The Importance of Bookkeeping

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Five reasons why bookkeeping is essential.

1. It is required to complete your taxes.

In order to do your taxes accurately, you need to be aware of your net profit, which is determined from your total income and expenses. There is only one way to know this information, and it is to have error-free books that are updated daily.

2. It allows you to see exactly what your money is doing.

The only way you can understand the wellbeing of your business is by having your books completed and generating your financial statements.

You may find yourself wondering if sales are increasing, or if the cost of shipping is too great. Maybe you are concerned that you won’t have enough funds for payroll next month or are unsure if cash flow is going up or down. These types of issues are easily addressed with a proper bookkeeping system in place.

3. It helps you determine what tax deductions you can claim.

When your books are updated regularly and the information in them is correct, you have the best chance to discover possible tax deductions (expenses subtracted from your taxable income).

When you give your accountant your books, the more thorough they are the more deductions you will be able to claim, allowing for a larger tax return.

Having your books in order also allows your business to be well prepared in case of an audit, as the IRS has strict recordkeeping requirements.

4. It is required to attain funding.

If you ever find that your business needs extra funding, more than a family member or friend could lend, you will need to have proper books. Having books that are current and well done allows you to show your financial statements to a potential lender. This is a requirement in order to attain a business loan, a credit line via a bank, or even a seed investment.

Any potential investor or lender is not going to fund a business without a clear picture of how that business is performing and their financial status. In order to get that picture, they need to see your financial statements including the balance sheet, income statement, and cash flow statement.

5. It allows you to find and correct errors promptly.

A huge mistake would be waiting until the end of the tax year to reconcile your financial transactions. If there was ever a mistake during the year, finding it possibly months later will be a colossal headache. Keeping your financial documents organized and comparing them to your bank statements on a regular basis allows you to discover and rectify errors quickly, versus finding out you paid an unnecessary overdraft fee 6 months ago and it is too late to fix.

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