1.2 – WHY IS BOOKKEEPING IMPORTANT?
This is part 2 of an introductory series about what bookkeeping is, why it’s important, and how it’s generally done in a small business setting. In part 1, we learned the very basic definition of what bookkeeping is. Now, we will discuss why bookkeeping is incredibly important for any small business.
Why is bookkeeping important for any small business? There are many key, and possibly very long, answers to this question. All of them, however, deal with one thing that is of paramount importance: Money! The main reason bookkeeping is so important for a small business is because that is how you track your money. Successful businesses make money. Unsuccessful business lose money. You need to know which direction your money is going in order to assess the “health” of your small business, and an accurate set of books will tell you exactly that.
Lets say you’re an individual with a wallet and some cash inside it. Chances are you’ll open it up and check how much money you have every once in a while. In doing so, you can assess your “financial health” as well as make the best possible plan for the future based on how much cash you have right now. You can imagine that forgetting to check your wallet for a while might be nerve wracking. Eventually you’ll forget how much cash you have left, and it will become harder to make the best decisions for the future. Or worse, you might end up in a bad situation, like buying dinner at a restaurant only to realize that you don’t have enough money to pay for it.
Keeping tabs on your own personal cash is pretty simple, but when it comes to keeping track of the cash flow of a small business, you can’t exactly glance at a giant stack of receipts and instantly know where you are at. This is why we keep our books: To accurately track and assess the financial health and performance of our small business. To “check our wallet,” per say. The books of a small business will tell us:
how much money we currently owe (liabilities)
how much money is owed to us (assets)
how much money we have in our bank account
how much equipment we have
how much that equipment is worth in dollars
how much profit we saw this month compared to last month
what aspects of our business are making us the most money
what aspects of our business are costing us the most money
And that is the kind of exact information that any small business owner needs to make optimal decisions to be successful.