My cousin and her boyfriend each have motorcycles. And at some point, each of them had a gas gauge that was busted. When my cousin first got her bike, her gas gauge wasn't working. Full disclosure: I don't know shit about motorcycles. For reasons that are unknown to me, they didn't fix her gauge right away. Instead, they ran some experiments to try to figure out how long she could ride without having to fill up the tank. It was like an extreme version of testing out how long you could drive with the gas light telling you to refill your tank.
My cousin's boyfriend would go on short rides with her in the city, and when she ran out of gas, he'd fetch some. I remember her telling me that through their experiments, she had some general idea of how many miles - or trips - she could take before needing to fill up the tank again. If it sounds vague, it's because it was. Thankfully her gauge is fixed now, so she knows exactly how much gas she has in the tank.
Having bookkeeping is like being able to understand how much gas you've got in the tank. Bookkeeping helps you keep track of what's come in, coming in, what's gone out, and what's going out. So you don't have to guess. Otherwise, you're puttering around on a motorcycle, not knowing when your gas tank will run out.
If that analogy wasn't convincing enough, here are four reasons why bookkeeping matters and why you should care about it.
So you don't miss deductions
When it's time to file your taxes for the year, your accountant will prepare your returns based on the information you provide. It's kind of like how a doctor will give you a diagnosis based on the symptoms you describe. It's essential to make sure you are keeping accurate records of your expenses and tax deductions, so you don't overpay on taxes or miss out on getting back money in the form of a tax return.
It becomes even more critical for businesses that handle the accounting or purchasing for big-budget projects. A creative agency working on big, corporate campaigns or an interior design firm handling the purchasing and procurement for a new hotel will have a lot of money going into and running through their accounts. Let's say; a creative agency has a project with a budget of $100,000. They expect to spend $75,000 to produce it and keep $25,000 in profit. It's critical to keep the expenses and the supporting documentation accurately organized. Without proper bookkeeping, some costs may not get reported, which can improperly inflate taxable income or profits.
Your accountant's filings can only be as accurate as the underlying data you provide.
So you can see where your money is going
You can't expect to run a business well if the only bookkeeping method you have is looking at the bank balances. Your balances will show you money going in and out, but you can't easily see which clients or jobs are the most profitable or worse - which jobs or clients could be losing you money. You can't analyze how the new marketing campaign is impacting sales. You won't see any of the outstanding money owed to your business and how long it's been outstanding.
The process of bookkeeping creates financial reports that can help you see much more data and at the literal click of a button. Think of financial reports as a report card for your business' finances. If you're doing poorly in a class and you want to turn it around, the first step is knowing where you're at โ then coming up with a plan to turn things around. Financial reporting can not only help you make decisions and projections; the reports can help you see if the changes are impacting the business.
So you can get a business loan
I'm sure you'll be shocked to learn that banks don't hand out business loans to anyone with a pulse - even though that seems to be the requirement for student loans. When you apply for a business loan, you'll need to provide the bank with a laundry list of items, including some standard financial reports. They'll usually want to see the last three years of reports. If you don't have those records, it can be painful to try to piece together years of financial reporting, especially if you don't have an accounting background. A bookkeeper can do multiple years of catch-up bookkeeping, but it can be costly.
Even if you aren't planning on taking out a loan or line of credit, having the option available is just that - an option. Opportunities for expanding can pop up, and you'll be poised to move swiftly.
So you can spot banking errors quickly
Reconciling your accounts on a regular, monthly basis helps check your records against the bank's records. If you only reconcile your accounts at tax time, and you do find an error, you'll find yourself in the unpleasant position of trying to fix a mistake that may have occurred many moons ago. Spotting and reporting these errors promptly can save you a lot of time and stress and not to mention money. Most banks and credit card companies have fraud policies that won't hold the account holders responsible, but it's imperative to act promptly.
Whether you plan to tackle your bookkeeping yourself or find a professional to outsource it to, wherever you are, just start now. No matter how far behind you are, waiting another day to implement proper bookkeeping is costing you. The scary part is not knowing how much.