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“Beware of little expenses; a small leak will sink a great ship.” – Benjamin Franklin
Remember the Titanic? The mighty steamship of that time. If you ignore the importance of bookkeeping as they overlook the iceberg, your business will definitely be doomed!
To get everything well catalogued for your business, you can’t nullify the importance of bookkeeping. To enhance your understanding regarding this, I’ve summoned up 15 reasons why it is crucial. So, buckle up and stay with me.
What is Bookkeeping?
So, what is bookkeeping? Is it like keeping books with you? Definitely no!
In the business world, bookkeeping is the record of financial transactions and is a part of the process of accounting in business. Transactions include purchases, sales, receipts, and payments. Usually, business organizations or firms make the record from the beginning of the corporation to the very end.
A bookkeeper is a person responsible for bookkeeping. He/she can do the work by hand or by a computer program, for instance, google sheet or excel. Bookkeepers can use either single-entry or double-entry bookkeeping to record financial transactions.
Poor accounting is one of the prime reasons businesses fail. Without bookkeeping or accounting, you are blindly driving your business.
Bookkeeping is essential for helping you maintain accurate financial records. Yet, many businesses fail to implement this necessary process. Besides the fact you are required under law to keep specific books and records, doing so will save you frustration later on.
However, below I’ve listed 15 reasons about the importance of bookkeeping for you.
1. Financial blueprint
The importance of bookkeeping arises when it comes to the budget.
A budget creates a financial road map for your business. With a budget, you can plan for future expenses and the anticipated resources that would cover those expenses. When income and expenses are correctly organized, it makes it easier to review financial resources and costs.
2. Tax obligations
In most cases, your business has to file a tax return every year. With a proper organization of records on your earnings, you won’t have to worry about scrambling for receipts and invoices. It is because all your files are appropriately documented through bookkeeping.
Besides, as a businessman, your income tax is related to your business also. In order to know how much you earned, you have to understand what your business received first. See, bookkeeping helps in your own tax return too!
You have to report your investors about crucial info like the financial status of the company. However, the process of reporting is no longer worry if you practice bookkeeping. From the book of account, you will get all the necessary charts, graphs, and lists of data.
Moreover, bookkeeping helps you to impress the investors as you can give a wood-perfect presentation regarding their investments. After that, they may be interested in investing even more, who knows!
As a business owner, you have to organize your business from tip to toe. And bookkeeping helps you extensively in this regard.
By definition, bookkeeping is the organization of financial information. Keeping your financial records organized makes it easier to locate and provide to appropriate parties. Besides, through this process, you have all the info ready in hand all the time.
5. Business planning
Bookkeeping makes your business planning smoother and more manageable. What you need is only the Balance Sheet. Also, you will require Profit and Loss to check if the company is on the right track financially from where you can start your business planning so much quicker.
6. Record keeping required by Law
Your business policy and procedures must meet the rules and regulations stated by the government. In this regard, bookkeeping allows you to keep your records properly as per the required laws.
Also, you will organize documents and files in a convenient way, such as small to big or vice versa. So that retrieving process becomes more manageable when audit time comes.
7. Business analysis
In analyzing your financial statements, you can easily manage your profit and loss. By practising bookkeeping, you can assess your business performance and identify your strengths and weaknesses.
8. Decision making
With analysis comes better decision making. Geared towards the best decisions possible, you need access to all available information. Where to find the details? Of course, bookkeeping as it provides this information.
However, you can’t expect to take profitable decisions without the backup of financial information. Can you?
9. Financial management
Bookkeeping is crucial as it allows you to take control of your business finances. To clarify, it paints a picture of how you spend money. Therefore, 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.
10. Track profit and growth
Bookkeeping helps you in preparing the income statement, which reflects your profitability. Without this particulars, you can’t track your performance, whether it is good or bad.
Forbye, bookkeeping aids you to trace growth also. Over time, you will accumulate months and years of data. With this, you can witness trends and gain a greater understanding of your business cycles. Besides, it portrays a scenario for comparing results across periods.
11. Focus on strategy
Tactical and strategic planning is the core of what you do as a business owner. You should use the information that bookkeeping offers to focus on strategy. You can track the results of your plan with bookkeeping and adjust goals accordingly.
12. Better cash-flow
You probably think that how can bookkeeping contribute to improving cash flow. Well, it can!
Bookkeeping provides information regarding your outstanding invoices. For instance, customer/vendor name, amount, date issued and due date. You can use this to implement better cash flow policies. By observing the documentation, you can always increase the average amount of cash you have on hand at any given time.
13. Easier tax audit
A Tax Audit is a full review of your tax returns to ensure the correct amount is being paid to Her Majesty’s Revenue and Customs (HMRC).
When HMRC audits, you wish to make sure your books are in order. Messy books prolong the auditing process and make your business more sensitive to fees and penalties. When faced with an audit, it’s best to make their job as easy as possible by providing what they request in due time. Otherwise, you give them time to find more issues with your company.
14. Assets = liabilities + equity
It is an accounting equation. It means that everything the business owns (assets) is balanced in contrast to the claims against the company (liabilities and equity). Penalties are claimed on what you owe vendors and lenders. Owners of the business have claims against the remaining assets (equity).
These are the three essential components of a balance sheet. Therefore bookkeeping again proved its importance.
15. 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 HMRC no longer have to give you anxiety. Instead, you’ll find your mind at ease, and more focused on other elements of your business.
Original article: https://www.alphaacademy.org/why-bookkeeping-is-important/