Here’s a hard truth from the US Small Business Administration: half of all new small businesses fail within the first five years, and the number one cause of failure is financial mismanagement. Tough to hear, but as a new business owner or solopreneur, you need to be aware of the critical role bookkeeping plays in successful businesses. That's why when we hear someone ask, "Does my small business need bookkeeping?", the answer is an emphatic "YES!" Here are a few reasons bookkeeping matters...
So You Don’t Make the Taxman Angry
As a business (and an individual for that matter), filing and paying your taxes is a must. And as a business owner, you can't file and meet your tax obligations without accurate bookkeeping. Handwritten notes in a notebook or on coffee-stained receipts aren’t going to cut it. You need reports that clearly breakdown your company’s cash flow at tax time, and bookkeeping is the tool that makes it possible.
So You Get Paid
Without bookkeeping, you won’t know who owes you what. Basic bookkeeping means invoices sent and payments received. In the early days of a small business this can seem unnecessary because you can juggle that information in your head, but as your business grows you’ll need systems to track things like payables and receivables. And ultimately, how your business manages its cash flow directly impacts what you personally take home!
So You Don’t Screw Up Your Bank Account
If you keep track of your business' bookkeeping, it’s a simple thing to go through your monthly bank statement and make sure everything matches up. This is called bank reconciliation. Accurate bookkeeping makes reconciling your bank accounts easy and prevents banking errors from causing financial problems.
So You Know If You’re Making A Profit
Ah, profit. Aside from passion, profit is probably one of the top reasons you're an entrepreneur in the first place. But without bookkeeping it's going to be really tough to gauge whether or not your business is actually profitable. While your bank account might be in the black at the moment, that doesn’t mean your company will show a profit at the end of the year. Keeping accurate books, on the other hand, allows you to see inflow vs. outflow. And that's how you know whether or not your business is profitable.
So You Pay Less In Taxes
If you’re not tracking your expenses in your bookkeeping, chances are your tax bill is going to be higher than you want it to be. Why, you ask? Because expenses reduce your net revenue! (That may sound like a bad thing, but keep in mind that the lower your bottom line, the less your tax exposure.) Sure, your credit card and debit card expenses are pretty easy to track, but little expenses here and there covered in cash can (and will) add up. (P.S. - You better not be mixing business with personal!)
So You Can Get Financing
If you're business is growing and your considering financing to help with expansion, that's great—until you walk into the bank without any evidence whatsoever that you are actually running a successful business. And surprise, surprise, but accurate bookkeeping is the foundation that generates that evidence. When you do proper bookkeeping, you can easily generate reports such as balance sheets and profit and loss statements that are critical to helping you make your case for financing. Bottom line: no bookkeeping means no loan.
Can you run a money-making venture without accurate bookkeeping? Sure. It's just not a business.