If you run a small business and you want to take care of your bookkeeping but are unsure about exactly how to do it, consider this article your bookkeeping 101 crash course. Bookkeeping may not be the most exciting thing ever, but we’ll try to teach you what it is, why it really matters, and what are some of the most important steps to doing your own bookkeeping, especially for those of you filing taxes when you are self-employed.
Bookkeeping is defined as the process of tracking all of your company’s transactions, so you can see exactly where your revenue is coming from, where your business is spending money, and which tax deductions. So, why does bookkeeping matter for your small business?
Why Bookkeeping Matters
Bookkeeping allows you to keep accurate financial records and get organized for things to come. Still, there are too many businesses out there who fail to properly implement this process. If you’re still not convinced that you should focus on your bookkeeping, here are a few reasons why we think it is important.
Helps You Catch More Tax Deductions
When you record and categorize every transaction in your business, you’ll be able to see which expenses are tax-deductible so that nothing falls through the cracks. Without year-round bookkeeping, you’ll forget about one-off deductions, like lunch with a client eight months ago that you could have deducted. Even with the best of intentions, deductions will always fall through the cracks at tax time, unless you have bookkeeping in place.
Helps You Get a Business Loan
If you’re applying for a small business loan, banks will request to see financial statements, and we don’t just mean the type you can download from your online banking. You’re going to need to have something that shows your expenses and revenue, otherwise known as an income statement. This is something you’re going to be able to get through bookkeeping.
Helps You Catch Financial Mistakes
When you’re bookkeeping, you’re keeping a close eye on your business transactions, which means you’ll be able to catch things like invoicing mistakes, bank errors, and sneaky subscription fees for services you are no longer using.
Gives You a Clear Picture of Where Your Money is Going
When you have bookkeeping in place, you’ll be able to keep track of your expenses so you can budget better. You’ll also be able to understand the flow of your money more clearly, so you can see the differences between payments to credit cards or loans versus other expenses. You’ll also be able to track how your business is growing and improving over time and what months are busy or slow. This will help you plan for the future.
Best Way to Keep Your Records
You need to keep records of your bookkeeping but there’s a bit more to it than just cramming all your receipts in a shoebox. The rules state that you should keep records of all expenses over $75 to prove the expense and that you should keep every financial record and receipt for three years.
When it comes to actually keeping the records, we recommend storing them digitally. The IRS is totally fine with that and it’s an easier way for you to do it this way. For this, we recommend software such as QuickBooks. This software will allow you to focus on your area of operation, so if you deal with manufacturing, for example, you’ll want to optimize your QuickBooks for manufacturing.
As we said in the beginning, bookkeeping isn’t the most exciting thing, but if you do it consistently, you’ll have a smarter financial insight into your business every month of the year and you’ll save yourself a lot of time and headaches come tax season.