You might wonder what the importance of a bookkeeping system is...
...especially if you are a small business owner who will face many challenges, one of them being the management of your business finances.
You might be doing your own bookkeeping due to financial constraints.
Before you dive in, let’s highlight what the key reasons are for going to all the effort of implementing a system.
These reasons will not only highlight the importance of a bookkeeping system, but also hopefully encourage you to stay on top of your bookkeeping knowing that there are benefits and good outcomes to be gained.
The first reason for the importance of a bookkeeping system is that, you will get real-time insights about your business’ financial health because you will instantly see your total income, outgoings, payments due and more.
You will have access to up-to-date financial information whenever you need it.
Just as you might get a regular health checkup, you can do a regular “check-up” on your finances to provide yourself with a clear picture on the trajectory of your business.
This can help you avoid uncomfortable surprises that come with running out of cash or forgetting to pay a bill because you will always be aware of what is due or about to happen.
This knowledge will increase your confidence in managing
your business on a day-to-day basis.
Fulfilling tax obligations is your responsibility as a business owner.
This really underscores the importance of a bookkeeping system which makes tax filing easier and less stressful by keeping your income, expenses, and necessary paperwork in one tidy place.
What do accurate records mean for you?
They enable timely and accurate tax filing, helping you stay compliant with tax laws, reducing the risk of penalties
They ensure that your business “accounts for” all its income and expenses and helps you pay the right amount of taxes.
They help you take advantage of deductions to reduce your tax liability.
Failing to maintain accurate records can lead to underreporting or overreporting income, both of which can result in legal trouble with your tax authorities.
Tax laws and regulations tend to change over time, so be sure to sign up for regular updates from your tax authorities to help you keep compliant.
Here are some common tax returns:
Income Tax Returns: all businesses, regardless of structure, must file a tax return every year, to report business income and calculate the amount of income tax owed to the government.
Sales Tax or VAT Returns: sales tax returns detail the amount of sales tax collected on taxable goods or services sold – this tax must be remitted to the government. VAT returns detail taxable sales and purchases the difference between the two will either be remitted to the government or refunded to the business.
Payroll and Employment Tax Returns: employers must report and remit payroll taxes for their employees on a regular cycle; these can include income tax (federal, state, PAYE/G), social or national security tax, medical taxes/levies, superannuation/pension, and more.
Estimated Tax Payments: Businesses or self-employed individuals may be required to make regular estimated tax payments throughout the year to cover their income tax liability.
Your business decisions will be more strategic and well-informed when based on organized financial data, another highlight of the importance of a bookkeeping system.
Your bookkeeping reports provide a clear financial foundation for your future plans whether it's deciding to expand operations, purchase new assets, hire employees, or reduce expenses.
You will be a lot more confident when it comes to pricing, budgeting or identifying cost-saving opportunities.
Without accurate and up-to-date bookkeeping records you:
These can lead to financial uncertainties and significantly impact your overall success.
If you need an injection of money to grow your business you may want to apply for a business loan or seek investors.
They will want to scrutinize your financial records because they want to know they’re putting their money in reliable places.
The lenders will be confident in your business when they see that:
Investors and Lenders will look at things like:
Transparency: The detail and accuracy of your records will show that you are committed to financial transparency and will make your business more appealing. It will boost their certainty that an investment in you will provide a good return on their investment.
Performance: Lenders will examine your financial statements to assess its performance. This includes:
Consistent and well-kept records can showcase the financial stability of your business.
Payment History: Lenders may review your business's payment history with suppliers and creditors, which is documented in the accounts payable section of the financial records. Timely payments can enhance your creditworthiness. Use a budget and pay your bills on time!
Tax Compliance: Lenders need assurance that your business is compliant with tax and legal obligations. Complete and accurate financial records and paying your tax bills on time, help demonstrate this compliance. If you don’t pay your tax bills on time, will you make loan repayments on time?
Good cash flow management and budgeting goals also go a long way to helping your business growth, which are discussed in the next two points.
By keeping tabs on your income and expenses, a bookkeeping system helps you manage your cash flow to ensure you have enough funds to cover day-to-day requirements.
This helps avoid unpleasant surprises, like running out of cash!
Here is why good cash flow management is key for your small business success:
Survival: Many small businesses struggle with cash flow issues. Proper management ensures you have enough cash on hand to cover daily expenses.
Stability: It helps smooth out financial peaks and valleys, reducing the stress of unexpected financial emergencies.
Debt Service: It helps you meet debt repayment obligations, avoiding late fees and damage to your credit rating.
Vendor/Supplier Relationships: Timely payments to suppliers can lead to better terms, discounts, and improved supplier relationships.
Avoid Crises: Managing cash flow helps identify potential issues early, allowing you to take corrective actions before they become critical.
Emergency Funds: It enables you to build a financial cushion for unexpected events or downturns in the business cycle.
Profitability: Cash flow management helps you understand not only your revenue but also how efficiently you convert sales into cash, which can be different from reported profits.
Another feature to the importance of a bookkeeping system is that it helps you to create budgets which are roadmaps to staying profitable.
With a budget you can:
Such as capital and materials to ensure money is directed toward areas that will generate the most value.
Spending limits can be set and will help you identify unnecessary or excessive expenditure. These can lead to cost reductions and improved profitability.
Both short-term and long-term goals can be factored into your budget with targets for increasing revenue or decreasing expenses consequently improving profit margins.
You can compare your actual financial results to your planned budget and identify where you are exceeding or falling short of your goals allowing you to make timely adjustments or corrective actions.
The possibility of having an audit always hovers.
Use a good filing system to safely keep all your supporting documents organized and easy to find.
Keep Business and Personal Transactions Separate
Maintain a clear separation between your personal and business expenses. Use separate bank accounts and credit cards for business transactions.
Regularly reconcile your bank and financial statements with your bookkeeping records to identify and rectify any discrepancies.
Detailed Transaction Records
With all transactions record descriptions, dates, amounts, and their purpose.
By following these steps and maintaining thorough and
organized bookkeeping records, you can:
Tips for long term business success:
Start-Off with the right bookkeeping system for you that has the capacity to expand to your growing needs.
Organize Your Documents – digital or paper receipts, bills, invoices, checks should be filed with a suitable method; lost paperwork is no fun.
Enter Data Regularly - once a month or once a week, allocating your financial transactions from all sources:
...to the appropriate account categories.
Capture All Expenses - so that you are able to increase your deductions which increases your profitability. Enter every business expense no matter how it was paid for even if it was paid from cash in your pocket or from your personal account.
Accurately Invoice your customers by keeping good track of work-in-progress and invoice your customers at least monthly if you provide a service, or right away if you only sell products. Put a ‘pay by’ date on the invoice.
Keep Your Accounts Receivable Low – keep in regular contact with clients who are overdue in paying the invoices you send them, though even better is to receive payment before shipping products.
Review your financial reports on a regular basis to:
Stay in the Good Books of Your Tax Authorities by doing your level best to keep your records fully up-to-date and accurate before filing your tax reports, and always paying your taxes on time or at least scheduling regular repayments approved by them when cash is tight.
Stay Informed about the financial happenings of your business. Always keep your eyes on your reports and results.
Hire a Professional Bookkeeper if you find the bookkeeping overwhelming or if you keep putting it off for “another day”, which ends up being months away.
Having a good bookkeeping system in action means all your financial data is easy to locate.
Think about all the time you can save by not having to search through stacks of invoices and receipts.
A bookkeeping system keeps all your financial data handy, freeing up your time for more critical tasks.
Now who doesn’t want that!