By and large, most business owners launch their own companies because they are passionate about something. For example, perhaps you’re madly in love with animals and decide to open a pet care business. Or maybe you’re a superb gluten-free chef who has started a specialized meal delivery service. Whatever the case may be, most entrepreneurs are genuinely passionate about what they do. However, your business isn’t just your passion; it’s also your money maker. And bookkeeping is a fundamental tool that helps you keep your money-making on track. Therefore, paying careful attention to your bookkeeping is absolutely essential regardless of the type, size, or structure of your company.
What Is Bookkeeping and What Does It Involve?
Bookkeeping is a broad topic with a relatively simple definition. It refers to all of the processes and activities involved in recording your company’s financial transactions. When your books are accurate and up to date, you can see how much operating capital you have to work with at a glance. You can also keep tabs on your cash flow, manage your payroll, and check whether your business shows a profit or loss.
Why Bookkeeping Is Important For Your Small Business
Bookkeeping is essential for every type of business, regardless of its size. It’s important for sole proprietors, LLCs, and every other kind of business structure. It’s even crucial for nonprofit organizations. But accurate bookkeeping is absolutely vital for small businesses because funds are limited, and a financial mistake could have catastrophic effects. Here’s a look at the top seven reasons why bookkeeping is important for your small business and why you should prioritize keeping accurate and up-to-date books.
Taxes and Audits: Bookkeeping Helps You Meet Your Tax Obligations and Be Ready for a Potential Audit
Every business has to file tax returns and may need to pay quarterly taxes. And filing your company’s tax returns will be impossible unless you know how much revenue your business has generated and the business expenses you can deduct. Income tax isn’t the only concern, either. You’ll need proper bookkeeping practices to manage your payroll taxes and sales tax if your company sells products. Furthermore, accurate and up-to-date books are essential in the event that your company gets audited.
Realistic Budget: Bookkeeping Allows You to Create an Accurate Budget
Companies need budgets just like individuals do. You’ll need a clear picture of your company’s revenue and expenditures to develop a workable budget. And having a budget enables you to create a financial roadmap for your company so you can plan ahead for future growth.
Financial Health: Bookkeeping Enables You to Measure the Financial Health of Your Business – Profit or Loss
It’s impossible to know if your company is doing well or in the red unless you’re keeping up with the bookkeeping. But proper bookkeeping gives companies a reliable measure of their performance as well as valuable insights about ways to improve their financial health.
Timely Payments: Bookkeeping Helps Ensure Timely Payments by Tracking Accounts Receivable and Accounts Payable
As previously noted, bookkeeping tasks include entering every financial transaction into the corresponding account. For example, you’ll enter payments made to your suppliers (accounts payable or AP) and payments that your customers make to your company (accounts receivable or AR). If your records of financial transactions are not up to date or accurate, how will you be able to determine if you’re in danger of being late on a payment to a supplier? Similarly, it will be difficult to identify which customers’ accounts are delinquent.
Accurate Payroll: Bookkeeping Helps to Ensure Payroll Is Managed Properly
If you have employees, you’re responsible for ensuring they get paid properly. Businesses can face significant repercussions for underpaying employees as well as failing to withhold the correct amounts. Therefore, managing your payroll – including payroll-related taxes – is a vital bookkeeping function.
Cash Flow: Bookkeeping Makes It Possible to Monitor Your Company’s Cash Flow and Operating Capital
Your cash flow is the money that flows in and out of your company. And businesses, especially small businesses, need a positive cash flow to survive. In other words, your company needs to bring in more money than is going out. Operating or working capital is like a barometer of your company’s short-term financial health. Knowing your working capital will enable you to determine whether your business can continue meeting its financial obligations.
Growth: Bookkeeping Provides the Financial Information Needed to Secure Credit or Fund Future Growth
Some businesses are funded entirely through the entrepreneur’s savings. It’s possible that you won’t ever need to apply for a small business loan or to discuss your venture with potential investors. However, if you do have plans to expand your business (purchase expensive new equipment, open additional locations, etc.), it’s quite likely that you will need to apply for a loan at some point. You may also need to establish a line of credit with a supplier or vendor. No conscientious loan officer or supplier would knowingly approve funding for a business that doesn’t keep accurate and up-to-date books.
Whether you’re a seasoned pro with numbers but crunched for time or you’re feeling a little lost, we can help. Accounting Meister provides comprehensive bookkeeping support services for small businesses and startups in the North Port, Florida area and beyond. Contact us today at (941) 267-1416 or schedule your initial consultation online, and we’ll help you make sense of your bookkeeping obligations. Our QuickBooks® Certified ProAdvisor can also streamline your bookkeeping processes.