When I’m working with small business owners, I find that a lot of them think bookkeeping and accounting is something they should worry about once they get going, get some sales under their belts, and start generating profits. If you aren’t sure where this kind of financial tracking comes in, you’re not alone. When, you may ask, is it time to count the beans?
Whether you decide to do your own bookkeeping (please take time to learn what you are doing or have someone with experience to guide you) or hire someone to handle it for you, bookkeeping needs to start as soon as there are transactions. As soon as money starts changing hands, someone needs to keep good records. Why? First, bookkeeping and accounting are like the central nervous system of your business. They tell the brain (that’s you) when your hand is on a hot stove and make it possible for you to move it quickly. Business owners who do not have a good system in place for tracking the movement of money in their business often have to wait until the end of the year to find out something is wrong or needs to be changed. As in the hot stove metaphor, waiting this long is not ideal.
Secondly, there are a ton of tax deductions that can be claimed in early stages of your business, but they won’t be possible if you don’t keep good records. Start-up costs can be deductible and so can all the expenses that you incur in your early stage, before you really start making any money. Think that you don’t need to worry about tax deductions because you aren’t going to make enough profit to owe anything? Think again. If your business loses money (on the bumpy road to future success) you can claim an NOL or net operating loss. This loss can actually offset income from other sources and lower your tax bill, or even be carried forward or back to reduce your taxes from another tax year. Can’t do that without good records can you? One more fun fact, only businesses can claim this NOL. A hobbyist can reduce their liability down to zero if they lose money breeding ferrets for meat (or whatever you’re into) but they can’t claim a loss and offset other taxes. One of the ways the IRS decides whether you have a business or just an expensive hobby is how well you keep your books. Good accounting = serious business owner and that can equal a smaller tax bill and more money in your pocket.