Importance of Bookkeeping
Bookkeeping is an integral part of accounting that involves recording all financial transactions including purchases, receipts, payments, sales, as well as payments by organizations or businesses. In any business, proper records of all aspects of your finances ensure that you maintain positive cash flow and keep working capital in place.
This article summarizes eight (8) reasons why proper bookkeeping is important for your business.
To Avoid Tax Audit
A bulk of any tax revenue agency program spending resources goes to auditing small to medium-sized businesses. Avoid a tax audit by keeping track of all your financial transactions through proper bookkeeping practices. Be prepared and pay close attention to the tax audit red flags, such as revenue discrepancies, large business expenses, and outliers.
Here are some of the most common bookkeeping triggers or red flags the IRS looks for.
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- Net Losses Over a Year: Businesses with net losses over a year or in more than two of five years of business operation are at risk of a task audit, most particularly for individual entrepreneurship.
- Late Filing of Taxes: IRS is attracted to businesses that consistently file late taxes and incur penalty fees. Do not wait until the very last minute before paying your taxes.
- High Employee Salaries: Small and medium-sized enterprises or SMEs should be careful when paying salaries to their employees. Note that high earners usually invite the IRS. Pay your employees based on the industry’s standards. Your chance of getting audited gets higher if the salary you give is higher than the average.
- Too Many Tax Deductions: When making deductions, make sure to always check each item. At the same time, always ensure that a backup document or proof is always available. That’s why a professional bookkeeper is very important to any business. Be updated with new tax laws and keep all business expenses records in detail along with receipts, including deductibles for meal expenses and travel expenses.
To Use Digital Currencies Properly
The latest trend of digital currencies includes bitcoin, ripple, and Ethereum. As much as possible, you should avoid using digital currencies because they haven’t met the “legal tender” tag (or coins and currency in the United States, including circulating notes of the national and Federal banks and Federal reserve notes). However, if your business goes through this route, you have to take extra precautions.
Using digital currency in your business will attract the IRS. That’s why you need to have an experienced bookkeeper to ensure that you keep a record of all of your digital transactions.
For Better Global Business Operations
If you have a business that operates in other countries, your profits are taxable and paid in the host countries. You’ll be most likely qualified for foreign earned income exclusion and the IRS will make sure that all earnings are legitimate. For smoother business operations in this context, hire a bookkeeper who has knowledge of tax policies of other countries you’re operating in.
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To Help in Budgeting and Reviews
As a plan for anticipated resources and future expenses, budgeting creates a financial road-map for any business. Bookkeeping helps you budget, keep expenses and income properly organized, and make it easier to review financial expenses and resources.
Remember that your investors, lenders, customers, employees, and the IRS are some of the important people and entities interested in your financial records. Thus, providing accurate information when requested is essential for smooth business operations.
However, for some business owners who lack organization skills, hiring a bookkeeper is critical. If you’re unable to provide accurate records, your cash flow will stop, and your relationships with your business partners and customers will be compromised.
For Better Business Analysis and Management
Bookkeeping helps with business analysis and management. These are tools to analyze business performance. As a product of bookkeeping, financial statements must be regularly generated and analyzed to track cash inflows and outflows.
Bookkeeping allows you to study what business lines are profitable and which ones need prompt intervention. It enables you to focus on your strengths and improve your company’s weaknesses.
Proper bookkeeping means that all customer accounts are up-to-date so that you can quickly see if you are spending too little or too much on inventory or if you’re not getting your expected cash inflow from sales. In short, accurate bookkeeping serves to alert entrepreneurs when they need to better manage their cash flow.
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For Better Business Decision-making
Through proper bookkeeping, you can analyze accurate data so that better decision-making follows. Having access to all key information through accurate bookkeeping, you’ll have a better view of your past financial performance and compare it to your most recent performance to create better action plans for the future.
In terms of coming up with better business decisions, these are two of the top advantages of proper bookkeeping:
- Tax Planning: It helps your accountant or CPA access the data that is necessary for the proper categorization of expenses and revenues. Your accountant can structure certain favorable expenses. For instance, if you have regular client meetings, you might want to provide lunch during meetings that provide favorable tax and profitable benefits for your business.
- Investor Reporting: It’s only natural for your investors to always want to stay updated about your company’s financial performance to ensure that the value of their investment is secure and improving. This is why proper bookkeeping should include your income statement, cash flow statement, and balance sheet. Investors can make well-informed decisions about staying with your business, which is the ultimate purpose of proper bookkeeping.
To Track Profit and Improve Cash Flow
Bookkeeping can prove business viability. For instance, you’ll see if your business is profitable by checking your income and cash flow statement. Without this data, it’s impossible to determine how well your business is doing.
Also, bookkeeping through routine recording of expenses, revenues, receivables, and liabilities helps improve your cash flow. For instance, it can help you to quickly track vendor and customer invoices to make sure they are paid in a timely manner and for you to avoid late fees.
Peace of Mind
In terms of peace of mind, nothing beats complete and accurate financial records and proper tax planning. With proper bookkeeping, you can sleep soundly at night knowing that you know where your business is heading. In addition, since you know the status of your company, you won’t be stressed out by a tax audit, by declining cash flows, or by anything that could jeopardize your business operations. Because everything is well accounted for, you’re always prepared to present your business to the IRS, to your investors, and to your clients.
Proper bookkeeping is important in all aspects of your business. With accurate financial records, you’ll be able to make better business decisions, manage your budget in the best ways, plan your business effectively, and avoid tax audits. Naturally, since your business records are all organized and accurate, you’ll enjoy smoother business operations, locally or globally.