Proper bookkeeping might not close the next big deal for your business. But when done right, it will tell you exactly where to devote your energy.
You might be tempted to overlook your books. It’s administrative, it’s not a revenue-generating activity, and many entrepreneurs simply don’t know how to do it right. So you push it to the side.
This is the wrong move.
As a new business, you have a few major priorities: plan well, and don’t run out of money. Bookkeeping is an essential ingredient for both.
Clean Books Make For Better Systems
Let’s back up for a moment and start with basic assumption
● A business is a system.
● A business’ health is measured by its financial wellbeing.
Bookkeeping, then, is a core business system for tracking your financials.
In other words, it helps you answer the question “did we make money last month?” Or better yet - “how can we make more money?”
These are vital questions for any startup.
Whether you’re relying on double-entry or a simple, single-entry system, bookkeeping basics boil down to very straightforward record-keeping: every transaction, no matter how small, is recorded as a journal entry.
Closed a new customer? Record what they paid you as income.
Spent $50 at a client dinner? That gets entered too - as an expense.
The journal entries then get categorized in a ledger. You don’t need to dig into anything more advanced to see that simply tracking your business transactions eventually lets you gain insight into some really important things, and make important decisions. How important?
Let’s take just one outcome of good bookkeeping - a profit-and-loss (P&L) statement - as an example.
P&L statements will be integral for the following:
Calculating Your Taxes (And Finding Savings)
When it comes to your fiscal year-end, a profit-and-loss statement will come in very handy if you’re still trying to take your business off the ground.
No business owner wants to be losing money - but if you are, and your statements demonstrate this, you will be tax-exempt. Not to mention that properly organized books will help you submit claims.
Funding Your Business
If you’re applying for a loan, or even if you’re looking at other avenues of funding, both banks and potential investors will want to assess your business based on your books. You will have to provide financial statements to stakeholders - as they will want to evaluate whether investing in your business is viable.
Figuring Out If Your Sales Actually Make You Money
Making a sale comes with associated costs - labour, marketing, product development, materials, and many others.
You need to know if the cost of producing your goods ever starts to exceed your per-sale revenue. If that’s ever the case, you know you have a problem, and need to either increase your prices, or lower your product costs. Clear bookkeeping will help you address this.
Discovering Business Trends
Having insight into categorized month-by-month income and expense reports tells you a lot about your business. You can analyze seasonal trends, assess the impact of spending on various sales and marketing activities, and most importantly, keep a close pulse on your cash flow.
Making Tough Decisions
If you’re ever faced with difficult choices, having clear P&L statements can be invaluable. Have you increased business expenses without much impact on the bottom line? Is the larger payroll not bringing in the expected additional revenue? Or is now a perfect time to look for external funding?
Whatever business problems you may be facing, clear books will help point you in the right direction, and where you should investigate further.
By Matas Pranckevicius on Oct 22, 2018