Bookkeeping is important for helping you maintain accurate financial records. Yet still, many businesses fail to implement this integral process. Besides the fact you are required under law to maintain accurate books and records, doing so will save you frustration later on.
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 15 reasons why bookkeeping is important.
1. Bookkeeping Helps You Budget
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.
2. Tax Preparation
In most cases, your business has to file a tax return every year. And every year, millions of business owners are scrambling through their desk to find missing paperwork. Sound familiar? The tax filing process can be made more efficient by simply having a bookkeeping function within your company.
Bookkeeping is important for filing your personal tax return too. As a business owner, a large part of your income comes from your business. In order to know how much you earned, you have to know what your business earned first.
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.
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.
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.
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 provides this information.
How can you expect to make profitable decisions without financial information to back it up?
6. 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.
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 do just that. The balance sheet, income statement, and cash flow statement all present the value of your business.
As stated previously, the product of bookkeeping is financial statements. Bookkeeping allows investors to have up-to-date and accessible information. Investors will be able to make better, well informed, decisions which is the ultimate purpose of bookkeeping.
Bookkeeping is not only for current investors but for future investors too. Prospective investors are more likely to invest in your business when you have organized financial information. Think about it, if you were an investor, would you invest in a company that didn’t have accessible and organized financial records?
8. Financial Management
Bookkeeping is important because it allows you to take control of your business’ finances. Bookkeeping paints a clear picture of how you spend money. You can see outstanding invoices owed by you or your customers. You will benefit from paying your bills on time and receiving payment for your products or services on time too. Its this delicate balance of cash inflow and outflow that will keep your business going.
9. 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.
10. Track 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.
11. Better Cash Flow
Bookkeeping improves your cash flow. The routine recording of revenues, expenses, liabilities, and receivables, will allow you to track when your customer and vendor invoices are paid. As a business, you want to ensure that your customer invoices are being paid in a timely manner. The sooner, the better. Paying your vendor invoices should also be done in a timely manner, to avoid any late fees.
How does bookkeeping help improve cash flow?
Because bookkeeping provides information regarding your outstanding invoices – customer/vendor name, amount, date issued and due date – which can be used to implement better cash flow policies.
Some examples are shortening the amount of time you allow your customers to pay you. On the flip side, you can delay the payment of vendor invoices by waiting until a day or two before the due date. By doing so, you are increasing the average amount of cash you have on a hand at any given time.
12. 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.
13. Provides a Snapshot of Your Business
Bookkeeping provides financial information about your company in the form of financial statements. Financial statements like the balance sheet, income statement, and cash flow statement all provide financial information for a set period of time. Together these statements take a snapshot of your business allowing you the ability to see how well your business performed.
14. Easier IRS Audit
In the unfortunate circumstance, you are audited by the IRS, you want to make sure your books are in order. Messy books prolong the auditing process, making your business more susceptible to fees and penalties.
If the IRS feels that your books are disorganized or outdated, they have more motivation to impose penalties.
When faced with an audit, it’s best to make their job as easy as possible by providing what they request in a timely matter. Otherwise, you give them time to find more issues with your company.
15. Requirement Under 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.