For many small business owners, bookkeeping and accounting can be summed up in one word…
You may have had another word in mind that I can’t share in this blog post. Either way, it comes down to your books being a necessary evil that you deal with as quickly and infrequently as possible. You only keep records because you’re required to and you’re concerned about a plausible audit (we’ll talk about that in a minute).
But the truth is, your books can do much more than help you comply with the law. A good accounting system can actually make it easier to run your business, simplify your decision-making, and help you save on taxes and increase your profitability.
Here are a few ways a good accounting system can help you.
Your business is a living, changing thing. If you want it to remain living, you need to understand what’s happening on the inside. Your accounting system can give you exactly that kind of visibility.
Your accounting system keeps track of all the numbers in the correct accounts inside your Chart of Accounts (if you think of each account as a file folder then the Chart of Accounts is a well-organized file cabinet). When everything is in order, you can create financial reports with the click of a button. Reports like your P&L, Balance Sheet, and Cash Flow Statement give you an inside look at the financial health of your business any time you need it.
Your Profit and Loss Statement (also called a P&L) shows revenue and expenses for the month or year and calculates your profit (or loss). Far too many business owners are operating on smaller profit margins than they think, working hard for not enough reward.
The Balance Sheet is a record of what you own (your assets) and what you owe (your liabilities). It gives you a snapshot of the net worth of your business, known as Owner’s Equity.
Finally, the Cash Flow Statement shows exactly how much money came in and out of your business for the period. Cash flow can be very different from profits, so the Cash Flow Statement separates the accrued income and expenses that are still outstanding to reveal how much cold, hard cash is moving in your business.
Smarter Business Decisions
All those financial statements aren’t just meant to be framed – although if you have a particularly impressive month, you may want to do just that. Your reports give you a deeper insight to make data-driven decisions on a daily basis.
Whether you have that insight or not, you’re called upon to make dozens of decisions every week that have a lasting impact on the financial health of your business, yourself, and your family. Making those decisions with guesswork and gut instinct is a major reason so many small and medium-sized businesses fail.
Of course, this isn’t just about avoiding failure. Data-driven decisions can also help you proactively grow your business and increase your profits. For example, your P&L can be customized to show profits by customer or product line, allowing you to focus on the most profitable parts of your business and improve or eliminate the weak spots.
If you’ve been crossing your fingers and hoping for success, It’s time to start guiding your business decisions with the financial facts in your accounting system.
Painless Taxes (with a smaller price tag)
So here we are, back to taxes.
Fortunately, your financial records are good for more than the bare minimum of tax compliance. In fact, they can make tax time fairly painless and even help you shrink your tax bill… if you do it right.
First, a quick note on why compliance does matter. IRS audits have been less and less common over the past decade, but due to falling tax revenue, they’ve decided to step things up starting in 2021. The IRS plans to bolster its staff and increase small business audits by 50 percent! There’s no better time to have your finances in good shape to ensure you’re audit-safe and get to keep your deductions. That shoebox of receipts just isn’t going to cut it.
Remember those clear, useful numbers we just talked about from your financial statements? They work wonders at tax time too. Your tax preparer can pull everything together much faster when you have clean, complete accounting records. He or she will likely also be able to maximize your tax deductions and minimize your tax bill because you’ll have the documentation to support those deductions.
Accounting Systems For Small Business
If you’re still struggling with spreadsheets or scratching numbers down on cocktail napkins, it’s time to simplify your life and your business. A solid accounting system allows you, your team, and your accountant to take your business to the next level. This is one of the few times in life when the decision with the best outcome is also easier! Reach out to our office by calling (314)-260-7808.