I will start off by saying that I am NOT a tax professional. I am just having a friendly conversation with you business owner to business owner.
We all have one thing in common. We want to make money in our business doing the things that we love to do. Statistics show that not everyone is making money in their business and worse yet many small businesses go out of business within their first year of operations. “According to data from the U.S. Bureau of Labor Statistics, about 20 percent of small businesses fail within their first year. By the end of their fifth year, roughly 50 percent of small businesses fail. After 10 years, the survival rate drops to approximately 35 percent.”
What is happened?
What is one of the common denominators that lead to the death of a business?
The most common issue that leads to small business failure is money woes. “Owners of failing companies are less in tune with how much revenue is generated by sales of products or services. This disconnect leads to funding shortfalls that quickly put a small business out of operation.”
What is one of the simplest solutions?
Keep your books up to date. It can be easier said than done I know that’s what you are thinking. You are also probably thinking that your already so busy running your business that as long as you know what is in your checking account then that’s all you need. This is not the best way to manage your business operations. Yes, you can take a peek at your checking account to see how much money is available to pay bills or withdraw cash but it won’t give you the information below:
How much revenue did you bring in for the services or products you sold within a given time period?
Were there any fraudulent charges by a vendor?
Do you know which customer invoices are outstanding?
Do you know which vendor payables are outstanding?
How much equity do you have currently within your business?
Are you making a profit?
Are you spending too much on unnecessary items?
The list could go on but you are getting the picture about how important it is to keep your books up to date.
Tax Time Preparation
Another great reason to keep your books up to date is to make sure you are taking the right deductions which can lower your taxable income. According to Inc.com and tax and business attorney Barbara Weltman, “"The tax law specifically requires certain records in order to take deductions," Weltman says. "Without these records, legitimate expenditures may not be deductible." Here is a short list of what is needed:
A system for tracking your income and expenses
A system for capturing receipts for purchases
A policy for certain types of record keeping such as mileage and car expenses
In short, by having a good bookkeeping process in place you will be able to pull your financial reports which will give you the overall health of your business. You will be able to see if you are profitable or not. Additionally, you will be able to take advantage of any deductions that are available and lower your taxable income. In short, just looking at your checking account won’t give you all the information you need to run your business effectively.
So are you currently using a system for bookkeeping or are you just winging it? Share your feedback in the comments below.
Keep It Sunny!