Bookkeeping is much more than number crunching and spreadsheets. An understanding of bookkeeping best practices is essential for your business to run smoothly, now and in the future. Bookkeeping ensures that you have the organized data that you need to help your accountant make predictions about your business’s future and diagnose your business’s financial health.
But what is bookkeeping? And why is it so important? We will walk you through what you need to know about the basics of bookkeeping.
What is Bookkeeping?
Bookkeeping is the process of tracking all documentation of any financial transactions that a business entity makes from launch to closure. Documents can be bills, receipts, invoices, purchase orders, or other financial reports that indicate a transaction. Bookkeeping is just one facet of doing business and keeping good financial records. Bookkeeping has two primary objectives:
- To accurately document all financial transactions that result from business activities using best practices.
- To determine and analyze the financial outcomes of business activities.
Why is Bookkeeping Important?
There are two basic reasons to keep your records updated:
- Know how your business is performing.
- Plan your future growth.
Importance of Good Bookkeeping
To understand the significance of bookkeeping you must first understand the implications of bad bookkeeping – it can be worse than no bookkeeping at all. One of the challenges confronting the bookkeeping industry is a lack of standards to manage bookkeeping quality. Bookkeeping serves two broad functions which are:
- To provide useful information promptly.
- To assist with regulatory compliance.
Below are some reasons why bookkeeping is important for small businesses in Canada.
- Enhance Budget Accuracy. Budget is a financial roadmap for your business. Its accuracy is crucial for business growth so it should not be mere guesswork prepared using messy accounts. With your income and expenses meticulously organized, it is convenient to review your financial resources and costs and ensure a high accuracy level for a budget.
- Keeps you proactively prepared for tax season. Many business owners struggle to find their missing paperwork when tax season begins. However, the process of filing taxes can be less stressful just by having accurate bookkeeping. Bookkeeping saves your time from scrambling for the required documents by getting your financial record ready for tax preparation.
- Nurture and sustain organized records. Business stakeholders will always have an interest in learning your business financial records. The stakeholders can be Canada Revenue Agency, your staff, customers, suppliers, investors, and lenders. The last-minute stress of trying to find an important piece of business can lead to missed deadlines and some small errors creeping through. Well maintained bookkeeping systems prevail in smooth ongoing business operations. This assures that any information requested by the stakeholders is readily available.
- Tracking profitability. Poor or no bookkeeping can damage the pace of your business growth. Bookkeeping enables you to analyze the true picture of your business performance with regularly generated statements and reports. You can monitor the in-and outflows of your business. This enables you to determine which business activity is profitable and which is not performing well. Profitability measures let you easily and quickly track transactions and determine how much your business earns. Some profitability ratios that let you gauge your business’s efficiency include:
- Gross margin ratio.
- Profit margin ratio.
- Return on assets.
- Return on equity.
- Return on capital employed.
- Avoid the CRA Audit. Doing your books is the essential strategy to avoid CRA audit. In the unfortunate case that you are audited if your books are in order, you can breeze through the time-consuming and costly audit.
- Obtain business financing. Lenders are interested in a business that can assure the payback. Bookkeeping is the only solution to have well-kept books that can help in obtaining a business loan. The business records and forecasts will be represented accurately to the lender to show that the loan will be repaid.
Bookkeeping saves you time, money and lessens the stress of handling the daunting task. If you feel the need of executing the process, consider contacting professional bookkeeping services and if you want to do it on your own get yourself trained by professionals to acquire the required expertise.
We at Filing taxes provide reliable bookkeeping services for small to mid-sized businesses in Toronto, Hamilton, Mississauga, and Oakville. If you are looking to streamline your bookkeeping processes and strategically utilize your resources, feel free to reach out to Filing Taxes at 416-479-8532? Schedule an NTR engagement appointment with us and take the first step towards proper management of your finances.
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting firms and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.