The Importance of Bookkeeping and the Danger of Not Doing It
Why Do You Need A Bookkeeper?
Whether you’re an established business or just starting up, you most likely have an endless to-do list. As a result, bookkeeping is probably the last thing on your mind. It’s common for small business owners to neglect their bookkeeping function until tax time rolls around, but is this really the path you want to go down?
Bookkeeping sets the tone of your business. If you neglect the regular procedures, it can lead to some pretty serious consequences, like overpaying on your taxes. Here are some reasons that bookkeeping is important and why you should make it a priority.
Table of Contents
You Become Blind to Your Financial Situation
The goal of bookkeeping isn’t only reconciling bank statements. The primary purpose is to give you insights into your financial situation. Without accurate financial statements, you won’t be able to tell how your business is truly performing and where changes may be needed.
In addition, bookkeeping is important to provide a paper trail of when money comes in and where it is being spent. Without the proper bookkeeping procedures, you won’t be able to tell what your break-even point is or if you are effectively managing cash flow.
Financing Becomes Nearly Impossible
If you are looking to expand your business, bookkeeping is indispensable. Lenders will request a copy of your financial statements to assess your profitability and financial health. If you are six months behind, it can take a while to clean up, keeping you from much needed funding.
Investors will also require a copy of your financial statements. Few people are willing to invest in a company without concrete information about past and projected future performance.
You’ll Miss Out on Key Deductions
Bookkeeping is not only important from a financial standpoint, but from a tax standpoint as well. When you accidentally run a charge through your personal credit card, these transactions often get missed in your accounting system. This leads to overstating income and overpaying on taxes.
When your expenses are properly documented within your bookkeeping function, you minimize the risk of missing deductions and credits. Additionally, you’ll make your accountant’s life a whole lot easier with clean records.
Payroll Becomes a Nightmare for You (and Your Team)
Payroll is not as straightforward as you might think. Misclassifying employees and independent contractors, dealing with maternity leave, and managing employee turnover can become a nightmare with poor bookkeeping procedures.
You’ll Make an Enemy of the CRA (Canada Revenue Agency)
You don’t want to get on the bad side of the CRA. Improper bookkeeping procedures can lead to unpaid taxes, improper deductions, and late remittances. If the CRA catches wind of any unusual items, they won’t hesitate to send you a letter demanding penalty payments and back taxes.
If you rack up a tax bill unknowingly and can’t pay the amount due, the IRS CRA can place a lien on your company, which can be detrimental to any startup or established business.
When to Wave the White Flag
Can you see the importance of bookkeeping? Lacking the necessary bookkeeping procedures can take your business from thriving to barely surviving. How do you know when it’s time to bring in an expert? If you notice any of the following, it may be time to contact a professional:
- Manual record keeping
- Manual calculations
- Frequent CRA letters
- Inconsistent financials
- Financials that seem off
- Bouncing cheques
For help dealing with these issues and more, click here to reach out to our team.
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