Benefits of Bookkeeping for Small Businesses
When an entrepreneur first starts up a business, it’s exciting to make the first sale and watch customers walk through the door. Interacting with customers and meeting their needs is what you’re passionate about, so the thought of bookkeeping and tracking your finances is probably the last thing you want to do.
However, the success of a small business is directly tied to the ability to keep accurate, up-to-date financial records. It might be hard to be passionate about bookkeeping the same way you are about your small business, but there are so many benefits to it.
What is bookkeeping anyway?
Before we dive into the benefits of bookkeeping to small businesses, let’s discuss what it is in the first place. Bookkeeping is the recording of financial transactions on a daily basis. This can include purchases, sales, receipts, and payments from customers. As the name implies, it is the keeping of books, which is the recording aspect of financial accounting.
Bookkeeping falls under the umbrella of accounting, which is the much broader subject of processing and interpreting a company’s financial information through their accounts. A good way to think of it is, bookkeeping provides the financial information that accounts are made from.
A bookkeeper sends invoices, makes payments, manages accounts, and records day-to-day transactions like sales, purchases, receipts, and payments. They are recorded in the proper daybook, which works similarly to a diary. Daybooks include sales, purchases, purchase debts, petty cash, and a general ledger. A general ledger contains all the accounting data from the various daybooks, and is the backbone of a business’s bookkeeping.
The more diligent and accurate you are about keeping records of your transactions and accounts, the better grip you’ll have over your small business’s financial standing, and the greater chance of success your small business will have.
Benefits of Bookkeeping for Small Businesses
Here are the top 4 benefits of bookkeeping for small businesses:
Helps plan for the future
Small businesses are the first to be hit by economic downturn and uncertainties. Financial planning is arguably the most important thing a small business can do to prepare themselves for the future. Bookkeeping plays an essential part in financial planning, because it gives you an overview and summary of a company’s accounts and transactions.
Unlike a confidant, bookkeeping does not sugarcoat financial problems. Bookkeeping will show you the honest truth about your financial strengths and weaknesses, line by line, and let you know if you have enough to stay afloat, or need to take out a loan. Accurate bookkeeping gives you the confidence to make adjustments and decisions about the future of your company and employees, should difficulties arise.
Keeps your business compliant
Small businesses are required to pay taxes and keep accounting records. Your business structure, whether it’s a sole proprietorship, LLC, or LLP, will determine what federal taxes you pay. These include: income tax, self-employment tax, employer tax, among others. Depending on where you live, your small business may also have to pay local and state taxes.
That’s a lot to keep up with, right? Bookkeeping not only ensures you’ll have enough to cover all those taxes, but it will also save your business in the event of an Internal Revenue Service (IRS) audit. Audits can be triggered for a number of reasons, including not reporting all cash payments, failing to comply with taxes, incorrectly reporting sales tax, and claiming losses every year. Bookkeeping records are invaluable during an audit to prove to the IRS that your small business is compliant.
Reduces risk of fraud
A bookkeeper that keeps up with daybooks like they should, will be the first to spot a suspicious transaction, which they can report immediately. Without closely-monitored finances, it opens the door to the possibility of fraud and embezzlement, either from business partners, employees, or customers. While this is a nefarious thought, it’s a very real threat.
Every single transaction done with business funds is kept on record with good, thorough bookkeeping. That way, in the event of any suspicious activity, you’ll have proof or evidence of wrongdoing, right down to the cent.
Saves you money
A benefit of bookkeeping is that it’ll keep your company from underreporting revenues or incomes, which could lead to financial losses. With good bookkeeping, you can track revenues, investment incomes, and other earnings, as well as valuable tax deductions that could save your business money. It also ensures your employees are receiving the right amount of year-to-date earnings.
There are so many loose ends when running a small business, that you need bookkeeping to keep track of them all. Paying your creditors late as a result of inadequate bookkeeping could ruin your company’s credit score, and hurt your chances of future lines of credit or loans. Additionally, you could incur late or overdraft fees and end up costing your business a lot of money. Small businesses need every bit of help they can get to make money, save money, and maintain a good rapport with financial institutions.
Thankfully, GritForce Bookkeeping is here to help companies do what they do best! They provide a virtual bookkeeping service, personalized for small businesses and non-profit organizations. GritForceworks with you to get your books in order so you can focus on your main priorities. Their goal is to assist you to understand your financial position, enabling you to make smarter, informed decisions.