Top Reasons Why Bookkeeping is Crucial To Your Small Business

The importance of bookkeeping cannot be stressed enough. As a small business owner, you run the show. From multi-tasking to finding ways to cut costs where possible, most small business owners (like yourself) tend to end up wearing the accountant hat. But without a professional accountant to do the heavy-lifting, bookkeeping can easily be left on the back burner. In those cases, businesses, which otherwise would have been successful, can be dragged down by their failure to maintain proper financial records.

Whether you’re a small business owner looking to grow your business or you’re just a little nervous about tax season—early tax planning, including bookkeeping and record-keeping, is crucial to keeping your business financially healthy.

Bookkeeping: What is it and why is it so important?

Bookkeeping refers to the process of organizing, storing, and analyzing financial and accounting documents. It includes ledgers, journals, financial statements, income tax records, and more. As a small business owner, if you neglect bookkeeping, you no longer have a paper trail that explains how your business sits financially.

For example:

• Are your expenses higher than your income?
• What does your business’ financial performance look like in any given period?
• Are there seasonal highs and lows that your small business faces?
• Do you have the right records to show to the Internal Revenue Service (IRS) or Canada Revenue Agency (CRA) when an audit comes during tax season?

Answering all of these important tax and accounting-related questions is vital to business decision-making, completing tax returns, and attracting investors to your business.

Picture this: planning a trip to South America

Imagine landing in Bogotá, Columbia, and starting a six-month backpacking trip across South America with zero collection of boarding tickets, receipts for accommodations, or a detailed itinerary. That’s exactly what running a business without bookkeeping looks like. You have nothing to account for the most mission-critical parts of your next six months. Now that you know what no bookkeeping might look like, let’s dive a little deeper.

So, why exactly is bookkeeping so crucial anyway?

1. Be tax season ready

Navigating business taxes can be daunting, time-consuming, and highly stressful—especially when audits are possible. When you own a business of your own, not only do you have to file personal taxes, you’re also now responsible for filing business taxes, too. When small business owners fall behind in bookkeeping, you end up scrambling last minute to get your books caught up—especially before the tax deadline. Leaving these bookkeeping tasks to your year-end accountant can also lead to expensive bills post tax season.

Imagine a much better scenario.

Rather than scrambling last minute to find bookkeeping records and documents (like receipts), organize and store your books throughout the year to make tax season easier, reducing the risk of late payments and penalties or submitting inaccurate information.

Want to avoid an audit altogether?

It’s simple. Try these exercises:

• Schedule Consistent Time for Bookkeeping: Keep track of all your books regularly. Create a weekly time block in your schedule dedicated to bookkeeping tasks to hold yourself accountable. This can include sorting receipts, adding up calculations, or reconciling your business bank account to ensure all transactions add up.
• Leverage Smart Accounting Software: Leverage double-entry accounting software that automates bookkeeping. Like most types of administration, bookkeeping involves highly manual work that can absolutely be automated. Designed for the modern truly small businesses, TrulySmall Accounting offers simple and smart bookkeeping that eliminates redundancies found in typical traditional small business accounting software. By connecting your business bank account and scheduling a little bit of time weekly to upload, organize and post your transactions, you can enter tax season with confidence.
• Understand Typical Red Flags: If you want to be even more prepared, pay close attention to the red flags that the CRA notices in small businesses like revenue discrepancies, outliers, and large business expenses.

2. Keep audits at arm’s length

Having your books in good order means that you’re well equipped for the unfortunate case that your books are audited by the IRS or CRA. Because self-employed small business owners are the most at risk for an audit, proper bookkeeping becomes more crucial than ever. The more accurate and up-to-date your business’ books are, the quicker the IRS or CRA can move on from your case—leaving less time for headaches, and more time for actually growing your business.

3. Improve business financial analysis and management

For any sized business to stay afloat means that it needs a healthy and positive cash flow. Unfortunately, cash flow management is not the easiest task. Proper bookkeeping allows you to analyze and manage your cash flow so you can see a more accurate picture of your business’s financial situation.

Proper bookkeeping also helps you stay on top of paying invoices to vendors in a timely fashion. Plus, you always know exactly where your outgoing money is being spent.

With TrulySmall Accounting, you can easily upload and track your business expenses and income from anywhere. All you need is a wifi connection and a device to see where your small business stands at any given time. This option is ideal for small business owners who want a tool for both invoicing and accounting.

Using a simpler tool like TrulySmall Invoices, you can create and send out branded invoices straight to your clients with a Pay Now button on your invoice, which on average, helps you get paid twice as fast.

4. Don’t miss out on potential tax deductions

Slow and inconsistent bookkeeping can easily lead to missing a legitimate tax deduction that you otherwise could have received. (i.e. home office expenses) Alternatively, the IRS or CRA could disallow your tax deduction based on missing paperwork, which you might have misplaced.

According to Toronto-based income tax attorney Rotfleisch, you should be keeping your receipts and invoices for at least 6 years. Otherwise, the IRS or CRA has every right to deny the deduction that you’re claiming. This means that you should be waiting until the end of 2028 until you can safely destroy your 2022 return. Keep in mind the general rule of thumb in any tax assessment is that the IRS or CRA is always right—unless of course, your records prove otherwise.

5. Be more equipped and informed with bookkeeping

When tax season rolls around and it’s time to file your year-end taxes or submit your GST/HST remittance, the last thing you want is to be scrambling for your paperwork. In the same vein, you don’t want to receive a notification letter from the IRS or CRA stating that you’re subject to an audit. Save yourself time and headache by recording all your transactions (income and expenses) directly in TrulySmall Accounting throughout the year, and reap the rewards of bookkeeping in the long run.

Ready to take charge of your small business with better bookkeeping practices? Test our TrulySmall Accounting’s 14-day trial today for free! If you want a simpler invoicing option, send your first few invoices for free with TrulySmall Invoices.