There is a lot to keeping a business running, no matter how small. You need to calculate your fixed costs, keep track of your variable expenses, and keep tabs on your revenue. You also need to keep an eye on your monthly profit and pay off ongoing debts to determine whether your business can survive and break even. With all of these financial responsibilities, it’s imperative to invest in proper bookkeeping.
And those are just the financial components. Let’s not forget the manufacturing process for your products, rendering your services, hiring and paying staff, and managing marketing campaigns and ad budgets. Then, depending on your business, you will need to consider vehicle and transport costs, property taxes, business permits, standard equipment, location inspection, and so on.
It’s easy to see why some fundamentals, like bookkeeping, are left behind. Who has time to tally every receipt and outgoing cost and ensure everything lines up when you’re already working 80-hour weeks and feeling burnt out? But without regular and consistent bookkeeping, your business will inevitably hit a point of utter confusion and severe tax problems.
The As and Bs of Basic Bookkeeping
What is bookkeeping? Put simply: bookkeeping is clear and accessible recordkeeping of a business’s financial input and output. Depending on the complexity of the enterprise, bookkeeping will consist of accounts receivable (money going in) and accounts payable (money going out). It can also include the transparent and manageable storage of receipts, transaction records, and bank account statements needed to verify every major exchange of funds. Here are a few reasons bookkeeping matters:
- First, proper bookkeeping helps ensure that you aren’t losing money somewhere. It gives you an overview of what you’re earning each month and lets you verify that every cent is where it should be.
- Secondly, knowing what you make and what you lose every month is essential for tax purposes. Banks and other third-party organizations must compile and send information reports to the IRS and cross-reference that data with the information you transmit. Discrepancies lead to red flags, and red flags lead to audits. So, stay consistent with your bookkeeping. Cash or accrual? Single-input or double-input? Choose the practices that best suit your business.
- Third, a business that keeps clean books is more reliable than one that doesn’t. Lenders and investors want to see some financial data, and the more you can provide, the better. That is important if you try to secure funding through investments or credit.
As you grow, the financial complexity of your business grows proportionately. Financial reports need to be accurate (down to the last cent) and become crucial to ensure transparency, maintain the trust of your shareholders, and ensure that your business meets its financial obligations.
Utilize Software to Make Things Easier
We’ve come a long way from needing everything to be recorded in ink and paper. However, that doesn’t mean you can just set and forget your favorite accounting program. You should manually track every incoming and outgoing dollar and cross-reference your books with what your software follows. Businessowners can synchronize most modern bookkeeping programs with their accounts and across devices through the cloud, so they automatically update themselves when money goes in and out.
You can further supplement that information with your data entry to catalog and track specific transactions and ensure that you have a digital paper trail for each of your long-term clients or suppliers. Keep your receipts, orders, ledgers, and transaction histories. It would help to familiarize yourself with your software, whether it’s a dedicated bookkeeping platform or Microsoft Excel. But take good care of your hard copies.
Audits? No Problem
The IRS does not perform as many audits as it used to, but it’s also performing more audits than it was just a year ago. While it’s improbable that the IRS will target you or your business at random, there’s always the chance of an IRS audit every year – and the IRS doesn’t like it when the math doesn’t add up.
Good bookkeeping is more than just ensuring you’re breaking even and making a profit. It’s also central to calculating your tax liability and business tax deductions. Whether it’s payroll taxes or income taxes, the IRS levies seriously hefty penalties and interest on businesses that fail to pay their taxes on time – and they don’t take kindly to individuals who try to avoid paying tax debt.
Tax compliance is crucial, and it’s not always easy. Consider hiring a professional to review your books and records and help you manage your business taxes. Not only will you keep your business off the IRS’s radar, but a tax professional can help you minimize your annual tax liability and maximize those end-of-the-year tax refunds.
Good Bookkeeping Attracts Investment
It’s a harsh world, and competition is getting fiercer – especially on the global level. Any business that hopes to thrive and survive needs serious capital, and loans alone are not the best way to get it. Investment is. But attracting investors takes more than bright-eyed ideas and high-concept marketing. Good investors know that the profitability of a business is connected to its fundamentals.
Unmanaged, nonsensical, or missing bookkeeping records are more than just a red flag – they’re often a severe dealbreaker. Sure, you need to dream big. But if you are months behind on the books and are not meticulously keeping track of every incoming and outcoming dollar, how is any investor supposed to trust your business to do well with their money?
There may come when you want to retire and leave behind your business. Or ensure that you’ve left behind something profitable for your children to continue or sell for profit. To that end, it helps to leave behind a business that is not only bringing in revenue but is financially manageable. Good bookkeeping is a sign of proper organization and a well-oiled daily system for incoming and outgoing transactions and the recordkeeping that comes with them.
It’s much harder to sell a business when handling its finances would be a major nightmare for the buyer. This is especially true if your asking price is an honest reflection of the time you’ve put into the company. Getting a head start with proper bookkeeping and accounting habits, and making it a priority to stick by these, can sometimes mean the difference between creating a lasting legacy and yet another startup that struggles to get off the ground floor.
Of course, managing the books, in addition to everything else, is a daunting task. There’s a good reason many small businesses struggle with proper bookkeeping habits. It’s in your best interest to not just rely on software solutions but hire a professional accountant or bookkeeping team. These can ensure that your business’ finances are manageable and a significant selling point rather than a big weakness. Whether you’re preparing for a far-future sale or want to be ready when the IRS decides to drop in as a surprise, clean and balanced books are often part of any good business’ strong fundamentals.