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The importance of bookkeeping for small and medium sized businesses

Business health begins with good bookkeeping
Good bookkeeping is good business

Every business owner agrees that bookkeeping is a necessary part of running a business. Yet with so many demands on an owner’s time, it’s no surprise that bookkeeping often falls to the bottom of the to-do list. It shouldn’t. The reality is, staying on top of your books is like practicing healthy habits: you’re keeping your business in good shape. And if you don’t keep on top of your books, you’re exposing your business to risks.

Bookkeeping: a health check for your business

“There’s a direct relationship between bookkeeping and business health,” says Amit Khanna, National Marketplace Lead, Deloitte Private. “Quite simply, you can’t monitor something you don’t have data for.”

Khanna notes that many business owners manage their business through their bank statements alone. If the statement shows money in the bank, then the perception is that everything is good.

“That’s dangerous,” he says, “because you need a way to know what’s coming. And the reality is, a lot of the money in your bank account isn’t even yours. There’s GST or HST, payroll taxes, other commitments you’ve already made. So when it comes to year end, you could get a surprise bill that you didn’t put aside the cash for.”

Up-to-date bookkeeping, on the other hand, provides a much clearer picture of where you stand. Think of it like you would a medical check-up: bookkeeping gives you the details you need to understand the overall health of your company.

The path to opportunity

Without regular bookkeeping, your company could also miss opportunities. For example, if it’s prospering, you might wish to approach suppliers to arrange to have more inventory on hand. Those suppliers will want to see your financials to ensure you’re a credible buyer and to confidently extend you a larger credit line. Or, perhaps you want to get a loan to expand to a different province. The first thing the bank will ask for is your financial data.

“Any sort of expansion requires someone else to believe in you,” Khanna says. “And that first step is showing your books.” If your bookkeeping isn’t there, the opportunities won’t be either.

Bookkeeping gives you insight

One of the biggest benefits of regular bookkeeping is that you’ll gain a clear, timely picture of how your business is actually doing. This can help you plan more effectively.

For example, entrepreneurs are typically optimists: they often over-project revenues and underestimate expenses. Having proper books is a useful reality check.

Khanna uses the idea of runway as an example. “A lot of businesses start off with an investment. The concept of runway is: for how many months can you lose money until you run out of cash? The more sales you have, the longer the runway until you become cash-flow positive,” he says. “So if I have $100,000, and I lose $5,000 a month, I have 20 months of runway to get me up to speed. That’s a really important figure to know because every month is another marble out of the jar. Knowing that gives you a real sense of how much you have to hustle to make it.”

Bookkeeping is also instrumental in determining how to grow over the long term. A small business with one truck that’s considering investing in another, for example, needs to know if it has enough capacity. It can simply turn to its books to determine when it can afford the next level of investment.

Without those numbers, you’re flying blind. That can hold your business back. Khanna recalls a business that included several partners. “They were running $3 million dollars a year,” he says. “They could have been at $5 million if they had taken a bit more risk. And they couldn’t, because their bookkeeping was several months behind. That didn’t give the partners a lot of confidence. No one is willing to invest more money if they can’t see the basic numbers.”

The benefits are in the details

Bookkeeping can show you exactly where your business is making money, and whether you’re spending that money in the right place. “Consider a retail store selling gifts, while out the back it sells flowers and does party-planning,” Amit Khanna says. “But it’s all one corporate entity. How would you know which division is more profitable? It could be that the retail business is losing money, but is funded by the party-planning business. Maybe the advice is: shut down the retail store and just focus on party-planning because that’s making most of your money.”

In this particular example, the business owner would have no way of knowing whether the company was plowing profits into an unprofitable part of the business just to keep it afloat. Bookkeeping that tracked each initiative separately would reveal this data clearly, showing where the owner should focus.

A need-to-have when you need money

Bookkeeping is vital when seeking additional funding. Financials that are clean, understandable, and on time communicate confidence, which will make banks much more willing to loan you money. In fact, up-to-date books can also help you turn potential negative perceptions into positive ones.

“Most banks will ask for prior-year financials and then year-to-date financials. They want to see a successful, growing business. Maybe last year you had a bad year. But nine months into this year, you’re doing great. Banks need to see that to give them the confidence to lend to you.

When arranging financing, remember that bookkeeping isn’t a one-time effort. “Every year, banks are going to ask for a financial update,” Khanna says. “If you don’t do that on time, it’s going to be a red mark against you. And next time you ask for a loan, they might not give it.” External investors, meanwhile, will likely want to see your progress quarter to quarter, if not month to month.

Outsourcing makes bookkeeping easier

While bookkeeping is the best way to understand all the financial transactions related to your business, that doesn’t make the process any less tedious. Fortunately, you can automate many repetitive functions by outsourcing to an accounting firm that makes extensive use of cloud-based solutions.

The right firm can digitize your entire work flow all the way from invoicing to digital payment of bills to digital storage of documents, and insert as much automation as possible.

However you choose to do your books, the key is to make a point of completing them regularly, and you’ll be well on your way to success. Just like maintaining good health habits typically leads to wellness.

 

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