Have you ever driven somewhere and had to be there by a specific time? But you left the address behind, so you don't have a map to follow?
Not using a bookkeeping (accounting) system for your business is like leaving the address behind.
An accounting system is your map. The income and expenses are the roadways to your destination: the amount of profit you want to earn.
A bookkeeping system is a place for all the transactions of your business, your income, and expenses to live.
It is a software system containing all the accounting rules that record the financial information and various financial transactions that occur in the business.
The transactions of your business are brought together in the financial statements. They are the balance sheet and the income statement (also called the profit & loss). There are other essential statements, but these are the most important two.
A bookkeeping system tells the story of your business. Did you know that? Yep, your company tells a story in numbers.
Your financial statements pull the numbers together and create the story. The story of your business should be read at least every month.
Knowing the story of your business will let you track and plan your business and be ready for taxes.
Without a bookkeeping system, you won't know how much money your business is spending or where. It's essential to categorize the money you pay out into different buckets, called the "chart of accounts."
When you can see where your money is going, you can quickly make adjustments, such as canceling a subscription you no longer use.
Many business owners have more than one stream of income. Such as:
A bookkeeping system allows you to track these different streams of income accurately. By categorizing your income into different buckets (see a trend here?), you will know where you make your money.
Sure, you can run reports from PayPal, Stripe, and your website to see what you've earned. But, if you have more than one revenue stream, you are not able to see the big picture: where are you making your money?
Financial reports show the big picture at a glance of how your business is doing. Are you growing and by how much over the previous month? Are you spending more than you are taking in, i.e., do you have a profit?
When you can see the income and expenses of your business in a nice, easy to read profit & loss statement, you can make better decisions about the direction of your business.
You can plan for income and expenses based on history. Know whether you can hire someone. Can you afford that course based on the expenses going out and projected revenue?
When you accurately track your business, you can plan for the growth of your business.
Yep, sorry, I had to go there because it's so important.
No matter what your business structure is, the income and expenses of your business flow through your personal taxes.
It's not enough to just know how much you made and spent based on a bank statement or a guess on a spreadsheet.
You need to know where you spent your money because you need to fill out a Schedule C* for taxes. Or you may need a K1 schedule in which case you file a separate business tax return, so you need the detail.
Breaking out income is not important on a tax return. But, reporting 1099 income is. Tracking where your income came from will tell you if you should be receiving a 1099 form from a client or customer.
One of the great things about most bookkeeping software is that you can create a budget within them. See how much you are growing by the month, quarter and year. Not just in dollars but in percentages. I like seeing that I grew 25% over the previous quarter!
Think of the bookkeeping part of the story as the index or summary of the story. You get the big picture of where your business is headed.
The chapters of the story are your launch numbers, re-pins, website hits, etc. If you don't have the big picture first (the summary), it's harder to make the right decisions in other parts of your business, the chapters.
A bookkeeping system is the compass of your business. It helps steer you in the right direction so you can make the best decisions for your growing business.
*NOTE: if you are a sole proprietor or LLC, your business taxes flow directly through your personal taxes. If you are an S Corp, you need to report your K1 information on your personal taxes.
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