What exactly is bookkeeping?
To put it simply and more official sounding, bookkeeping is classifying and recording every business transaction in your books. Your books can be a literal book with pen and paper. Or like most people your books are in a software program like QuickBooks for example. On the surface it seems pretty straight forward, but once you get into classifications along with everything else, bookkeeping can get complicated.
Bookkeeping is a big part of accounting. It’s a tool and mechanism to properly manage your money. Since money is very important to your business, you can catch a glimpse as to why bookkeeping is important. It’s often perceived as one of those necessary evils. So whatever the reason might be, it’s the task that gets perpetually put at the bottom of the to do list.
When you think about it, it makes sense that bookkeeping is one of those things that gets put off. After all, you’re fitness experts, artists, chefs, product designers, marketers… not accountants.
Your purpose and passion are furthest from accounting as possible.
Your purpose is why you took the leap of business ownership. It’s how you’re going to change the world. As it should be.
Let’s look at your business from a different perspective to get some clarity on the issue.
In order for you to continue to fulfill your purpose and make a difference your business needs to survive. Obviously surviving is the bare minimum, because you can’t sustain yourself by only breaking even. It leads to burnout. You need your business to thrive, to create profits to more fully make a difference. As you know, cash is the fuel for your business. You need money to keep, not only your business growing and being profitable, but keep your personal life secure and sustainable.
As you can see, your money needs to be managed well to reach your goals and bookkeeping is the tool needed to effectively manage your money.
Even for those that do see the benefit of bookkeeping, it still gets put off… but why?
Top reasons bookkeeping is NOT done.
Time is a big one. As a business owner, you simply don’t have extra time. There are always so many top priority tasks that bookkeeping stays at the bottom of that list. With bookkeeping being seen as a task, it naturally gets put off if it’s not a priority for the day.
Besides being so busy in general, as a business owner your time is very valuable. It’s hard and not good for the business if most of your time is spent on things that don’t more directly bring in revenue. Your focus should be there. So in order to always have an accurate picture of where your business is at financially, if you’re really bringing in revenue, your bookkeeping needs to get done.
Lack of Knowledge
As we’ve established you are not accountants. It’s just not your expertise and is likely boring and tedious, just another task to do instead of a tool to utilize. To some, it might seem overwhelming because you don’t know what all the numbers mean or how to accurately account and categorize every single business transaction. That automatically pushes it farther down on your to do list.
Lack of knowledge can lead to oblivion. That sounds kind of harsh, but what I mean is because you don’t know the intricacies of accounting, you might become oblivious to the importance of doing it, let alone classifying things accurately and consistently. Some might think you don’t like doing bookkeeping and besides, your business is fine. You have money in your bank account and no major issues have come up and your business is pretty straight forward anyways. You basically know what’s going on so why bother with bookkeeping.
I was recently reading an article that stated laziness as a reason business owners don’t do their bookkeeping. That is totally not true. I don’t believe any entrepreneur is lazy. This is an example of a perceived factor in reality being one of the top two factors. Just because you don’t do one thing, doesn’t mean you’re doing nothing. You’re working hard on what you see as the most important aspects of your business. It really falls into the top categories – lack of knowledge or lack of time.
Why bookkeeping SHOULD be done.
By now you’re seeing the importance of bookkeeping and I suspect you’ve always kind of known in the back of your mind. But that doesn’t make it any easier.
Let’s look at some of the benefits and consequences of either good or nonexistent bookkeeping.
Tax season at the beginning of the year can be a nightmare. You scramble to document all your transactions to put together the financial statements you need for filing. Were there any you forgot or didn’t have the receipt for? Is there anything else you bought that could be a deduction? Was that one thing an expense or a distribution? You owe how much in taxes? Do you have enough money to cover that? Even from your personal account? Where is that going to leave you moving forward?
That’s a nightmare a lot of business owners experience every year.
On top of that horribleness, you could very well trigger a red flag to the IRS with inaccurate numbers. That leads to even more stress because frankly, they really don’t care about your situation and just want to get more money from you. If you don’t have any way to prove your numbers with accurate and updated books, they can take what they want. And now you are on their radar and that is never a good thing. More audits in the future.
With accurate and up to date books you can know ahead of time about how much you will owe in taxes and prepare for it. You’ll also have the proof, should you need it, for you numbers.
Cash is the fuel of your business. If you’re going to take your dreams anywhere, you need fuel. Do you know how much cash your business has? Did you account for that check you sent out, but hasn’t been deducted, yet? Too many times we’ve seen owners who think they know what cash they have only to overspend and then not have enough for the important expenses.
With consistent bookkeeping you’ll see the cash leave your business as it’s happening and if you find you are overspending in a certain area, you can stop it before it hurts your business.
Key Performance Indicators (KPI’s) are essential for running a profitable business. Even looking at your revenue or profit or expenses by category, you are looking at some basic KPI’s. They are telling you the story of your business. It’s even better when you can create more specific KPI’s for your particular business or industry. Compare to last year at the same time and see how much you’ve improved.
The problem with inaccurate books, or no books at all, is you really don’t know any of those numbers. You don’t know how your revenue compares to your expenses or how it compares to last year. Are you actually profitable or worse are you running at a loss and not even aware of it?
You NEED to do your bookkeeping
Financials are the language of your business.
You need bookkeeping to…
- Simply file your taxes
- Pay less in taxes
- Make sure you don’t miss out on deductions
- Get a loan or help from any financial institution
- Know where your money is going and where it’s coming from
- Catch errors because of accurate KPIs much quicker which will save you money
Managing a profitable business comes with countless challenges. The last thing you need is to make a critical error because of inaccurate financial data.
The secret weapon to actually managing your cashflow well, tracking accurate revenue, and paying the least amount of taxes as possible is bookkeeping. It’s the ultimate tool for making the best decisions possible involving anything and everything related to your money.
Do you want to save a ton of money on taxes? Keep expenses as lean as possible? Know your cash situation to the minute? See if you are improving from last year?
Without accurate books you are just guessing on all that important stuff.
Take the time to do your bookkeeping. To manage your time and not get overwhelmed, I would suggest scheduling probably one day a week at most to two days a month at the least for your bookkeeping. Only on those days you do it and then you don’t have to worry about it any other day.
There are plenty of resources out there to help you out. Learn what you can so whether you do it yourself, hire someone to do it inhouse for you or outsource it to a professional, you should be aware of how it’s done, because you are ultimately responsible for it.
We’ll talk more about who should do it in another upcoming article.
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