As a business owner you have to have a way to keep track of your income and expenses. This article explains why good records are important and how a good bookkeeping system can help you grow your business.
All businesses need to have a bookkeeping system in place. Bookkeeping is the process of recording and maintaining financial transactions for your business, and it’s a great way to generate a detailed financial overview for your business whenever you need it.
The first reason you need a bookkeeping system is it’s required by law. You need to keep track of your income and expenses for tax purposes. The truth is most business owners don’t understand how to keep a set of accurate books, and many don’t have the time; it’s a task that is usually neglected, which is a big mistake. Accurate bookkeeping will keep you out of trouble and give you an important tool to help your business succeed.
With a complete bookkeeping system in place you can manage the financial health of your company. You can analyze expenses and revenue for any time period and compare it to past results. You will also be able to create budgets that can be compared to actual results. Identifying key areas of over or under spending is vital to keep spending in places that will maximize business success.
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Business owners should get in the good habit of reviewing their financial information on a monthly or, at a minimum, quarterly basis. What was revenue for the month? For the quarter? How does that compare to other periods? Who are your biggest customers? What is your inventory turnover rate? How much did you spend on marketing? What are the tax implications of your current profits? Review the aging of accounts receivable to identify past due customers (This is one area I see businesses struggle. It’s great to make that sale but unless you collect your money and collect it in a timely manner, your business will be in serious jeopardy. It’s about cash flow!) There are many other reasons to have an up to date accurate bookkeeping system such as financial statement preparation for lenders and investors.
So how do you establish and maintain a bookkeeping system?
There are a great deal of software packages available, some cloud-based, that can get the job done.
As businesses grow, many hire in-house bookkeepers; some are full charge (handle all aspects of bookkeeping) while others are area specific such as invoicing, accounts receivables, payables, payroll or some combination. Outside CPAs are often used to make adjustments, offer advice and prepare all the required returns.
Many smaller companies often hire a bookkeeper/accountant to help. A hybrid system is usually settled on where the company enter data such as invoices and expenses, and the accountant will do some bookkeeping clean up, make adjustments, book payroll, reclassify, offer advice, and do all the necessary filing, which may include payroll, sales tax, and corporate returns.
Your time is valuable and many small businesses should not try to handle all aspects of bookkeeping and tax compliance themselves. It’s often ineffective and could cost you down the line. A good accountant will be of great value. Take the time to find someone who will work with you – not just with your accounting needs – and who cares about your success.
While bookkeeping can be a hassle, it should be viewed as a key component of your business. It’s a great way to protect yourself legally, keeping your business compliant with current tax laws and regulations. Bookkeeping is also a smart technique for analyzing your business’s financial health. Knowing your financial numbers and ratios will help you create strategies that will strengthen your business. Because there are so many options available to you, setting up a bookkeeping system should be your first priority.
John Lepore is a CPA with 21 years experience who serves Long Island, NY and the New York City metropolitan area. He can be reached at 516-297-3708. Or, visit his website at http://www.leporecpa.com