Top 5 Reasons Why Bookkeeping Is Important
Are you wondering why you can’t keep track of your business finances? Did you pay a high tax liability last year? Have you been scattering through receipts lately? If the thought of bookkeeping makes you quench and you’re wondering why bookkeeping is important, you’ve come to the right place. In this article, we’ll guide you through the importance of bookkeeping.
Why is bookkeeping important in a business?
Bookkeeping is essential for your business because it keeps track of your business finances, allowing you to see what is working and what isn’t. When companies keep track of their cash inflows and outflows, it enables them to maintain accurate financial records, improve cash flow, and prepare them for tax season or an IRS audit.
What exactly are bookkeeping records? The term refers to all of the information that is recorded by an organization throughout its day-to-day operations. This includes both monetary transactions and non-monetary data such as time spent on different tasks, inventory levels, customer orders, etc.
In addition, record-keeping allows businesses to identify trends within their business to improve decline in sales. With proper records, a company can forecast sales and prevent the waste of money on useless inventory. Finally, maintaining records and keeping receipts provides clear-cut evidence of the business’s income and expenses. This ensures that all necessary information is well organized and accurate; Which is crucial when requesting a loan or gaining investors.
Let’s dig deeper into the benefits below.
Accurate financial records
For a business to have accurate records, a company’s financials must be recorded and properly categorized. Having precise and clear-cut transactions is exceptionally important for taxes, loans, business credit, and keeping shareholders informed with the company’s finances. Business owners must keep records to substantiate claims if deductions, expenses, and tax credits are claimed for tax purposes.
Regarding loans, banks are skeptical about lending funds to businesses with untidy books. Banks will more likely approve business loans or credit if the company keeps well-organized records. Last but not least, sloppy or false financial statements can send misleading information to banks and shareholders. Misleading information can also result in criminal charges if deemed as fraud.
Improve Cash Flow
Bookkeeping is essential for cash flow management. Being able to see transactions in hindsight allows business owners to budget finances accordingly. Businesses can make adjustments to reduce unnecessary costs and project expenditures. When companies keep track of KPI’s (Key Performance Indicator), cut costs, and focus on income-generating activities, it will significantly increase cash flow.
Prepare for an IRS Audit
Many different factors trigger an IRS audit. However, fear not, as proper bookkeeping will help prepare for an audit. This is where the importance of record retention comes to play. Up-to-date and accurate bookkeeping allows you to keep detailed records of expenses to keep the business afloat. It proves how the company made income and why the costs incurred were ordinary and necessary.
Requirement under Law
Some business structures are required by law to have bookkeeping in place. For example, a corporation is required to provide financial records of the business to the public. This allows transparency to its shareholders. Also, any company that is using a Fiscal year must keep bookkeeping records during the accounting period. If no bookkeeping is in place, they must adopt the calendar year.
Organized financial records
The primary purpose of bookkeeping is to maintain organized financial statements. The most critical financial statement is the balance sheet, cash flow statement, and income statement. These statements combined will help manage the business and increase profitability. The financial data in financial statements identify debts, income goals, expenses, employee expenses, assets, equity, profit and loss, and how much money is coming in and going out.
Organized record retention permits tax savings as you’ll be able to take advantage of every deductible expense, tax credits and keep tabs on depreciable assets. You’ll have a bird’ eye view of the company’s financial statements, including the income statement, balance sheet, statement of cash flow, and statement of shareholders equity.
How do you keep records organized?
You can keep your books organized by categorizing transactions to the appropriate account and by noting specific transactions. Don’t leave unclear expenses vague or broad. Always add a description for more clarity when needed.
Keep digital receipts of everything.
Scan or take pictures and upload them to a secure folder. Doing so will eliminate the hassle of going through receipts during tax time or an audit. Create an expense report and add each expense when possible. This will allow you to keep a log of your expenditure.
Do not co-mingle funds.
Go ahead and apply for a business bank account. Co-mingling funds can trigger an IRS audit. The IRS can recategorize transactions if a business cannot prove an expenditure was ordinary or necessary to the company. Co-mingling funds is usually hard to determine if a purchase is for business or personal use.
Last but not least, if you purchased something for your business through your personal bank account, set up an accountability plan. Fill in the template and have the company reimburse you the funds. This way, you can deduct it during tax time.
Do note, to keep your books organized; you must keep records in a safe and secure location.
Which records should a small business owner keep on file indefinitely?
You should keep certain files for your business indefinitely. Although you have a bookkeeping system in place and provide when needed, it is necessary to keep important files secure. For example, if your business purchased a property, keep the deed, mortgage files, and tax statements in a safe place. This helps calculate depreciated expenses and show proof of ownership.
Another important document to keep in file indefinitely is your articles of incorporation and your EIN letter. In addition, according to the IRS, you must “Keep records indefinitely if you do not file a return.” You must also “Keep records indefinitely if you file a fraudulent return.”
What records need to be kept for 7 years?
Records that must be kept for seven years are documents to substantiate bad debt deduction. Bad debt is usually money that is owed to a business; however, the company cannot retrieve payments due to unsuccessful attempts. Another record that must be kept for seven years is filing a claim for worthless securities. This means IRS can audit a company within seven years for those worthless security claims.
Let’s get back to why bookkeeping is important.
How can bookkeeping help your business?
Bookkeeping can help your business by increasing profits. There are a variety of reports available to your business once bookkeeping is in place. For example, you can access the accounts receivable aging report to see open invoices. Which can help implement a strategy to retrieve unpaid funds.
Bookkeeping provides a clear picture of profit and loss. You can run a profit & loss (P&L) report and see what service or product generates revenue and what expenses you’ve paid during a specific period. The profit & loss statement includes sales, costs of goods sold, gross margin, operating and administrative expense, and net profit. Looking at the P&L statement can help determine which cost to eliminate to retain earnings.
You can review your cash flow statement. This allows you to see the company’s inflows and outflows. Seeing what’s coming in and going out will guide you when creating a business budget and forecasting upcoming income and expenses.
You can review your balance sheet. You’ll be able to see the business’s investments, assets, or contributions to the company. You can also keep track of each partner’s basis by keeping tabs on the partner’s equity.
Bookkeeping produces financial guidelines for success. Reports are limitless as you can view the financial health of the business. Financial forecasting is a crucial part of running any business. Without the ability to generate accurate and reliable financial statements, there would be no way for owners and managers to make informed decisions about their company’s future. Businesses are more likely to substantiate claims during an IRS audit with accurate and up-to-date bookkeeping.
Note: Hiring a professional bookkeeper can save thousands in tax dollars. A good bookkeeper can help with everything from payroll taxes to filing quarterly reports. Our company provides expert services that are designed specifically for businesses like yours! We’ll work with your team so that everyone knows what they are doing without having to worry about accounting tasks getting neglected along the way! Click here or visit our service page to schedule an appointment with us.
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