The backend of your business sometimes feels like it is filled with daunting tasks–with your bookkeeping being one of them. The fact is, while it usually is not fun for business owners, bookkeeping is an integral part to a small business’s success. Without keeping the books, you as a business owner are not able to get a great picture of how your business operates or even if you are profitable.
What is bookkeeping?
Lets keep this simple; bookkeeping is keeping track of your revenue (money coming in) and expenses (money going out). Pretty simple, right? What should be an easy feat turns into a monster if not tended to periodically. Based on your business you can choose how often you need to be in your books. Some businesses can get away with only popping in monthly to do a quick reconciliation and make sure all is good, while others may need to hop in weekly or even daily to make sure the business is operating correctly.
Let’s take a look at why it is so important to have a bookkeeping routine for your small business.
Ensure all tax deductions are accounted for
Tax deductions are all the expenses that qualify as business expenses. If you are a single member LLC or even a sole proprietor, your business expenses decrease your tax liability for tax time. This means you pay less taxes when tax time rolls around–and who doesn’t love that idea?! General rule from the IRS is, a business expense must be ordinary and necessary. Here is a quick list of expenses you may be missing in your small business:
- Postage & shipping
- Telephone & Internet
- Contract Labor
- Business Insurance
- Education
- Home Office/Office rent
- Bank and Interest Fees
Remain audit ready
Many small business owners worry about Uncle Sam and the IRS sneaking up and requiring an audit on their small business. Keeping accurate and updated books can keep the worry at bay. While no one wants to go through an IRS audit, having all your bookkeeping information updated and available can help it remain smooth and have minimal interruptions to your workload. While an accounting system or spreadsheet is important for organizing income and expenses, it is also equally important to store your receipts. You can use the shoebox method–literally, throw all those receipts into an empty shoebox for safe keeping; or you can use a digital platform. My personal favorite is Google Docs!
Another great point to having audit ready books is you can be ready in a moment’s notice to take advantage of any aid that may be available or loans that you decide to apply for. For example, when the government issued the PPP money; being able to be one of the first hands in the bucket meant those small businesses were able to lock in funding for payroll and continue normal business operations.
Improved financial insight
It’s no secret that having well manicured and updated books provides many benefits to you as a small business owner; the most valuable benefit (in my opinion) is the financial insight. As a business owner, you should be looking at your profit and loss statement and your balance sheet at least monthly.
Your profit and loss statement will show you your income and expenses, normally broken down by month. Take a look at your current month and compare it back to past months. Identify any categories that are inconsistent from month-to-month and investigate why that is. Sometimes you may have transactions that only occur quarterly or even annually. Knowing when those expenses will occur can help you manage your cash flow and ensure you can cover all expenses.
The balance sheet is what houses all your assets, liabilities, and equity. Your assets will consist of your bank accounts, savings accounts, fixed assets (such as machinery, equipment, etc.), and sometimes cash on hand or petty cash accounts. Make sure these accounts accurately reflect the monthly statements and reconcile back to those statements. The liabilities section is going to include loans payable, accounts payable, line of credit, and taxes payable. Loan statements, line of credit statements, and credit card statements should all be compiled monthly and accounts reconciled. Included last on the balance sheet is the equity section. Those accounts include Owners distributions (aka Draws, personal expenses, etc.), Owners contributions (money you have put into the business; whether that be cash or the purchase of supplies for the business), and retained earnings (this is a roll up of prior accounting periods).
Once you have reviewed those two statements you should have a good idea on how your business is performing. Use the knowledge obtained to better your financial situation for your business.
Recap
To wrap things up, I highlighted why bookkeeping is important for your small business and how it can be beneficial. Three reasons you need to be jumping in your books periodically is to ensure all tax deductions are accounted for, you can be audit ready, and increased financial insight. It really depends on your business how often you need to be performing your bookkeeping duties; just set a schedule and make sure you are sticking to it!
I’d love to know what you thought of this post! Let me know if you have any questions or comments.
Thanks for reading.
Best wishes,
Lexi