Developing your new enterprise, finding customers, and keeping them happy—all while trying to turn a profit—is a daunting task, especially in your business’s early days. With so much to do, it can be tempting to put off less glamorous tasks such as keeping a careful record of income and expenses.
But before you put bookkeeping off for yet another day, consider these reasons why an early start on financial recordkeeping can benefit your startup in the long run.
First, What Exactly Is Bookkeeping?
Bookkeeping is the process of categorizing each transaction so that at the end of any reporting period (like a month, or a quarter, or a year), you have an accurate record of all your income, expenses, assets, and liabilities. If you’ve done that, then you’ve been “keeping the books.”
If you’re asking yourself what bookkeepers do, here’s the gist: bookkeepers don’t require any sort of certification, just an understanding of how basic accounting principles work along with how a certain business logs its income and expenses. A bookkeeper can be the business’s owner, an employee, an outsourced company, or even a CPA. It doesn’t matter who keeps the books as much as that they’re correct.
Why Is Bookkeeping Important For Your Startup?
Let’s dive into a few reasons why bookkeeping — promptly and accurately — is so important.
Preparing for Tax Day
Before you built your startup, tax season was much simpler: you collected a few forms from employers and submitted numbers to the IRS. As a business owner, however, taxes can get a lot more complicated. You’re now responsible for providing those forms and maintaining financial information about your company throughout the year, reporting not just income earned but any expenses you incurred. Business expenses can lower your overall tax bill—but only if you take the time to track and report them.
A business owner who has kept careful records of all expenses and income all year long will be prepared come tax season. The last thing you want to do in January is spend long nights going over last year’s numbers instead of getting a head start on your new quarterly goals. Keeping a detailed record of your business expenses will prepare you to fill out your tax forms correctly, receive deductions for your expenses, and have confidence in case of an audit.
Running More Efficiently
Your financial records offer you valuable insight into how to better grow and improve your business. Tracking—and regularly reviewing—your financial records will reveal changes you need to make your business more profitable.
For example, a restaurant owner might review expenses at the end of each month and discover that an increase into fresh produce prices has eaten into the bottom line. Armed with this information, the owner can review and revise the menu to better meet the needs of the customers—and the bottom line.
Keeping detailed records for your business also helps prepare for the future. Armed with information about past income and expenses, you or an outside advisor can now answer questions about future growth. Questions such as “How much have I earned in the past year, and are my earnings growing month over month?” and “Based on this growth, can I afford to hire new employees now, or should I hold off another quarter?” are best answered with data. This kind of data can only come from keeping careful records.
Preparing for the Big Leagues
While your business is young, you might be able to get away with a simple or sporadic bookkeeping system. But play your cards right, and there will come a day when your business will grow so large and complex that you won’t be able to get by without careful accounting.
When that day comes, congratulate yourself! You’ve achieved the entrepreneur’s dream. And hopefully, you’ve kept great records along the way and can scale up your bookkeeping system as your business grows. Start now to develop great financial recordkeeping habits, and it will pay off in the long run.
Go On, Tell Us What You Think!
Did we miss something? Come on! Tell us what you think about our article on The Importance Of Bookkeeping in the comments section.
Jaren Nichols is Chief Operating Officer at ZipBooks Online Accounting Software. Jaren was previously a Product Manager at Google and holds an MBA from Harvard Business School.