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The Importance of Bookkeeping for Small Businesses

Financial management is the backbone of every business because success and failure are measured by its financial health. Thus, bookkeeping becomes an ongoing activity in every organisation to maintain up-to-date financial records and understand the incomings and outgoings. Entrepreneurs must attain financial literacy to understand financial reports and use the data to make informed decisions.

Without bookkeeping, it is impossible to keep track of bills, invoices, taxes, stock, and payroll. Business owners must hire a professional from the launch stage to ensure the working capital is utilised effectively and breakeven is accomplished quickly.

Let us help you understand the importance of bookkeeping for small businesses. The list below will inspire entrepreneurs to pay attention to bookkeeping instead of trying to do it themselves.

1. Maintain Accurate Financial Records

Every business has to maintain records of every transaction to comply with legal regulations in the state. The Australian Taxation Office requires businesses to keep all financial records, including tax and superannuation information. If the business does not maintain these records, it can be penalised. All transaction records must be saved for five years.

They must be categorised correctly in the books, which requires the assistance of a bookkeeper or accounting software. Digital records are easy to manage and must be protected with effective cyber security measures. Organised records help to identify past orders and sales patterns.

2. Create An Effective Budget

Businesses must have an effective budget that helps plan the utilisation of capital. Entrepreneurs and bookkeepers can use historical financial data to prepare the budget for the quarter and the year. This helps anticipate sales correctly and allocate funds to each department.

Financial planning ensures the business does not overspend or move beyond the threshold that can push it into deficits. Organised records also help to sell business online without hassles as buyers are interested in checking the financial health and history of the entity.

3. Prepare for the Tax Season

Filing taxes becomes challenging for business owners if the recorded transactions are inaccurate. They need perfect records to calculate the taxes correctly and generate reports to be submitted to the ATO. Any discrepancies in the data can lead to penalties.

Also, precise records help businesses to claim tax deductions for various business expenses. If they cannot prove the business incurred the costs by showcasing payment receipts, they cannot claim deductions and will lose money.

4. Get Business Funding Easily

Entrepreneurs require funding to grow their businesses or expand into new markets. Banks and moneylenders readily offer loans to businesses with immaculate financial records and a high credit score. The amount of capital to be borrowed is also large for businesses with organised information.

Investors, like buyers, also check the financial data when the owner has to sell business online. This gives insight into the entity’s capabilities and potential to grow in the future. It will also help sell the business online quickly because the entity is capable of managing its debts efficiently.

5. Identify Business Strengths

Bookkeeping involves conducting a SWOT analysis of the business to identify its strengths, weaknesses, opportunities and threats. Entrepreneurs require this information to grow their venture by leveraging strengths and eliminating weaknesses.

It helps them understand what is leading to losses and what is increasing profits. Thus, they can increase their profit-making endeavours and seize opportunities that can help in expansion. The analysis also helps avoid threats that can prove damaging to the business. Thus, the business owner can make informed decisions based on advice given by the professional and the inferences drawn from the data.

6. Maintain A Positive Cash Flow

Maintaining a positive cash flow is an integral part of bookkeeping. The professionals ensure the incoming is always higher than the outgoing to avoid falling short of capital. They employ various cost-saving measures to bring expenses down and find ways to increase revenue to keep the cash flow positive.  It is one of the first things checked by buyers when they are planning to acquire a company.

Thus, exit planning must include cash flow management to ensure a profitable deal when you sell business online. The profit-making tactics include enhanced customer service, discounts for loyal buyers, referrals, automation, increasing product prices, incorporating e-commerce, etc.

Similarly, cost-cutting measures include finding suppliers with low-priced materials, reducing work-related travel, going paperless and managing waste.

7. Pay Bills and Send Invoices on Time

With so much work to do and many transactions taking place, entrepreneurs have no time to look into every matter. It can lead to missing the bill deadline or forgetting to follow up with clients for payments. These problems can create financial trouble and lead to discrepancies in the records.

Bookkeepers ensure that all bills, such as utilities, rent, debts, salaries, etc., are paid by the due date to avoid a late fee. They also take charge of invoicing and generate them as soon as a transaction takes place. They maintain good relations with clients and get them to pay on time through frequent interactions. It ensures that more money keeps flowing into the business.

Wrapping Up

Bookkeeping goes beyond data entry and number crunching. It involves payroll management, filing taxes, inventory management, invoicing, bill payments, financial reporting, recordkeeping and much more. Small businesses need this service to maintain their growth momentum.