Bookkeeping is recording your business’ daily transactions in an organized manner. A common myth among small businesses, preventing them from paying attention to this essential practice, is the belief that their small setup does not require bookkeeping and that bookkeeping is reserved for large, complex businesses. However, any company that files for taxes, undergoes audits and needs investors, yearns to save time and money, needs to value bookkeeping.
Let’s discuss eight out of the many reasons why bookkeeping is essential and how to keep books for a small business.
1. Assists You During Tax and Audit Season
Bookkeeping enables you to record your everyday transactions and the financial statements you might generate from the process. These details come incredibly handy during tax filing and audit season when you are expected to submit a wide variety of information that needs to be 100% accurate. It is also vital that you bookkeep through software instead of the conventional methods of preparing records on pieces of paper with a pen or pencil.
Bookkeeping enables you to record your everyday transactions and the financial statements you might generate from the process.
Opting for the latter might save you an initial investment on software, but the long-term effect can be devastating. This is because manual bookkeeping often entails errors and aggravates the chances of losing track of key documents. Suppose you misplace any important file and cannot submit it for your tax returns or audits. In that case, you will eventually land your business into hot waters, and the resulting penalties and heavy fines will incur a severe dent in your budget.
Hence, with due attention to bookkeeping, you can ensure timely and accurate tax returns and audits that will eventually speak positively of your business practices, assisting in image-building.
2. Reduces Burden from the Budget
Be it the management of accounts, keeping the record of transactions, paying the employees and/or trying to expand the business, it is difficult for businesses to accommodate them all within limited financial resources and budget. They often fall short and are forced into cutting down on certain essential activities.
Moreover, a tight budget can lead businesses into serious turmoil in case an unexpected crisis such as a pandemic takes over. If not all, several activities can be consolidated under one roof under bookkeeping. This way, you can maintain a proper record of transactions, avoid penalties, and prepare financial statements without spending much money. In case you are wondering how to bookkeep for a small business without incurring unbearable costs, you can quickly gain access to one-window software solutions, such as FreshBooks, and with their automated processes, enjoy a stress-free process.
Also, with bookkeeping, the resources you previously spent on unnecessary activities are saved and can be directed towards campaigns that might prove beneficial for expanding your business. You may, for instance, utilize that money to incorporate the costly but fundamental sustainable practices in your industry.
3. Prevents Frauds and Discrepancies
The truth is, if you rely on manual methods to keep your books, you risk inviting data theft, financial discrepancies, and fraud that you may not even be able to detect until it’s too late and you’re wondering where all the money went. This is because it becomes easier for employees to change the data, misrepresent it, or even engage in embezzlement.
The risks are unimaginably brought down if bookkeeping is religiously practiced and can be ultimately brought to an end if an automated software like QuickBooks is opted for. This is because bookkeeping involves keeping a strict check and balance on everyday transactions. The modern software solutions ensure the track is marked with the reminders they constantly provide.
Bookkeeping and the resultant products are crucial to winning investors over.
Through sync options, they may also compare one piece of data with the other related pieces to identify any misrepresentation or error, helping you monitor any fraud or discrepancy that may surface. Besides, any employee, tech-savvy or not, can easily indulge in manual bookkeeping, but software can only be managed by someone well-versed with its technicalities. If fraud still occurs, it will become easier for you to identify the culprit as you would not have directed every employee towards the management of your bookkeeping software. Many solutions also offer audit trails and logs to identify the perpetrator.
4. Aids in Convincing the Investors
From an investor’s perspective, it is easier to trust an established enterprise with all their money than a startup yet to make its mark in the market. They are hesitant to support a small business unless they see a strong potential that you can only reflect through your business practices and activities. They need solid evidence of every claim you make; if you manage to do that, you have won big.
Bookkeeping and the resultant products are crucial to winning investors over. They require you to provide them with all the relevant records of the company’s health, which you can only do if you regularly keep the books. With the financial statements and reports, and the day-to-day entry of records generated, it becomes a piece of cake for investors to get to the bottom of a company’s current standing and prospects.
Moreover, apart from presenting your company’s financial position, in a nutshell, bookkeeping speaks volumes about your ideologies and sense of responsibility. It will be a point in your favor during negotiations with the investors, as you can let them know how concerned you are with keeping track of every detail and how hungry you are to evolve your business. It is also vital that you consistently practice the same determination even after convincing the investors. It would take a second for them to pull their money out in case you deviate from the path of responsible bookkeeping.
5. Prepares You for the Future
Many small businesses conveniently neglect bookkeeping as they find it unnecessary for the small scale they operate on. Indeed, these would have been the businesses worst hit by the financial crisis, such as the one recently caused by the COVID-19 pandemic. With no previous records, they would have miserably failed in their preparation for such an unprecedented time and would have never seen that coming.
Although a pandemic is never predicted, as a responsible business, you must keep all the possibilities in mind and be prepared for the worst so you can equip your company and protect it from collapsing in case a crisis takes over. This is partly possible through bookkeeping and brings us to our fifth reason why small business bookkeeping is an obligation, not a choice. You can produce error-free financial statements when you strictly maintain a proper record of your day-to-day transactions.
With error-free financial statements at service, you can analyze your business activities over several periods and quickly identify any issues that you think have hampered your business growth. You can also highlight patterns that proved fruitful for your setup. Activities such as what-if analysis, breakeven analysis, and margin of safety evaluation can provide insights into the risks faced by a business. These crucial details help in being proactive and not letting you face extreme heat. You can easily decide what you want to avoid in the future or what activities might sail you through a tough time.
6. Access to Valuable Business Advice
What if you have no one within your company to assist you with managing the bookkeeping software? If you can afford it, you can also opt for outsourcing and hiring a bookkeeper. Where software only automates multiple processes for you and prepares essential documents, a bookkeeper also provides you with valuable business advice, simultaneously performing all the other functions with incredible proficiency.
Time is a valuable resource, especially if you run a small business
For instance, the bookkeeper keeps an eye on the cash flows, manages the bank feeds, ensures that your business complies with the laws, prepares invoices, and processes employee payrolls. After you seek bookkeeping services for your small business from a bookkeeper, you can sit back and relax even during audit and tax seasons. Your bookkeeper would take all the headaches and assemble the required documents.
7. Helps Save Time
Time is a valuable resource, especially if you run a small business because there is so much going around that you constantly need to check to ensure that you are not left behind in the competition and can sustain in the market. With such important responsibilities on your shoulder, if you would not value bookkeeping, you will eventually cause all the damages you fear can bring your business down.
However, you can save a lot of time and energy through bookkeeping. With records of every transaction, you will not have to run around to find important documents during tax or audit seasons. Moreover, by the end of the month, you would not have to sit and worry about how the money at hand does not correlate with the activities performed throughout. Yet, it is not the manual bookkeeping that guarantees you this but the automated one. For a task that might take you hours to complete through manual bookkeeping, automated methods would complete it within a few minutes or even seconds. The time that you manage to save through this can be invested in discussions, meetings and activities that can further lend some push to your business growth.
8. Billing Features Serve a Cherry on Top
Lastly, several bookkeeping software, such as QuickBooks or Zoho, also contain invoicing and billing features. These features genuinely serve as a cherry on top for a small-scale setup that does not involve heaps of data. Apart from bookkeeping, you can also easily manage your bills and invoices without the need to put your already tightened budget through another trial.
You might need to use separate billing software to handle other vital services like international billing, recurring billing, multi-currency billing and discounts. Consider a scenario where a company opts for billing software despite already having a bookkeeping system. In that case, this probably means that it expects the billing software to have automated invoicing, a user-friendly product catalog, recurring billing automation, finance and account management, metering, important and timely notifications, etc.
Platforms like Invoice2go, bill.com and Vcita are software specially designed to support invoicing for small businesses meaning they cost less and are budget-friendly. Besides, they ensure payments with one click and customizable invoice templates and images to provide you with creative freedom.
To conclude, bookkeeping is the act of recording every transaction concerning your business regularly. As much as this practice is essential for complex setups of large-scale companies, they are necessary for small-scale ones if they really intend to excel. Besides keeping things organized, bookkeeping releases pressure from the company’s budget comes in handy during tax and audit seasons, protects your business from frauds, helps in convincing investors, and much more.