Today, I’m going to give you 15 reasons why bookkeeping is important.
You heard that right, not 5, 15 convincing and valid reasons.
I know, I know. There are a ton of things that are important to businesses owners like:
- service delivery
…and much more.
But if I was you, I’d place bookkeeping at the top of my important list as it affects literally everything I just mentioned, which you’ll see why and how by end of this post.
In fact, if you are doubtful that bookkeeping is important, I want to pose a question that I want you to answer at the end of this article!
The question is this:
What story is your bookkeeping telling you? Is it a horror story or one where the main character is triumphant?
Ok, we’ll come back to that!
Let’s talk about why bookkeeping is important. Here are 15 reasons:
15 Reasons Why Bookkeeping is Important for Businesses
1. It Helps You Stay Organized
You’re probably saying now, really, that’s what you start with? Well, hear me out.
Being organized is a skill every business owner should have. You should be able to find information regarding your business at any time.
There are a few parties that are interested in your company’s financial records – the IRS, employees, investors, lenders, and most importantly, YOU! Being able to provide the information requested by these parties are vital to your ongoing operation.
- If you don’t have the information for yourself you could make a financial decision that could cripple your business.
- If you don’t provide records requested by the IRS, that could mean penalties and fees.
- If you don’t provide records requested by investors or lenders, that could mean a stoppage of cash flow and so on.
Being disorganized with your books could cause your relationships with these parties to be compromised or terminated altogether.
Literally, by definition, bookkeeping is the organization of financial information.
Keeping your financial records organized makes it easier to locate and provide to appropriate parties.
2. It Helps You Budget
Bookkeeping is important because it helps you budget. When income and expenses are properly organized, it makes it easier to review financial resources and expenses.
A budget creates a financial roadmap for your business. With a budget, you can plan for future expenses and the anticipated resources that would cover those expenses.
3. It Helps You With Tax Preparation
In most cases, your business has to file a tax return every year. Even more, you also have to file a personal return that requires your business return be filed.
And yet every year, millions of business owners are scrambling through their desk to find missing paperwork. Sound familiar?
The tax filing process can be made more efficient by simply having a bookkeeping function within your company.
4. It Helps You With Performance Analysis
Bookkeeping is a tool used by management to analyze business performance. The product of bookkeeping is financial statements. Financial statements should be regularly generated and used for analysis.
With analyzing financial statements, you can track your cash inflows and outflows which lets you know what business activities are working or not working.
This type of analysis allows you to focus on your company’s strengths and improve on its weaknesses.
5. It Helps You Make Better Decisions
With analysis comes better decision making. In order to make the best decisions possible, you need to have access to all available information. Bookkeeping is important because it provides you this information.
How can you expect to make profitable decisions without financial information to back it up?
6. It Helps You Plan For The Future
Bookkeeping presents the past financial performance of your company. In order to plan for the future, you have to have a good understanding of the past.
This includes planning for strategic purposes and tax planning as mentioned previously.
7. It Helps You Easily Report to Investors
Investors want to know the financial performance of your business to be able to want to quantify the value of their investment. Financial statements do just that.
The balance sheet, income statement, and cash flow statement all present the value of your business, which allows investors to have up-to-date and accessible information. Investors will be able to make better, well informed, decisions which is the ultimate purpose of bookkeeping.
Bookkeeping is not only for current investors but for future investors too. Prospective investors are more likely to invest in your business when you have organized financial information. Think about it, if you were an investor, would you invest in a company that didn’t have accessible and organized financial records?
8. It Helps You With Financial Management
Bookkeeping is important because it allows you to take control of your business’ finances.
Bookkeeping paints a clear picture of how you spend money.
You can see outstanding invoices owed by you or your customers. You will benefit from paying your bills on time and receiving payment for your products or services on time too.
It’s this delicate balance of cash inflow and outflow that will keep your business going.
9. It Gives You Peace of Mind
Disorganized books can weigh heavy on your mind as a business owner. With all of the other factors of running a business, your bookkeeping should not be keeping you up at night.
When your books are complete, you can rest easy knowing that your company’s financial information is review ready.
Banks or the IRS no longer have to give you anxiety.
Instead, you’ll find your mind at ease and more focused on other elements of your business.
10. It Allows You To Track Profit and Growth
Want to know your business’ profitability? Start bookkeeping.
For example, the income statement is one of the financial statements that is prepared from your bookkeeping.
On the income statement, you can see if your business is profitable or not. Without this information, it is impossible to know how well (or not so well) you’re doing.
Bookkeeping also helps with tracking growth.
Over time, you will accumulate months and years of data. With this data, you can observe trends and gain a greater understanding of your business cycles and compare results across periods.
11. It Improves Your Cash Flow
How does bookkeeping help improve cash flow?
Because bookkeeping provides information regarding your outstanding invoices – customer/vendor name, amount, date issued and due date – which can be used to implement better cash flow policies.
Some examples are shortening the amount of time you allow your customers to pay you. On the flip side, you can delay the payment of vendor invoices by waiting until a day or two before the due date. By doing so, you are increasing the average amount of cash you have on a hand at any given time.
12. It Provides a Greater Focus on Strategy
Tactical and strategic planning is the core of what you do as a business owner. You’re always thinking of ways to grow and develop your business. With bookkeeping as a tool, you are closer to your short and long-term goals.
You should use the information that bookkeeping offers to focus on strategy. You can track the results of your strategy with bookkeeping and adjust goals accordingly.
13. It Provides a Snapshot of Your Business
Bookkeeping provides financial information about your company in the form of financial statements. Financial statements like the balance sheet, income statement, and cash flow statement all provide financial information for a set period of time.
Together, these statements take a snapshot of your business allowing you the ability to see how well your business performed.
14. It Makes an IRS Audit Easier
Let me say this…I hope you never get audited by the IRS!
But in the unfortunate circumstance that you are audited by the IRS, you want to make sure your books are in order. Messy books prolong the auditing process, making your business more susceptible to fees and penalties.
If the IRS feels that your books are disorganized or outdated, they have more motivation to impose penalties.
When faced with an audit, it’s best to make their job as easy as possible by providing what they request in a timely manner.
15. It’s a Requirement Under Law
Last, but certainly not least, the law requires you to keep financial records for your company. Depending on your legal structure, the law requires you to keep financial records separate from your personal expenses. Failing to do so, can lead to termination of your business.
There you have it. Now that you know the 15 reasons why bookkeeping is important, let’s revisit the question I asked you earlier.
What story is your bookkeeping telling you? Let me know in the comments.
If you find yourself needing to implement a bookkeeping process, consider hiring a bookkeeping professional to help such as the LYFE Accounting team. Contact us today to learn more on how we can help you.