Running a small business is no easy feat. That is why it can be scary to realise that bookkeeping is yet another task you must perform to run your business successfully. In this article, we look closely at bookkeeping and its importance.
The Difference between Accounting and Bookkeeping
The terms accounting and bookkeeping are often used interchangeably. However, the truth is that bookkeeping is a small yet vital element of the overall accounting function. Bookkeeping refers to the process of recording and reporting financial information, whereas accounting is the process of analyzing financial data and developing a financial strategy.
What Does Bookkeeping Involve?
Bookkeeping is all about managing the everyday finances of a business. It encompasses:
- Collecting payments from customers and clients
- Making bill and customer payments
- Making sure your company pays the required amount of tax
- Reclaiming tax for your company
- Managing payroll to pay the HMRC and your staff correctly
Bookkeeping tracks cash inflows and outflows of the business using three financial records:
- Cashbook to record your cash flow
- Sales Invoice to record what you have sold, including both unpaid and paid invoices
- Purchase an Invoice to record your goods and services and how you have paid for every purchase.
Importance of Bookkeeping for Small Business
Bookkeeping allows you to budget for your small business, prepare for tax returns, keep your company organised, and much more. You need to do it if you wish to keep your finances in check and ensure HMRC does not come and create further problems. Here are some reasons highlighting the importance of bookkeeping for small businesses.
1. Organises Your Records
No matter what happens in your organisation, you must keep your finances organised. When you need to make a budget, apply for grants or loans, or check your profitability, bookkeeping helps you access the required information swiftly.
Accounting for small businesses allows you to organise your financial information in a single place. Without proper accounting, your financial data will be scattered, and you won’t have a clear idea of your organisation’s finances. Bookkeeping keeps all of that data in a single and easily accessible system.
In addition, organised financial information can allow you to plan your payments. Knowing when your payments are due, you can properly organise your finances.
2. Allows You to Create an Accurate Budget
Bookkeeping is crucial to any business as it makes budgeting significantly simpler. When your expenses and income are properly organised, it’s easy to go through your financial costs and resources.
A budget works as a financial guide for your small business. When you have a proper budget to guide you, you can easily plan for future business expenses to facilitate growth. If you fail to maintain updated and accurate books, it will be tough to prepare a proper budget as you will essentially be doing guesswork.
3. Helps You Make Sound Financial Decisions
Every business owner needs to make several critical financial decisions. Basic bookkeeping for small businesses makes decisions simpler. Confident choices a business owner might need to make include whether or not to recruit employees, apply for grants or loans, and the list continues.
By using bookkeeping, business owners can assess the data needed to make intelligent decisions. For instance, do you have the budget to recruit new staff members? Review reliable information to evaluate if your business can add members to the payroll.
4. Prepares You for Tax
Tax season can be stressful for small business owners – however, it doesn’t need to be. The importance of bookkeeping becomes quite evident when it’s time to file taxes.
Instead of digging through a pile of documents to find the information you need, bookkeeping assures that this information is structured correctly ahead of time. You will have all your bills ready to go and can identify any possible tax write-offs.
5. Helps You Monitor Spending and Improve Your Business’s Finances
Understanding what your business earns and invests is crucial. Nevertheless, one of the most significant benefits of bookkeeping is that it allows you to look at your costs quickly and, if needed, modify your budget.
Reviewing the financial statement, you can see which industries, services, or items are helping you generate the highest profits. You can refocus your small business if needed to maximise the profits further.
It can even help you identify investments that were profitable initially but are no longer making sense. For instance, advertising in newspapers was once a top priority for small businesses; however, it won’t be too lucrative in the current environment. Similarly, you might find it’s time to cut down a percentage of your marketing budget to strengthen other areas.
Financial statements can help you evaluate your performance and make intelligent decisions for the future.
Look at how things went in the current year before preparing the following year’s budget. You might discover new information that will help you boost your revenue.
6. Attracts Investors
Investors need to know the financial performance of your business to determine if they would like to get involved. If you don’t maintain proper accounting records, investors won’t be able to the potential of your company. Thus, you must ensure you have updated and accurate information at your fingertips.
7. Gives You Peace of Mind
Disorganised books, pending tax deadlines, and HMRC issues can all lead to panic and stress. As a small business owner, the last thing you want is bookkeeping problems disturbing your peace of mind.
When you have clean and complete records, you can rest assured that your business’s financial information is ready for review without the HMRC making you anxious.
Last Few Words
We hope this article helped you understand the importance of bookkeeping. Remember that not everyone is a professional in maintaining the books for your business. However, it’s simpler than you think to start and keep going. If you need help with bookkeeping, get in touch with the experts at ISA Consortium today!
Book your free appointment with ISA Consortium
For more information and professional advice, please get in touch for a free appointment. We will discuss all the needs of you and your business, and head you in the right direction for future business .
All this and more
We offer all the above as part of our full Tax Services and Accounting and can also help you with Capital Gains Tax, Inheritance Tax, Retirement Planning, even filling out your Self-Assessment Tax Returns for you.