As a small business owner, do you wonder why bookkeeping is important, or do you feel like it’s a waste of time? Would you rather spend your time creating your product or reaching out to potential customers?
I get it. When I had a small bakery in my 20s , I had to buy the ingredients, bake the cookies, pack them, and then deliver the goods. I was so busy that I barely had time to think about bookkeeping. There’s just so much involved in running a small business, especially when you’re starting out, that it’s easy to focus on the income-generating tasks instead of the paperwork.
But, while product development and marketing are crucial to business success, bookkeeping is also necessary.
Here are some of the reasons why bookkeeping is important and shouldn’t be done as an afterthought:
Accurate Financial Tracking
Bookkeeping keeps track of all the business’s financial transactions. When you record each purchase, you’ll know exactly where your money is going. Spent $800 on a new laptop? Write it in your books. That way, you’ll know that the funds went to an asset you’ll be using for years, not on supplies like pens and paper.
The same goes for sales. Every sale recorded shows you where your money is coming from. Whether you make $10 from an e-book sale or $1,500 from a speaking engagement, make sure to log it in your books. Doing so will help you quickly see your income streams at a glance.
Better Decision Making
When all transactions are correctly recorded, and everything is in the right place, you can use this data to make better decisions. For example, if your books show that one product does significantly poorer than others, the numbers can help you decide if it’s best to discontinue selling it.
You’ll also be able to see areas where costs can be cut. For example, if it shows you that your overhead expenses are far greater than your income, you can make an informed decision to lower overhead costs.
Cash Flow Management
If you have customers who purchase on credit, you know that having a lot of sales does not equal having a lot of cash. That’s why bookkeeping is important. With accurate bookkeeping, you’ll know how much cash you’ll receive and when to expect it. You can also keep track of late payments, allowing you to send reminders to your customers in case they forget.
On the other hand, your books will also show the bills you need to pay and when you need to pay them. Seeing all this information will help you plan your spending based on the cash you currently have and expect to have, so you can avoid any cash flow problems.
Future Planning and Growth
Any small business owner who dreams of taking their business to the next level needs to have correct financial records. These will help them track their company’s performance and set benchmarks for improvement and growth.
Through financial reports, you can clearly see your business’s financial standing, like whether you’re ready to expand or not. They can also help you project when you will be.
Compliance and Tax Preparation
Of course, the most obvious reason why bookkeeping is important is to comply with tax regulations. Every business is required by law to keep complete and detailed financial records. These records will be the basis of the taxes you file, so ensuring that they are accurate and regularly updated is vital for easier tax preparation.
By filing and paying the correct taxes, you can avoid unwanted issues and costly penalties that could hurt your bottom line.
In summary, bookkeeping is essential no matter how big or small your business is. Other than the fact that it helps you comply with tax laws, it helps you see how your business is doing financially, which is helpful when planning and making crucial business decisions.
