Why Is Bookkeeping So Important?
Updated: Aug 1, 2022
We decided to give you 7 really good reasons why you should make bookkeeping a priority
I was having a conversation with my sister, who owns a small piano business, about the possibility of hiring a bookkeeper. She asked me why she even needs to do her bookkeeping. Her business revenue was under $250,000 a year, she had less than 50 transactions a month, and minimal expenses. She was really curious about what a bookkeeper does and why the bookkeeping needs to be done. It was the first time anyone asked me this, and I was surprised to find myself stumped on how to respond. The answer for her was that she really doesn't need to outsource her bookkeeping. It makes more sense for her to do it herself, but that she should still do it. When you are starting a new business and trying to figure out all the financial ins and outs, it can seem like bookkeeping is not all that important. You might think, why do I have to do this when I can simply balance the check book and save all my receipts? If you don't understand the importance and value of proper bookkeeping, you may be missing out on the many benefits of bookkeeping when it is done correctly. Even for a small business like my sister's, many of these reasons are enough to learn how to do it yourself or hire someone to do it for you.
1. Bookkeeping makes you audit proof.
By being prepared for an audit you are safeguarding your time, integrity, and sanity. Being prepared can be the difference between a long and drawn out, stressful situation and knowing exactly what you have and handing it over to IRS without blinking an eye.
No one wants someone breathing down their neck for information that hasn't been thoroughly reviewed or prepared. Think of just throwing all this information together and hoping for the best outcome. That sounds pretty stressful to me!
2. Bookkeeping prepares you for taxes and can save you from high CPA fees.
Trying to compile 12 months worth of financial activity during tax season as opposed to having clean reports done on a monthly or quarterly basis seems like a no-brainer. You're more likely to avoid filing an extension when you can hand over clean financials to your accountant early on in the season. Also, CPA's will charge you higher than premium fees for having to do any bookkeeping related work.
$250-$500 an hour for HOW MANY HOURS OF BOOKKEEPING?! What the WHAT?! Your $150 an hour bookkeeping professional doesn't seem so bad now.
3. Bookkeeping provides you a snapshot of how your business is doing and how it has changed over time.
Financial awareness is something every business owner should have. What is your monthly or quarterly revenue? How does it compare to previous periods? How close did you come to meeting your financial goals or staying within your budget? Have your expenses gone wild? How are you doing compared to industry standards?
The most successful businesses analyze their reports regularly and make proactive choices to maintain a financially healthy organization.
4. Bookkeeping can help you to set financial goals for your business.
Bookkeeping provides a historical footprint of your financials that can be used as a foundation for creating budgets and forecasts. Without solid and reliable historical data, budgets and forecasts won't be accurately represented.
Budgets and forecasts are used to set financial goals and as time goes on you can monitor and assess how your business actually performed alongside those goals.
What would your net income be if your revenue increased 5% every month for 12 months? A budget vs actual report would tell you how close you were to this goal every month.
You want to open a new location in 12 months. What would it take to make that a reality? How much money in the bank do you need in 12 months to get started on this new project?
5. Bookkeeping gives you accountability
Let be real, everyone can benefit from having someone else look at their spending habits.
But if you are DIYing, you might not have that second pair of eyes, an expert with all the answers to your questions, or someone holding you accountable...you are still holding yourself accountable by independently organizing your financials and helping yourself to be more aware of where your money is coming and going.
6. The IRS requires S-Corp shareholders to track their equity.
If you are not tracking your equity you might be paying more or less to the IRS than you should be. This is a complex topic that requires it's own separate blog post. Bottom line is, if you are an S-Corp you are required to track equity and have some sort of bookkeeping records.
Yes, you can be an LLC and also an S-Corp! If you do not know your IRS tax entity, consult with your tax preparer.
7. Bookkeeping can help keep personal expenses separate from business expenses.
It might seem obvious, but its actually very common for people to co-mingle their expenses. This co-mingling of business and personal transactions can cause a lot of legal trouble. Good bookkeeping practices can sort out personal transactions, help identify co-mingling, and encourage the separation between business and personal finances.
Bookkeeping is not a new concept, it is something that has been a huge part of running a successful business for centuries. Understanding the benefits and reasons why you should do your bookkeeping will give you a clear purpose and appreciation for having it done well.