The success of a business or a company is not tied to just one aspect or employee. The individual components of a business all play a part in its success and profitability because when one area falters, the effect is felt across the entire establishment. That said, some areas are seen to be much more important than others as they can have a direct impact on the business.
The work of the employer is to identify these key areas and ensure they are functioning as they should. When these aspects have been gotten right, others will work seamlessly. One such area is bookkeeping. Efficient record keeping of a company’s financial transactions cannot be overemphasized. In this article, we will discuss bookkeeping and why it is incredibly important to the success of any business or company.
What is Bookkeeping?
Bookkeeping is the practice of recording regularly, the financial transactions of a company. When done efficiently, companies can manage cash flow, track spending, and make informed financing, investing, and operating decisions. Click here to learn more about the importance of cash management to businesses.
A company’s books are kept by a bookkeeper or bookkeeper, depending on the size of the company. These professionals manage all the financial data for businesses and companies. Without them, companies would struggle to keep track of their finances and ultimately will be unaware of where they stand financially.
Accurate and efficient bookkeeping is not only important for internal use within the company. External users like the government, investors, and financial institutions all rely on a company’s books to make better decisions on lending and investing. Without accurate information on how a business manages its finances and cash flow, the business fails to present itself as professional and ethical. Simply put, bookkeeping makes running a business much more organized, smoother, and seamless.
As important as this practice is to businesses, so is the bookkeeper responsible for it. Having incorrect books defeats the purpose of having them altogether. Therefore, companies must ensure that the bookkeepers they hire are reliable and efficient.
Depending on a business’s needs, bookkeeping can be done by an in-house bookkeeper or contracted to a reputable firm. If after evaluating your business’s situation you find that the latter appeals more to you, it is important to know that several firms offer this service. So, you would have to carefully consider your options before deciding. If you are based in Los Angeles, by running a quick search on say, Los Angeles bookkeeping, you can easily draw up a list of potential hires.
Key Functions of a Bookkeeper
Before you hire a bookkeeper, it helps to know what their job entails and all they will be doing for your business. The following are some of the key functions of a bookkeeper:
- Record daily payments and expenses
- Send customer invoices and document received payments
- Conduct monthly bank reconciliation
- Generate monthly, quarterly, and yearly financial statements
- Process payroll
- Organize the business’s books for the accountant
- Provide all tax-related documents to the accountant.
Important Aspects of Bookkeeping
Bookkeeping entails more than just keeping track of cash flow, there are several other areas of a business that this practice covers. They include:
- Cash: Cash flow is no doubt one of the most important aspects of bookkeeping. All the transactions of a business are passed through the cash account. Because of how important this account is, it is common to find bookkeepers using two separate journals, Cash Disbursements, and Cash Receipts, to track cash flow.
- Accounts Receivable: Businesses and companies that sell their products or services without collecting immediate payment must keep track of their “receivable”, that is, cash due from customers. Accurate bookkeeping keeps track of your receivables to ensure accurate invoices and bills are sent out on time.
- Accounts Payable: This aspect of the book tracks the money your business owes other businesses. Accurate information in this account ensures your payments are timely and that you never pay someone twice. Note that some businesses give discounts when paymentsare made early. Visit https://economictimes.indiatimes.com/definition/accounts-payableto learn more about accounts payable.
- Loans Payable: The loans Payable account keeps track of loans your business took out to fund certain operations and expenses like the purchase of equipment and other items. When this account is up to date, you will know when repayments are due and how much you have repaid.
- Owner’s Equity: This account tracks how much equity the owner(s) has in the business. It reflects how much money the owner has in the business once liabilities are subtracted from the assets.
- Sales: Tracks all cash inflow or incoming revenue from the products or services you sell. This account should be updated accurately and in a timely manner to know where your company stands.
- Inventory: Monitors all unsold products and ensures they are well accounted for. To keep this account accurate, physical counts of the inventory should be carried out regularly.
- Purchases: This account records all purchased finished goods or raw materials for the business. It is crucial when calculating the business’s gross profit.
- Retained Earnings: This tracks profits that are not paid out to the owner but are reinvested into the business. Retained earnings are cumulative and are important to lenders and investors as it gives them valuable information on how the company has performed over the years.
- Payroll: Payroll expenses are thebiggest expenses businesses make. This account is important for government records like taxes.
Importance of Bookkeeping
The following are some reasons why bookkeeping is important to any business:
Making Better Business Decisions
Without an accurate recording of your business’s finances making informed decisions that will grow the business will be difficult. When you have all the important information about your financial transactions, it is easier to make strategic decisions that are healthy for the company.
Accurate Reporting to Investors
Investors own part of the business and are entitled to know how their investment is doing. They want to know how their money is being spent, whether the business is making a profit, and its growth potential. With bookkeeping, all this information can be easily made available to investors on demand.
This puts the owner in a good place as it shows that they are professional and fully aware of how to run the establishment. The Profit and Loss account is incredibly valuable to both the company and investors as they can easily view how the company has performed over time. When your books are in order, reporting to investors becomes hassle-free.
Analyzing Spending and Improving Budgeting
Efficient bookkeeping helps to track spending and earnings, which is very essential to the success of any establishment. By analyzing how much you earn and spend, you can adjust your budget effectively to position your business for profit-making.
Financial statements allow you to see which products, services, or companies are helping you generate the most revenue. This enables you to focus on these areas to generate even more revenue and keep your company profitable.
Bookkeeping also helps you keep track of which marketing channels produce the most results. Again, this way, you can adjust your budget to favor those channels while you cut down the money spent on the less productive channels. Overall, these analyses help you spend on only areas that are profitable for the business. You can read this article to find effective marketing channels for businesses.
Businesses that want to make consistent profits cannot afford not to have accurate records of their financial transactions. As we have explained so far in this article, bookkeeping, when done properly keeps a business on top of its finances and can even turn around a failing one.