Bookkeeping isn’t simply a ‘must-do’ requirement for every small business owner. It’s the vital first step in your company’s accounting practices. Moreover, it lays the foundation for helping you set a budget, prepare annual tax returns, and more.
According to data from CB Insights, the top three reasons new business startups fail are because they run out of money (38%), there’s no market demand for what they offer (35%), or they were outcompeted (20%). One reason for that may be small business owners’ financial literacy. As an Industry Canada study notes, 71% of firms fail because of poor financial planning.
There’s an argument to make that financial literacy is a significant factor in determining whether a small business will survive, which, in turn, improves your bookkeeping prowess. Accurate small business bookkeeping helps to ensure your company survives and maintaining accurate financial records throughout the year can also help it thrive and grow. Here are six ways how it helps you do that:
1. Helps you determine a budget
You know you need to have an operating budget for your company. It serves as your financial roadmap. Accurately tracking your monthly income and expenses makes it crucial to determine your budget.
2. Makes filing taxes easier
When you go to file a tax return each year, a lot of business owners may have trouble finding all the necessary paperwork and receipts they have to account for what the company earned and paid out. Bookkeeping simplifies that task and can help you avoid making an error on your tax return that could result in an audit of your business by the Canada Revenue Agency (CRA).
3. Keeps you organized
Whether you intend to apply for a loan or grant or attempt to attract investors, bookkeeping is essential to ensuring your financial records are organized. Moreover, the CRA or a financial lender may request specific documentation that you must provide. If you’re not on top of it all, it can result in financial penalties or fees.
4. Improves decision-making
How can you know the future without understanding the past? Bookkeeping is the historical record you need to plot your future. It gives you a detailed look at your previous successes and challenges so you can plan how to move ahead wisely.
5. Improves cash flow
When you consider the no. 1 reason most startups fail is because they run out of cash, that should set off alarm bells. How do you avoid that situation? You guessed it: bookkeeping. The routine of recording income, invoices, and expenses help to ensure your customers pay you on time and as agreed. It also reduces stress significantly.
6. Meets your legal requirements
You can’t flout the laws of the land. Depending on your business’s financial structure, you are legally required to maintain accurate business records that are separate from your personal finances.
How to Safeguard Your Assets and Finances
Bookkeeping serves two essential purposes: accurately and consistently tracking all your company’s financial transactions and knowing the results of all your business activities.
If you decide to do the bookkeeping yourself, it’s critical to include errors and omissions (E&O) insurance in your overall policy. But ask yourself if you have the knowledge, experience, and time to do it consistently and correctly.
Just as professional bookkeepers should have a bookkeeping insurance policy to protect themselves, you also need to be prepared for the unexpected.
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