How much did your small business earn on the last job? How much did you spend on your latest office upgrade? If you want to accurately keep track of financial records, then you must understand the importance of bookkeeping.
In fact, implementing a bookkeeping system isn’t just a luxury—it’s an essential part of your small business. To properly manage your business, you need to know what’s happening on a basic financial level. Not analyzing your business expenses could prevent your business from reaching its full potential. Here’s what you need to know.
What is Bookkeeping: Why Your Business Needs to Diligently Track Finances
Bookkeeping is the practice of recording incoming and outgoing cash, or cash flow, in your small business. This system involves recording all financial transactions in your business, including expenses such as materials, services, and payroll, as well as income, like customer or client payments for goods and services.
Previously, bookkeeping was a tedious and monotonous task that involved physically recording all transactions. Thanks to new cloud-based technology, bookkeeping is now a simpler process that won’t require hours of your time come tax season. Outsourcing bookkeeping to an online bookkeeper is also a cost-effective alternative to hiring an in-house bookkeeper for businesses of all sizes.
What is The Importance of Bookkeeping?
Bookkeeping is an essential function in your business for both legal and financial management purposes.
By keeping accurate records, your business can get a snapshot of its health in the form of financial statements such as income statements, balance sheets, cash flow statements and more. While bookkeeping concepts deal with recording this financial data, accountants organize and analyze it, often providing recommendations to ensure accuracy and improve spending.
The importance of bookkeeping extends beyond simply staying organized. Additionally, diligently tracking all incoming and outgoing expenses can help you strategize for the future.
Proper bookkeeping practices also helps you respond to potential IRS inquiries or audits.
The Benefits of Bookkeeping
From staying compliant with IRS tax regulations to making informed decisions, bookkeeping is important in nearly every aspect of your small business growth.
1. Accurately Record All Financial Transactions
As a small business owner, it’s crucial for you to understand where your cash is coming from and going. Bookkeeping helps you clearly and easily understand this.
If you’re curious how much you spent on office supplies, you can easily find out. Or, check and see how lucrative your new clients are as compared to your older clients.
Accurate records can also come in handy when resolving discrepancies between employees, vendors, and customers.
2. Analyze Spending and Improve Your Business Budgeting
Knowing what your business is spending and earning is essential. However, one of the main benefits of bookkeeping is that it allows you to seamlessly analyze your expenses, and if necessary, adjust your budget.
By examining financial statements, you can see which products, services or industries are helping you generate the most revenue. If necessary, you can reorient your small business to increase profit even higher.
It can also help you identify expenses that made sense at one point, but no longer prove fruitful. For example, newspaper advertising was once a major focus for small businesses—but in today’s landscape, it might fall on deaf ears. Or, you might learn that it’s time to cut down on part of your marketing spend to improve other areas.
Financial statements can help you gauge your performance and make informed decisions about the future.
Before finalizing next year’s budget, take a look at how things went this year. You may find new insights that help you double or triple your revenue.
3. Bookkeeping Is Useful For Filing Taxes
Tax preparation time can be a stressful season for small business owners, but it doesn’t have to be. When it comes time to file taxes, the importance of bookkeeping will become clear.
Instead of sifting through a pile of documents to get the information you need, bookkeeping ensures that this information is properly organized beforehand. You’ll have all of your invoices readily prepared, and can identify any potential tax write-offs, too.
4. Protect Your Small Business in the Event of an IRS Audit
Even if you’re fully compliant with IRS tax laws, you could be audited. Only 2.5% of small businesses are audited, so the chances are low. However, thorough bookkeeping gives you the defense you need if the IRS decides to dig deeper.
With organized, clear-cut books, you can easily answer any questions the IRS may have about expenses, income, losses, tax deductions, tax returns and more. Rather than prolonging the process, you can put any issues to bed right away.
5. Improve Your Cash Flow Management and Get Peace of Mind About Payments
Cash flow is the number one struggle that small business owners face on a day-to-day basis. Paying attention to the importance of bookkeeping can help you mitigate that challenge by keeping close track of the cash moving in and out of your business.
With a cloud-based bookkeeping platform, you can see how much profit you’ve generated, and whether it will cover your upcoming expenses. If it won’t then you’ll be able to take action ahead of time by applying for a small business loan or line of credit.
Visualizing this information will give you the peace of mind you need to make financial decisions confidently.
Bookkeeping For Home-Based & Startup Businesses
You don’t need a bookkeeper on staff to accurately track your expenses and income. Even if you just opened a business that’s operating out of a home office, you can still take advantage of the benefits of bookkeeping by utilizing online and cloud-based services.
Before getting into the weeds with new financial transactions, online bookkeeping for your small business can help you grasp what’s working and what’s not early on. It’s simple, affordable, and easily scalable as your business grows.
How To Implement Bookkeep & Accounting In To Your Business
If you’re looking to prioritize the importance of bookkeeping in your business, it’s important to act fast. While there are two types of bookkeeping, one has a clear advantage.
Hiring an in-house bookkeeper can help you check off the box, but it may not be the most cost-effective move to make. In addition to salary or hourly wages and insurance, you’ll have to cover the other costs of hiring an employee.
Utilizing third-party online bookkeeping software allows you to take advantage of bookkeeping, without excessive costs. Digitally tracking expenses helps you reduce errors and ensure accuracy. Whenever you’re curious about cash flow, you can instantly find answers through a desktop or mobile portal—it’s that simple.
National’s online bookkeeping service gives you a centralized, accurate way to track your finances. Unlike Quickbooks, we do all of the work in recording and helping you analyze your finances, including assistance that’s available 24/7.
Start saving time for what’s most important—growing your business—and apply for online bookkeeping services now!