Keeping excellent books for your small business is absolutely essential. Here are ten benefits you can obtain by keeping good accounting records.
1. Detection of errors and fraud
Bookkeeping helps in checking for the presence of errors and fraud in the accounting systems. Not only should you do your bookkeeping regularly but you should also separate tasks such as receipting money received into the business and banking it, and ensure that employees have strict limits on the amounts they can spend.
2. Assistance to management and other parties
Bookkeeping helps the owners or the management to plan and monitor various business activities. The owners are able to make planning decisions and other alternatives that involve business transactions. This makes it an important activity towards achieving business objectives.
3. Aiding in business solvency
Surveys show that poor record keeping is a major factor of business failure. The owner of any business has to make sure proper bookkeeping records are kept that demonstrate the business can pay what it owes. Proper bookkeeping helps the owner in determining the fair value of his or her assets and liabilities but more importantly, a business owner must be able to pay accounts as they become due or they are considered to be insolvent.
4. Important information on position and performance
Following on from the solvency question, bookkeeping provides important information such as the statement of financial position and the profit and loss statement, which help in determining the position and performance of the business respectively.
5. Helpful in assessment of tax
Proper accounts are needed when dealing with tax rules and regulations. The records found in the books of accounts are helpful in lodging the tax returns of the business and determining the tax position.
6. Comparison of current and prior performance
Proper bookkeeping is helpful in making comparisons of current performance of the business with the previous performances. This is essential in determining factors that are influencing the performance of the business, particularly when it is under performing.
7. Useful in raising of loans.
Banks are very reticent to lend money to small businesses because of the risks they perceive. To stand at a better chance of receiving a loan when you need funds, you need to keep proper books of accounts. When you see a time of tight cash flow coming, it is also better to go to the bank proactively instead of waiting until times are really tight.
8. Increasing the power of the memory
In modern world, it is not easy to recall all business transactions. Hence, there is need to increase the memory power so as to counter limitations of the human memory. Doing your bookkeeping regularly and noting extra details for anything that is not immediately obvious can save you many hours.
9. Useful during admission and retirement of partners
Excellent bookkeeping records are of great benefit to a partnership or small company at the time of admission of new partners and retirement of a partner. There is always a need for a properly maintained system of accounts in valuation of assets such as goodwill as well as minimizing the risks created by poor record keeping.
10. Business valuation
As with a change in partners, good accounting records are vital when selling a business. It helps in valuing the assets of the business hence making it possible to determine the proper purchase price of the business.
So these are just ten benefits of keeping good business records. It is my experience that more stress happens over the cash flow of a business than almost anything else. Keeping good records can help alleviate this stress.
To your success,