As an accountant, I see firsthand how important bookkeeping is when creating reports and making strategic decisions about the direction of a business. When done well, bookkeeping is like a strong foundation that reliably supports the rest of your financial operations and gives you peace of mind. But when your bookkeeping is chaotic or riddled with errors or mistakes, your business accounting systems turn into a mess. But enough card-related analogies about bookkeeping importance…
Image Credit: Artist Bill Amend and FoxTrot Comics
When business and pleasure mix…
One of the biggest rewards of good bookkeeping is separation between personal expenses and business expenses. When you mix your personal and business expenses, known as commingled funds, you blur the lines between justifiable deductions and make it hard to claim tax credits and deductions that you might be eligible for. Commingled expenses also destroys the integrity of your company’s financial reports and you’ll think you’re more profitable than you really are. Or, you’ll think you’re worse off than you really are…
As Senior Accountant Robert Sanchez says, “Mixing personal and business expenses isn’t just a headache. It’s a red flag for the IRS and any auditor.”
Bookkeeping is your superpower in mergers and acquisitions
If you’re considering a merger or acquisition deal, good bookkeeping is important. Even if you’re just thinking about it in the future, it’s best to plan ahead and establish a strong bookkeeping foundation. This will help you:
- Ensure your financial statements accurately reflect your business’ financial health.
- Keep well-maintained records that let you evaluate tangible and intangible assets so you can set a fair price for your business.
- Give potential buyers a clear, accurate picture of their risk and reward in the deal.
- Gain a point of leverage during negotiations since you can demonstrate a record of profitability.
- Understand your debt profile so you can plan how to structure the deal in terms of a cash deal, stock swap, or a combination of the two.
As CPA Victor Godinez says, “Good bookkeeping gives you an advantage in business deals because you have clarity about your finances.”
Bookkeeping importance in strategic decision-making
Many business owners regard bookkeeping as nothing more than a set of transactional checkboxes. But the real value of having bookkeepers like MBS Accountancy on your side is that you gain clarity on your company’s performance so you can seize opportunities or make corrective adjustments to ensure profitability. Here is what I mean…
- An income statement reveals which activities are profitable and which are wasteful so you can use resources wisely.
- A balance sheet shows liquidity and solvency so you can choose whether to accept debt or make investments.
- Your statement of retained earnings shows you profits after dividends or distributions are paid to shareholders or partners. This data is key in mergers, expansions, and acquisitions.
- Your cash flow statement helps you track your company’s lifeline (cash) and avoid liquidity issues, bad cash management, bad investments, and missing out on business capital loans.
Bookkeeping chaos endangers business capital opportunities
When your personal and business bookkeeping are mixed or you are unknowingly making bookkeeping mistakes, you are putting your financial reputation with lenders at risk. When evaluating your application, lenders scrutinize your financial responsibility. If you have chaotic books, you don’t get a loan. If you don’t get a loan, your plans for business growth might be impacted. In short, it’s best to follow good bookkeeping hygiene tips so you’ll be better prepared for growth.
Tax planning is a guessing game without good bookkeeping
Your tax strategy is only as good as your bookkeeping because it relies on how accurately you’ve recorded financial transactions. If you don’t know the cost basis of assets, you’ll have trouble when calculating capital gains and losses. If you haven’t properly documented expenses, you’ll miss out on tax credits and tax deductions for which you’re eligible. All in all, good bookkeeping gives you the foundation you need for a solid, effective tax strategy.
Are your financial statements lying to you?
As our CEO Cassidy Jakovickas pointed out recently on LinkedIn, inaccurate financial statements lead to misguided business decisions. For example, if you have an error in your income statement, you’ll make bad pricing decisions for your services or products. Your financial statements are your dashboard for making sensible business decisions.
But crystal-clear accuracy doesn’t happen by magic or wishing it to be so. Rather, accurate financial statements are the result of prudent, diligent bookkeeping.
Ready to take action? How to ensure a solid foundation
Now that you understand the importance of bookkeeping to your company’s overall financial operations, it’s time to take action. There are three routes you can go:
- DIY bookkeeping: In the early stages of your business, you can manage your company’s bookkeeping using Excel or, even better, cloud accounting software like QuickBooks Online. I’d recommend AccountingCoach.com, the QuickBooks Youtube channel , and Open Learn courses.
- Hiring an accountant: Zippia estimates there over 900,000 bookkeepers in the United States as of 2023. Hiring a bookkeeper or accountant is the most common option for business owners who are tired of doing their own bookkeeping. This can come with downsides, however, since over-relying on specific employees is unscalable. Plus, you are responsible for training and benefits costs.
- Choosing an accounting firm: Similar to hiring an accountant, an accounting firm provides specialized management of your business bookkeeping and accounting needs. The difference is that you’re no longer responsible for training and benefits costs and you can trust they’re improving their technologies, workflows, and people to give you the best results and experience possible. At least, if you’ve hired a good accounting firm.
If you’re ready to choose an accounting firm, contact us today to speak with one of our managers about your accounting and bookkeeping needs. We’d love to help you build a strong financial foundation that enables clarity and confidence in your business decisions.