Even if you don't have a formal business entity, you still might need bookkeeping.
Yep, that's right. Just to be clear, I'll say it again: Even if you don't technically have a business formally set up, you still might need bookkeeping. Annoying, right? I know.
So how can you tell if you need to be keeping the books? From my perspective, if you are earning money as an independent contractor or freelancer, you should probably be using bookkeeping software to keep track of your business income and expenses.
If the inflow and outflow is pretty minimal, like sparse throughout the year and in small amounts, you might be able to get away with just keeping a spreadsheet. But if the transactions are regular and you're living off your freelancer earnings, you should most definitely be keeping books.
If you have an entity set up, you without a doubt are in need of bookkeeping. Here are the 3 reasons why: tax preparation, understanding where your business is and to satisfy requirements for lenders.
1. Taxes
Tax preparation tops the list as to why you must maintain a detailed set of books, but there are other factors at play. Your accountant will file your tax forms based on what you report to him or her via your financial statements. And your financial statements can be generated with the click of a button if your bookkeeping has been maintained and up to date all year long.
2. Knowing Where Your Business Is At
If you're running a business, you should know how much money your business earns and spends. You can compare your inflow and outflow to industry standards, but more importantly you can compare your business to itself over time.
For example, how did you do this year compared to last year? Or how were inflows and outflows in the first quarter of the last 3 years? These comparisons can allow you to see cyclical patterns in your industry and help you make informed decisions about your business.
3. You Need Books for a Loan
Lastly, banks or other lenders usually require financial statements to evaluate your qualification for a business loan.
Get Some Help
Doing the books yourself might save money at first, but if you arenโt qualified to do the work, you could end up landing in more trouble. Not investing in doing the books correctly can cost you more in time and resources in the end. Things like setting up your books, entering payroll properly, tracking credit card transactions and reconciling accounts can be pretty confusing for anyone who doesn't have bookkeeping experience - even if you can learn to navigate the software, you need some understanding of general account principles to know whats up.
In the same way you probably wouldn't cut your own hair or change the oil in your own car without either taking some classes or getting help from a professional, the same goes for your bookkeeping. Don't be pennywise and dollar foolish, guys. Get your shit together. :-)
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