Why Is Bookkeeping Important for New Businesses?
When starting a new business, it is easy to get consumed with the ‘exciting’ parts of the project: designing a product, coming up with sales strategies, marketing, hiring employees, etc. However, there are integral ‘behind the scenes’ parts of running a business that sometimes get overlooked when starting out. One of these is bookkeeping. Read on to see why bookkeeping is important for new businesses.
Bookkeeping may sound interesting to the math enthusiasts of the world (yes, they do exist!) but to everyone else, especially during the exciting early days of a startup, it may seem dull and get overlooked.
Unfortunately, if keeping track of your company’s financials isn’t prioritized, it can cause significant complications down the road. To position yourself to succeed, don’t let bookkeeping become something that you put off.
Accounting and Bookkeeping Help Businesses to Manage Their Cash Flows
Managing cash flows is hugely important for new businesses and proper bookkeeping practices can help you to prevent many cash flow problems before they start. By keeping track of all of your outstanding accounts receivable and accounts payable, for example, you can make sure that you will have sufficient cash to satisfy any upcoming obligations. If you anticipate more accounts payable (i.e. bills) than accounts receivable (i.e. revenue), then you had better make sure that you have sufficient cash and/or credit to satisfy your upcoming financial obligations or you may find yourself in trouble.
Similarly, by properly tracking and managing your accounts payable you can increase the probability that you will pay them on time. (Forgetting for the moment the larger problem described above.) This will help you to maintain good relationships with your vendors, keep your credit in good standing, and minimize your interest payments – all good things for a new business to do.
Then there is the classic business school problem of growing so fast that you run out of cash. How does that work? It’s really pretty simple. When you grow really fast you have a lot of orders, projects, contracts, etc. In order to satisfy them you must spend money. In order to satisfy a lot of them you must spend a lot of money.
Generally speaking, you have to spend the money to complete the work before you get paid for it, and if you are doing too many projects or making too many widgets you can run out of money before that happens. Imagine, for example, you receive 1,000 orders for razor blades you are making – far more than you ever dreamed you would receive. You start to make them and then run out of money after only 200. It’s possible you might be able to get a loan of some sort, but even so, that creates delays and costs money. Loans notwithstanding, this situation can lead to angry customers, angry vendors, new costs, and even the end of your business entirely.
Proper bookkeeping and accounting can help prevent this situation altogether by enabling a business to model out the costs associated with incoming orders and make sure that it has enough money to complete them. If not, than it may be time to slow down the growth.
Accounting and Bookkeeping Help Businesses to Keep Their Tax Bills Down
Taxes are hugely important for new businesses and if not properly managed they can greatly decrease your profits and even kill you off completely. (Just ask the countless new marijuana businesses that have learned this the hard way…) For one, you don’t want to miss out on any deductions that you can begin tracking now. If you don’t know about them until tax time you may not be able to go back and figure out how much to deduct. Mileage is a good example. If you can deduct mileage than be sure to keep track of every business mile from day one. (There are some great apps to help with this.)
Likewise, if you don’t keep good bookkeeping records from the beginning you will have a major headache come tax time. This will at the very least cost you a lot of time and may also cost you a lot of money. It takes a lot more work to figure out where you spent your money six months ago than it does to get it down when it happens. This means more effort trying to remember things on your part, more time and money spent by bookkeepers trying to get everything organized, and a greater chance there will be costly mistakes. As an added bonus, bookkeepers may charge you a hefty premium for taking up a great deal of their time during their busy season.
Another common problem is failing to make reasonable quarterly tax filings. Making such filings is a requirement for many businesses and doing them poorly, or not at all, can result in costly penalties and more money down the drain.
Financial Statements Help Businesses to Better Understand Their Operations
Another benefit of keeping your books in order: financial statements. The basic financial statements (income statement, balance sheet, and statement of cash flows) are extremely useful tools for describing how a business is functioning. (There is a reason they are central parts of annual reports.) They tell you in detail how your business is doing, what kinds of problems may be on the horizon, and fuel strategic decision making. (If you want to learn more about financial statements check out our blog on the income statement here, and our blog on the balance sheet here.)
If you don’t maintain your books there is simply no way to create your financial statements. If the financial statements were a building, monthly bookkeeping activities would be the bricks.
Maintaining Your Books Fuels Strategic Decision Making
Running a new business involves making important decisions on a regular basis, and informed decisions tend to be far more successful than uninformed decisions. Keeping your books in order can provide you with key information that can be useful in this regard. Say, for example, two clients call up with desperate pleas for some last second service. Unfortunately, you only have time to help one. Which one do you choose? If you have kept your books in order you can see which client has provided you with more revenues, and this may be the deciding factor. There are a myriad of possible situations like this where well organized books can provide you with valuable insights.
So, if you are starting a new business heed our warning: keep your books in order from day one. If your business succeeds you will need to get them in order eventually, and you will be better off starting now. Or, if your business doesn’t succeed, not having good books may have been one of the central reasons why.
There you have it. Key reasons why bookkeeping is important for new businesses. Interested in learning more about bookkeeping and accounting? Take a look at My OC Bookkeeper’s great bookkeeping and accounting blog or their bookkeeping, accounting and business strategy YouTube channel. Interested in hiring an outside bookkeeper, accountant, or business consultant? My OC Bookkeeper is here for you. We help businesses all over the country to tackle problems big and small. Click the video below to learn more. Let’s do great things together!