You’ve started your dream business, hired a tax accountant, and now you’re staring face to face with bills, invoices, receipts, and ledgers, unsure of how to handle them. Is the receipt from the office supply store even important? What about the pending and outstanding invoices from clients? Bookkeeping is a key part of organizing your business for financial success! Understanding the importance of bookkeeping will ensure your business is profitable, thriving, and compliant with the IRS.
Bookkeeping Basics
If you’ve just started a business, or if you’re looking to get a better financial understanding of your existing company, bookkeeping is going to be the game changer! By tracking your day to day expenses, financials, and transactions, you will be able to set clear budget goals, monitor profits, and make important business decisions regarding cutting costs or purchasing large expenses.
What is Bookkeeping? Essentially, bookkeeping is the process of keeping track of all business transactions in a ledger, spreadsheet or journal.
- Business transactions can include, but are not limited to, invoices, purchase receipts, payments/payroll, and incoming funds. Any debit or credit to the company should be tracked and logged.
Who Should Use Bookkeeping? To make the most of your business financially—whether large or small—it is recommended to have an efficient bookkeeping process.
Who Should Manage the Bookkeeping? Your process for bookkeeping will often depend on the size of your business. If you have a small business that is not too demanding in other areas, then you may be able to run the business and be the bookkeeper. If time doesn’t allow for you to maintain the books yourself, then you can either hire a bookkeeper or an accountant to assist in your record keeping.
When Should you Bookkeep? The beauty of bookkeeping is that you have the power to decide what process works best for you and your business. Some business owners chose to maintain and update their books with debits/credits daily while others record data monthly. Monthly, weekly, bi-weekly, and daily are all viable options to running a successful business.
- Although how you process your bookkeeping is entirely up to you, choosing to record your financial data daily or weekly will have less room for error. If you wait longer periods before entering your financial data, you may lose track of documentation or forget to record certain debits, credits, or transactions.
Why is Bookkeeping Important? Proper bookkeeping is crucial to understand your business’ financial strengths and weaknesses. By understanding your finances, you can have a better grasp on budgeting and expense planning. Depending on how you manage your bookkeeping, you may also be able to access easy to read financial reports, profit reports, or reports that can assist you in tax filing.
Where Can You Go for Bookkeeping? If you chose to manage your own bookkeeping, you can chose from the following most popular bookkeeping solutions:
- Use bookkeeping software such as Quickbooks or Xero.
- Enter your financial data in a manual journal for tracking.
- Create a spreadsheet on Microsoft Excel with a custom formula.
However, you don’t have to manage your own bookkeeping using one of the above methods. Many businesses chose to hire a designated and experienced bookkeeper. If you have a CPA or accountant, you can also check with them for bookkeeping services. Often times, CPAs and accountants can assist with managing your books as part of their accounting functions.
Importance of Bookkeeping
For any business owner, the ultimate goal is to make a profit! Bookkeeping is the simplest way to track how you stand financially. Knowing your money coming in versus the money going out will allow you to make important business decisions to benefit your company. Bookkeeping also:
- Lays out your financial credits and debits in a clear and simple manner. By having simplistic reports and visuals, understanding your finances will be more accurate and efficient.
- Analyzes your financial data. By having an analysis of your finances, you can clearly pinpoint successes in the business and areas of opportunity. Understanding areas of the business that may be less successful than others, allows you time to strategize and adjust accordingly.
- Keeps your business’ finances organized. This is extremely helpful in the case of any discrepancies or IRS audits. In the case of a client, business partner, or the IRS questioning an aspect of your business, you can easily locate documentation needed to provide as proof.
- Allows for better decision making. By understanding your finances, you can easily determine where you need to make cuts and where you can spend more money. For example, if you see that your business has been profitable and is increasing revenue quarter over quarter, then you can determine if bonuses or perhaps raises should be given to your staff. Being able to make decisions to better your business by simply reviewing your financial reports, will give you confidence, peace of mind, and time to spend elsewhere.
Owning a business is exciting and stressful all at the same time. You want to pursue your passion while making money. Who doesn’t want to make money in the process? In order to feel confident that your business is setup for financial success, it is crucial to understand the importance of proper bookkeeping. Although there is no officially right or wrong way to manage bookkeeping, it is key to know what method will work best for you and your business and stick to it! Having a successful bookkeeping process will translate to a financially successful business.
