The importance of bookkeeping
Whether you’re a small or large business, we can’t stress enough the importance of bookkeeping. As accountants, we see many businesses fail due to lack of bookkeeping more frequently than you’d think.
How can that be? Here are four reasons.
1. Bookkeeping is the backbone of your business.
An adequate bookkeeping system keeps track of assets and profits, as well as what a business owes to whom and why. This information includes salary, legal expenses, administrative costs, overhead, the cost of goods and services, quarterly and yearly tax liabilities, and so on. From this information, a business owner can make determinations like where costs can be cut and whether the business can afford to expand. On that same token, without such information, you’d be flying blind with your business, not knowing whether your financial goals are realistic or what your bottom line is.
2. You cannot rely on your tax preparer to oversee your business for you; that’s what the CFO is for.
A common misconception, at least among small business owners, is that hiring an accounting firm to handle your yearly taxes is all a small business needs to do for bookkeeping. It’s easy to make that assumption since a tax preparer parses through your yearly business expenses, profits, loses, etc.
However, calculating your tax liabilities only offers you a snapshot of how your business fared for the year, and only as far as tax liability is concerned. There is also a lot more to accounting than just figuring out tax liability. For instance, an accountant (or traditionally a Chief Financial Officer) will use bookkeeping to have a handle on day-to-day financial responsibilities. This likewise provides them with insight as to forecasting, strategic planning, property management, and deal analysis.
3. Bookkeeping allows you to keep track of your tax liability.
In the same vein as #2 above, your tax preparer can only do so much in terms of keeping track of your business expenses and receipts. Ultimately, it’s up to you gather that information, keep it organized to determine your tax liability, keep receipts for any possible IRS audit, as well as keep track of payments to the IRS.
For instance, the IRS may not always keep an accurate record of what you already paid in quarterly taxes, or what may owe in back taxes and interest. If you have a dispute as to that amount, it would essentially become your burden to show the IRS what you’ve already paid. Your tax accountant won’t necessarily have that information because they generally only calculate how much you owe and not what you’ve paid thus far. Keeping accurate bookkeeping will thus help you from getting “blindsided” by an invoice from the IRS at the end of the year.
4. Bookkeeping is particularly important for growing businesses.
Many business start off using a “cash-basis accounting” system, as this is the way most people handle their personal finances. This system keeps track of transactions as cash changes hands. In other words, you keep track of what you owe as you pay the bills, and likewise keep track of what you earn as you receive earnings. While simple, this system does not reflect what assets or liabilities a business has in real time.
As your company grows, you will want to implement an “accrual-basis accounting” system. This system keeps track of revenue when earned (not received), as well as expenses when incurred (not paid). It thus reflects how much in expenses you incurred to earn X amount of revenue. Not only is this system more accurate, it also reflects reality. If you’re looking for investors, it’s also the type of accounting for which lenders will want to see before approving a business loan.
While you certainly do not need an MBA or accounting degree to adequately manage the bookkeeping for your company, many business owners feel uncomfortable with this aspect of the business or would rather focus on their own field of expertise. In these cases, hiring an accountant would be ideal. When hiring an accountant, we suggest looking for ones that are both knowledgeable and tech-savvy. They should be updated on the latest software systems, as these produce statements, reports, and financial information more quickly and efficiently.