.jpg)
July 2019
Starting your own business is an exciting process. You finally get to do what you love at your own pace while creating a new income stream out of it. However, it is important to build your business with a strong fundament so that it can prosper later on, and a solid business fundament must include proper bookkeeping - let us explain why.
Keeping your finances well-organized
First and foremost, organizing your financial records into an appropriate set of books is a must. Say, you bought a new laptop to use it in your daily business operations. You would need to record this purchase as an asset or an expense depending on your company policy and cost of the item purchased. If you bought this laptop to resell it in the near future, then you would log it into inventory. But what if you used your business card to purchase the laptop for personal use? Then you should record this transaction as a personal expense.
As you can see, a single transaction may have multiple possible accounting treatments. Therefore, it is crucial to have a professional who properly handles your business transactions. As a result, with correctly set up bookkeeping system, you will be able to control and monitor your business better. Having a professional bookkeeper also enhances your productivity, saves your time, and money because now you can focus on your business growth.
Useful for tax purposes
While maintaining an accurate track of each business transaction throughout the year, properly organized bookkeeping also simplifies tax preparation process. A major benefit here is that you will not miss any deductible business expenses. So when it comes to filing your taxes, you can refer to your books instead of struggling to recall all your business transactions throughout the year. Another benefit is that when filing your taxes, you will also report to IRS that your records are kept by a professional in a well-organized system, which will increase credibility before IRS. Finally, in case of IRS audit, you will always be ready to provide all necessary financial information.
Better financial decision-making
Another great benefit is that with the accurate recordkeeping, you have a clear and precise image of the financial situation of your business. It also means that you can analyze your business performance through review of the financial statements and see which areas of your business need more attention. For example, you can control outstanding balances resulting from your customers and timely follow up with them on payments; or keep track of your inventory and be able to promptly notice if you are getting out of stock. And, of course, you will always be aware of the current financial position for making better business decisions and for tracking the effect of your decisions on your financials.
Needed for external users
While recordkeeping is useful for better financial decision-making, sometimes it is required for external users such as investors, lenders, and other stakeholders. For example, lenders or financial institutions would need your financial statements to evaluate your business performance and make a decision on whether to lend your business money. Without the ability to provide the required financial statements, your financing options are limited. Also, in some cases, investors or granters may want to review your financial statements to analyze how their investments are used or to decide to invest money into your business.
Properly organized bookkeeping is important for your business to prosper. In fact, poor accounting practices is one of the top reasons why businesses fail. Poor accounting practices include bad management of cash flows, insufficient financing, and inaccurate financial data entry. Running your business without bookkeeping or accounting systems is like sailing a boat without a compass. Therefore, it is a crucial tool for navigating your business.
Comments