The Importance of Bookkeeping for Your Small Business – [Explained]

Bookkeeping

Let’s start at the beginning: What is bookkeeping?

Simply put, bookkeeping is the process of recording, storing and organizing a business’s financial transactions.

Why exactly is bookkeeping crucial anyway?

Bookkeeping helps with budgeting

First and foremost, bookkeeping is important because it helps you with budgeting. It organizes your income and expenses in a proper way and makes it easier for you to review your current financial resources and expenses. This way, if you have an income deficit showing up on your budget, you can take steps to cut down the expenses, or if you have an income surplus, you can plan how to spend it wisely on future investments.

Bookkeeping helps with tax preparation

The tax season brings anxiety in galore. Business owners are often found scrambling through their desk to find missing files and documents as they try to meet the deadline. Bookkeeping makes the tax filing process efficient and accurate by keeping track of all the financial records year around, so that when the tax season approaches, you have everything in order and ready to go in one central place.

Bookkeeping helps with performance analysis

One of the biggest benefits of bookkeeping is that it empowers you with all the necessary financial information to analyze the performance of your business. Using the information available from bookkeeping records, you can review your cash inflows and outflows and assess how your business is doing. You can then strategize and address your weak points and seek ways to maximize your profits.

Bookkeeping helps with easy reporting to current investors

If you have investors who have invested in your business, they would want to know how the business is performing. You can use the financial statements—income statement, cash flow statement and balance sheet—generated through bookkeeping to provide reports on important key metrics.

Bookkeeping helps with attracting investment

Bookkeeping is not only for current investors; you can also use it to pitch your business to potential investors to attract more investment. Using the financial information from bookkeeping records, you can communicate the existing (and expected future) value of your business to investors, show them cash inflows and outflows and convince them to invest.

Bookkeeping helps with financial management

Bookkeeping is important because it gives you a clear picture of your business finances on a granular level, allowing you to adequately manage them. For instance, with bookkeeping, you can track outstanding invoices and take steps to ensure your customers clear their remaining payment without any further delay. Likewise, through bookkeeping, you can keep track of due bills and pay them on time to avoid unnecessary surcharges.

Bookkeeping software

Bookkeeping helps with resolution of customer disputes

Customer disputes can arise in a business. The business may lose the receipt from a customer and wrongly assume them as a defaulter. Conversely, a customer may lose the invoice sent by the business and miss out on the payment unintentionally. Consequently, the business and the customer could enter into a dispute where their individual records might not tally with each other. This is where bookkeeping helps by establishing an audit trail of every transaction, enabling disputes to be handled and resolved amicably.

Bookkeeping helps with IRS or state audits  

The state authorities or IRS can come knocking at your door any time and request for an audit. In the unfortunate circumstances, you want to make sure everything is in order. If the IRS or state authorities find your books messy or some documents missing, they can impose penalties and fines on your business. Practicing accurate bookkeeping ensures your records remain up to date and organized, so if the auditors request for anything, you can provide it to them in a timely manner.

Bookkeeping helps with maintaining compliance

Last but not the least; bookkeeping is important because it is required by law. It’s that simple. If you don’t maintain bookkeeping records and the government finds about it, you can have your business license terminated and be forced to close the shop.

What Next?    

You now know what bookkeeping is and why it is important for your small business. Next, you may think: How do I go about it?

Well, you can either do bookkeeping yourself or you can hire a bookkeeper to do it for you. The first approach saves you money but it eats up your time. The second approach means you’ll have to spend money on hiring and paying the bookkeeper but it will relieve you of bookkeeping responsibilities.

Regardless of whichever solution you decide to go for, you’ll need the right tools to ensure efficient and accurate bookkeeping. Here at gotomyerp, we provide reliable hosting services for two of the most popular bookkeeping and accounting software, QuickBooks and SAGE Cloud Hosting. Get in touch with us today to learn more about our services.

For further reading: Your Top QuickBooks Hosting Questions Answered Here!