Bookkeeping is the process of recording day-to-day transactions conducted by a business. Large organizations typically have a dedicated Accounting or Finance department that records all the business transactions and prepares a periodic report for the management or the shareholders. However, smaller businesses, such as sole proprietors or partnerships, are more reluctant to have an organized bookkeeping function.
Regardless of the size of your business, bookkeeping is not supplementary but obligatory to grow and sustain your business. Here are some of the reasons why bookkeeping is a critical activity and shouldn’t be delayed any further:
1. Aids in Tax Preparation
The process of determining self-employment or business tax is quite different from personal tax. Many new business owners are surprised when their tax consultants request key business information to file the business taxes. This leads to rushed attempts of categorizing the transactions for the entire period and consequently higher payments to the tax consultants. Timely bookkeeping can save this hassle.
With proper bookkeeping, you will never miss out on any tax-deductible expenses, and you will have all the documentation handy in case of a tax audit. This will also save time and money when you initiate the tax filing process.
2. Enables Business Planning and Budgeting
All business owners need up-to-date information to make key business decisions. For instance, you need to know the quantity of stock in hand before you commit to a new order. Similarly, you need to know the outstanding balance of each credit customer to chase up the payments. This is impossible without proper bookkeeping and you will often miss on your commitments with the customers, suppliers, lenders, or employees.
Cash is considered to be the lifeblood of all businesses. Many businesses fail not because they incur losses, but because they fail to have enough liquidity to settle the liabilities as they fall due. With real-time books, you can always forecast the cash position and take appropriate actions well in advance, if there is a cash deficit.
3. Helps Reduce Expenses
Small business owners who start maintaining proper books are often surprised by the number of unnecessary funds they spend on certain categories. Conversely, those without proper books are often confused as to why they keep losing money, even when they charge a higher product margin to the customers. It is impossible to identify where exactly the cash is going in the absence of a proper categorization supported by the books.
Start maintaining the books today and you will be amazed by the saving you can generate by controlling your expenses. Reduce or delay any non-value adding expenses, and perform a what-if analysis to see how much you can save by reducing certain expenses by a small percentage.
4. Allows Tracking Profit and Growth
If you do not maintain the books, can you answer how much profit you made today, this week, this month, or this year? The answer is No! You do not know whether you are running a business that you really should. Similarly, you cannot compare your performance with the prior periods to ascertain the direction of your business, and whether it is following the path you want it to follow.
Organized bookkeeping answers all of these questions. With product or service-level information, you can concentrate on the profitable products and discontinue the loss-making products. You can also adjust your margins by absorbing indirect costs of business in the product prices. The end result is a nice, clean profit statement with comparable periods to allow critical business decisions.
5. Supports Investor Negotiations
One of the very first questions asked by the investors or lenders is in relation to the business books. Investors want to understand the business potential and historical growth rates to predict their returns. The lenders, such as banks and other financial institutions, need to assess the ability of the business to repay its debt. Without proper books, a business owner cannot even sit at the negotiation table, let alone win the proposal.
Some investors and lenders also require audited books before making the commitment. The auditors can easily identify the anomalies with recordkeeping, and the only way to satisfy the auditors is to maintain correct books from the start. With impressive margins properly laid out on a professional report, you can definitely win the investors and expand your business.
6. Signifies Separate Entity Concept
A common mistake made by the new entrepreneurs is mixing up personal and business transactions. It is important to follow the separate entity concept for the business, which means that transactions related to the business should be recorded separately from the transactions conducted by an individual. Owners who do not maintain proper books often include both types of transactions in determining business taxes. This leads to incorrect tax submissions and the penalties that follow.
You can use the services of a professional bookkeeper or directly maintain your accounts on a tax-friendly software program, such as FreshBooks, to separately track all the business transactions.
7. Gives You Peace of Mind
Many small business owners keep performing all the calculations in their heads. With questions about whether they have rightly included or excluded certain items, an only result is a hypothetical number full of doubts. You shouldn’t let bookkeeping keep you up at night.
All the doubts, confusion, and anxiety can be eliminated by maintaining proper books. They allow you to access the historical and current business position and answer all of your questions, thereby giving you peace of mind. The energy saved here can be diverted to running the actual business.
Bookkeeping is the first step in taking your business to the next level. In the absence of proper information, you will not only lose customers and incur hidden charges but also face the risk of hefty penalties imposed by the tax authorities. The queries raised by tax consultants and potential investors will feel painful to answer, and you will be wasting your time and energy on performing petty calculations in your head.
Nip the evil in the bud, and start maintaining your books today. A simple bookkeeping software, such as QuickBooks, can be used to completely automate your bookkeeping, allowing you to reap the maximum benefits associated with organized books.