Why Bookkeeping is Important for Small Businesses

Why Bookkeeping is Important for Small Businesses

Bookkeeping is the relatively simple act of keeping and maintaining accurate financial records. This simple record of expenses and income is designed to help you determine your profit and loss each year, and becomes an important tool later on when it comes to things like preparing a proper tax return.

Regardless of the size or status of your business, bookkeeping for entrepreneurs is an essential service that you simply cannot do without. You might handle it yourself, or have an outside company or professional help you to do it, it makes little difference, just so long as it gets done. Below are some of the most significant reasons why bookkeeping is important, especially when you’re running a small business.

1. Helps You Plan Budgets and Cut Expenses

To make an accurate and effective budget, you need to have some idea of the reality of what things cost and how much you’ll have to spend. Bookkeeping gives you that accurate readout of these two elements, thus allowing you to improve your budget-making.

When many entrepreneurs make budgets in their first year of business, they can be way off what things really cost or how much revenue they really generate. Bookkeeping from the first year helps to hone and enhance that process to become more accurate. What’s more, if you want to expand your budget on something, your records will indicate where your biggest expenses are and where you can therefore make a cut.

 2. Makes Tax Return Time Easier

A complete and accurate record of all your financial transactions in a single book makes completing an accurate tax return far easier. You can get quick numbers month to month on deductions, as well as total income, net profit and more. What’s more, if the ATO wishes to look at your return more closely, you have everything in place and ready to show. It beats what the less organised entrepreneurs have to do, scrabbling to find receipts or any other proof of what they’ve spent, for instance.

3. Gives An Important Overview of Business Performance

After several months, your bookkeeping records become a big and important window into how your business is really doing. Many people run on their gut feeling and assume that business is great because they’ve done a lot of work, seen a lot of clients, or sent out a lot of invoices. But how many of them have actually been paid? How much cash has been brought in? Is there one product or service in particular that is performing incredibly well while others are suffering?

Using the insights of your records, you can make important and effective decisions about the future direction of your company and brand.

4. Important for Attracting Investment

There’s nothing investors hate more than hearing an exciting and potentially great pitch from an entrepreneur, only to then realise that they have no grasp at all on the basic numbers of their business, something that some simple bookkeeping would have done for them straight away. They can’t talk accurately about annual or quarterly turn over, gross profit, net profit and losses…it just makes a mess of their entire pitch.

Investors like detail, and bookkeeping is a simple yet detailed record of how everything is going. Those numbers tell a story to investors that no flowery well-rehearsed language can match!

5. Helps You See When Clients Pay You

Through proper bookkeeping, you might notice that a certain client is taking longer and longer to pay up on invoices, or how many outstanding regular invoices there are each month. This allows you to create a plan of action to try and boost the efficiency at which these invoices are paid, which in turn improves your cash flow.

Megan Shuey

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