If you intend on your business being profitable, bookkeeping is nonnegotiable. If you intend on growing your business, understanding your numbers (accounting) is a must. Starting a business is no easy feat and during the beginning and part of the intermediate stages, there’s a lot of DIY going on. It is very possible for you to manage your small business’ bookkeeping but it is up to you to determine if you truly understand what you’re doing or if you need help. If you’re generating income but barely keeping track of what’s coming and going, this is for you. I’m going to explain why your business needs bookkeeping.
Assess Growth Or Lack Thereof
No sane person wants their business to remain stagnant. By accurately keeping up with your numbers you can assess income, expenses, waste, cash flow, etc. These are important factors in determining whether your business is experiencing growth or decline. This is also a great way to assess the health of your business.
By comparing these numbers against your budget and financial plan, you can determine:
- The amount of income made
- Areas of overspending
- Expenses paid (both necessary and unnecessary)
- Cash movement (withdrawals, deposits, etc.)
- If you’ve met, exceeded, or went below budget
- Whether there are any discrepancies reported
- Are you profitable or is your business suffering a loss
There’s this notion that if you aren’t making much, you don’t have to keep track or monitor movement. This couldn’t be farther from the truth especially if you want to make more. What is true is that your small business finances may not be complicated to monitor if you aren’t experiencing accelerated growth and income. By assessing these areas, you can set profit and sales goals and compare to your own progress or to those who are in your industry.
Organization
Besides ensuring that your personal and business finances are separate you also have to keep them organized. No one should know your business better than you. You should be able to pull reports, know on average how much you’re making monthly, what your expenses are looking like, etc. and this comes from being organized. What does this look like? Having important documents (ex: financial reports) filed timely and properly, keeping up with receipts, managing bank records, keeping up with tax filings, etc. While it may not be financial in nature, it is certainly a key aspect to your overall money management system.
Tax Purposes
The IRS is the one government agency that you do not play with. How you file your taxes is dependent on the legal entity you’ve chosen for your business. Also, the requirement for quarterly taxes is also dependent on your estimated tax liability. As a result, none of these things can be determined accurately without proper money management. At the end of the year, it can be a nightmare to try to recount all that happened in your business without the proper tools in place. If you aren’t well versed in taxes and create a mess, it will be expensive to pay an Accountant to clean up your mess.
To Apply For Business Credit Card or Loan
If your plan is to eventually apply for a business credit card or loan, your finances need to be in order. Most lenders have income requirements and will comb through your personal AND small business finances. There are certain documents requested (bank statements, financial statements, tax returns, etc.). Hence the importance to treat your business like the important entity it is or you want it to be. People will only take you as serious as you present yourself. Be sure to carry your business in a professional manner.
People will only take you as serious as you present yourself. Be sure to carry your business in a professional manner.
Let’s be clear, as your business grows and as you become more consumed with running your business, you will need to enlist help. Depending on complexity and the volume of work you being to take on, you can land yourself in deep financial trouble if you don’t have the right help.
Throwing data into QuickBooks without knowing the key elements of the bookkeeping process can create some disastrous results. And those results may adversely affect your tax return. Not only that, but a subsequent IRS audit may result in additional tax liabilities as well as open up other years for examination. – FoxBusiness
