRS, that could mean penalties and fees. If you don’t provide records requested by investors or lenders, that could mean a stoppage of cash flow and so on. Being disorganized with your books could cause your relationships with these parties to be compromised or terminated altogether.
By definition, bookkeeping is the organization of financial information. Keeping your financial records organized makes it easier to locate and provide to appropriate parties.
4. 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 provides this information.
How can you expect to make profitable decisions without financial information to back it up?
5. Planning Purposes
Bookkeeping presents the past financial performance of your company. In order to plan for the future, you have to have a good understanding of the past. Bookkeeping will give you the clear picture of what exactly works or doesn’t work.
Bookkeeping not only helps with planning for strategic purposes but also plays a major role in tax planning. It gives your CPA the necessary information to properly categorize revenues and expenses.
With bookkeeping, you and your CPA can structure certain expenses to be more favorable. For example, if you have regular meetings with your clients, you might decide to provide lunch during your meetings. This has favorable tax benefits for your business.
6. Peace of Mind
Disorganized books can weigh heavy on your mind as a business owner. With all of the other factors of running a business, your bookkeeping should not be keeping you up at night.
When your books are complete, you can rest easy knowing that your company’s financial information is review ready. Banks or the IRS no longer have to give you anxiety. Instead, you’ll find your mind at ease and more focused on other elements of your business.
7. Tracking Profit and Growth
Bookkeeping is important because it shows your business’ profitability. For example, the income statement is one of the financial statements that is prepared from your bookkeeping. On the income statement, you can see if your business is profitable or not. Without this information, it is impossible to know how well (or not so well) you’re doing.
Bookkeeping also helps with tracking growth. Over time, you will accumulate months and years of data. With this data, you can observe trends and gain a greater understanding of your business cycles and compare results across periods.
8. Greater Focus on Strategy
Tactical and strategic planning is the core of what you do as a business owner. You’re always thinking of ways to grow and develop your business. With bookkeeping as a tool, you are closer to your short and long-term goals.
You should use the information that bookkeeping offers to focus on strategy. You can track the results of your strategy with bookkeeping and adjust goals accordingly.
Bookkeeping is important because it helps with business analysis. It is a tool used by management to analyze business performance.
The product of bookkeeping is financial statements. Financial statements should be regularly generated and used for analysis.
While analyzing financial statements, you can track your cash inflows and outflows.
Bookkeeping gives you information on which business lines are working or not working. This type of analysis allows to focus on your company’s strengths and improve on its weaknesses.
10. Requirement Under the Law
Last, but certainly not least, the law requires you to keep financial records for your company. Depending on your legal structure, the law requires you to keep financial records separate from your personal expenses. Failing to do so, can lead to termination of your business.
You now know why bookkeeping is important. It can save you money, time, and a headache. If you find yourself needing to implement a bookkeeping process, consider hiring a bookkeeping professional to help.
Accounting and bookkeeping can be complicated and convoluted. Even, classifying a single transaction can be unclear.