Why Small Business Bookkeeping is Important
There is a lot to consider when trying to grow a business. Start with a product or service that’s in demand, charge enough to earn a profit and market your business to increase sales. If you can get these things right, then you’ve made a good start.
In this article, we’re going to focus on an often overlooked aspect of growing a business; we’ll talk about the important role that bookkeeping plays in successful small businesses. We will explain why bookkeeping is important and how you can use accurate financial data to increase your profits.
Our main goal at Avalon is to help small businesses grow and thrive. We help business owners succeed by taking care of bookkeeping and accounting so that they can focus on what they do best. We provide timely financial information and advice.
If you’re not getting what you need from your bookkeeping, (or even worse, not doing it!), check out our bookkeeping services page to see how we can help. Our professional online bookkeeping services can be the ideal solution for small, growing businesses.
1. Bookkeeping Ensures Records are Up-To-Date
Proper bookkeeping will ensure that your records are kept up-to-date. Business owners are busy doing all of the other things that it takes to keep their business moving in the right direction. This means that bookkeeping often goes on the back-burner.
Let’s look at two very important reasons to keep your records up-to-date.
Know How Your Business is Performing
“I think my business is profitable... I usually have some cash in the bank at the end of the month”.
We have heard so many business owners say some variation of this phrase. If your bookkeeping isn’t up-to-date, how accurately will you know the financial performance of your business?
- How much revenue did you earn last month, quarter or year?
- From that revenue, how much profit did the business make?
- Who owes you money and when do you expect to collect it?
- What aspects of your business are the most profitable?
- What are you spending most of your money on?
How are you paying each supplier every month? (ugh, so many software subscriptions).
It is difficult to accurately answer any of these questions based on the amount of cash that’s in your bank at month’s end.
If your bookkeeping is up-to-date, you can easily pull financial reports that will tell you this information, and a lot more! To learn more about how to think about your small business finances and what reports you should look at, check out part 1 of our Financial Foundations Guide.
CRA Audits
Another less fun but equally important reason to have your bookkeeping up-to-date is that it will protect you in the event that your business is audited by the CRA.
If you can’t clearly show your revenue and expenses, CRA may make some assumptions and assess you with the tax bill they think you should pay. This is called a notional or arbitrary assessment and you can avoid it with proper bookkeeping.
2. Bookkeeping Helps You Plan for the Future
Once you have bookkeeping dialed in for a period of a year or so, you will have excellent historical data that can help you plan for the future.
Plan Your Growth
We will use Avalon’s own books as an example of this. We can look through our financial reports to see exactly how much we are growing each quarter (we actually look by month... but we’re accounting nerds).
Once you see how quickly you are growing, you can use that information to:
- Plan your hiring out for the next year.
- Understand when you will need to move into a larger space for bricks and mortar businesses.
- Forecast your cash flow to into the future.
Plan for a purchase of equipment or facilities to grow your business even further.
Our bookkeeping allows us to plan all of the hiring that we want to do for the next year. Sure, things change a bit as the year progresses, but we now have a good understanding of when we need to hire and for what positions.
Don't Get Surprised by Tax Bills
Bookkeeping that is up-to-date will also make sure that you know how much money your business owes at any given time.
If you collect GST/HST or PST on your sales, chances are that you will owe some of that to the government at the end of the year. As you make more sales, you collect more sales tax and the amount you owe increases; that money you’ve collected isn’t actually yours, it’s the government’s.
That’s all fine and a normal part of doing business. Where problems arise is when business owners fail to keep their bookkeeping up-to-date.
They tend to forget that the cash in their account isn’t actually theirs to spend. They’ll see a balance in the account and either spend it in the business or take it as income to spend on personal items.
If your records are up-to-date through solid bookkeeping processes, you’ll always be able to find out in two mouse-clicks how much you owe to the government.
3. Bookkeeping Provides You with Peace of Mind
There's a lot to think about while your business is growing, including hiring the right employees, creating the right objectives for the organisation, and ringing the dang cash register! You want to be secure in the knowledge that while you are tending to all of that, your finances are looked after accurately and that you’re compliant with the law.
A bookkeeper will highlight any mistakes and ultimately save the company time and money.
Duplicated Payments
Many times when I’m reviewing Avalon’s financial statements I see an expense category that looks really high in one month compared to usual. With our bookkeeping software, Xero, I can just click on the expense and see exactly why that is.
Most of the time the reason for the increase in expenses makes sense. However, there have been a couple of occasions when the increase was because we accidentally paid a supplier twice.
Your bookkeeper will be able to see this type of mistake and can flag any duplicated payments so that you can have your supplier credit you for the overpayment.
Late Fees and Penalties
Understanding who the business owes money to and when it is due will help to decrease costs. Whether you’re taking advantage of an early payment discount from a supplier or avoiding interest on late payments, proper record keeping will help you track payables and save you some money.
Some very common (and very costly) issues with late payments happen when payroll remittances are paid late. Having a competent bookkeeper in place can make sure you make these payments on-time and avoid the potentially big late fees.
4. Competent Bookkeepers Make it Easier to Get a Loan or Report to Investors
There are many scenarios where small businesses need to turn to the bank or to investors to raise additional funds. The business may need cash to grow and take on new projects, or sometimes large expenditures come as a surprise and there isn’t enough cash to cover the cost.
When you are on top of your bookkeeping, it’s far easier to provide the bank or investors with the information that they need to approve a loan or provide additional funding.
If your bookkeeping isn’t up-to-date then it becomes a stressful pants-on-fire scenario where you’re rushing to get things caught up so that you can provide financials to get the cash needed. Ensure that your bookkeeping is completed accurately and on a timely basis to avoid the pants fires.
5. Hire a Good Bookkeeper and Get Your Weekends Back
According to a Gallup poll, small business owners work on average 52 hours per week, and nearly 40% of small business owners work more than 60 hours in a week!
With all of the hats that small business owners have to wear, bookkeeping work often gets pushed to the evenings and weekends. I bet you have something better to do on a Saturday than bookkeeping!
At Avalon, we like to promote a work/life balance. As business owners ourselves, we aim to work strategically by handling the work we’re good at (not surprisingly, we do our own bookkeeping) and then outsourcing services for which we have little to no expertise. We’ve outsourced parts of our marketing and HR functions to some amazing professionals and each time we’ve been so thankful that we did.
Hire a competent bookkeeper and give yourself your weekends back to spend with your family and friends.
Avalon Can Help
For better or worse, bookkeeping is important for small business success. We’ve seen it many times where businesses come to us with messy books or no records at all. The owners aren’t sure how the business is doing or even how much they will owe in sales taxes.
We’re here to help. We love helping to remove that stress from business owners’ lives and to show them how good financial reporting can help them succeed.
If bookkeeping is a pain point for you, then please reach out and have a chat with us. We have different options for bookkeeping services and we also offer set-up and training packages if you would prefer to learn how to do your own bookkeeping.
.png)