The Importance Of Good Quality Bookkeeping
Keeping on top of finances is an essential requirement for any business. But despite its importance, many business owners find it difficult to keep their accounts up-to-date, which makes it harder to budget, pay expenses on time, or plan for the future. This is especially true of small business owners, who often have to juggle many responsibilities and struggle to find the time to properly manage their company’s finances.
Regular bookkeeping, however, not only puts you in firm control of your business’ financial health but makes it easier to manage the many other aspects of your business.
With that in mind, let’s look at the importance of good quality bookkeeping.
What Is Bookkeeping?
Bookkeeping is the practice of recording and tracking a business’ financial transactions. This includes keeping clear records to ensure financial information is easily accessible, keeping receipts, preparing invoices, and depositing and withdrawing funds from the business’ bank accounts.
Bookkeeping is undertaken by a bookkeeper, which could be an employee’s sole responsibility within the business or part of a larger role, like an office manager or accountant. In some cases, a business’ bookkeeping is carried out by its owner(s) or outsourced to a bookkeeping company or accountancy firm.
What Do Bookkeepers Do?
Bookkeepers are responsible for recording a business’ income and expenditure and maintaining accurate, up-to-date financial information. By keeping a company’s accounts, or “books”, current and organised, they consistently monitor a business’ performance and financial standing and provide its management with data that allows for better decision-making.
A bookkeeper’s core responsibilities include:
- Data entry: recording all of a company’s income and outgoings
- Bank reconciliation: cross-referencing the company’s books against bank statements and other financial documents to ensure their accuracy
- Generating reports: summarising the business’ performance and financial health for management, owners, and other key stakeholders
A bookkeeper can also have additional responsibilities depending on the size of the company and its skill requirements. These include:
- Accounts Receivable: producing and sending invoices to customers and following up on them to ensure payment. This may also include credit control: determining clients’ creditworthiness and enforcing the company’s credit policies.
- Accounts Payable: checking invoices sent from suppliers, paying them on time, and helping to negotiate extensions and payment terms if the company isn’t in a position to meet its financial obligations.
- Payroll: making sure all employees are paid in full and on time. In addition to calculating wages, this includes accounting for overtime, annual leave, and reimbursing expenses, as well as ensuring pension and tax contributions go to the appropriate places.
- Filing Taxes: Preparing and submitting a company’s tax returns
- Preparing Financial Statements: using the data from the company’s accounts to generate financial statements such as income statements (profit and loss statements), balance sheets, and cash flow statements.
- Staff Training: educating employees on financial best practices and how to use bookkeeping or accounting software.
- Business Strategy: assisting in devising and refining a long-term strategy for the company’s growth, including creating budgets and forecasts, and suggesting potential ways to increase income and cut costs.
- Liaison: Meeting with accountants and tax authorities on behalf of the owners of the company.
What is the Difference Between Bookkeepers And Accountants?
Bookkeepers typically collect, record, and ensure the quality of a company’s financial data. Accountants, meanwhile, analyse, summarise, and report on a company’s financial data and then use it to determine and minimise its tax liability. However, depending on the exact scope of a bookkeeper’s role within a company, some of their responsibilities may overlap with those of an accountant.
Seven Reasons Why Bookkeeping Is Important To Your Business
Now that we’ve covered what bookkeeping is and, by extension, what a bookkeeper’s key responsibilities are, let’s explore seven key reasons why consistent bookkeeping is so important to your business.
Allows You to Maintain Organised and Accurate Financial Records
First and foremost, staying on top of your company’s bookkeeping allow you to maintain accurate, organised financial records. This makes it far easier to find the information you need at any given time. Internally, organised accounts enable you to assess your business’ financial position at any moment, so you can make timely decisions with all available information to hand.
Organised records are also useful, and often essential, for people outside your business – particularly if you’re trying to secure funding. Without clear and up-to-date financial records, potential investors can’t accurately determine how successful your business is and are unlikely to commit their capital. The same is true when applying for loans, as a bank needs accurate records to determine how creditworthy your company is.
More Accurate Budgeting
With a clear and precise record of your income and expenses, you can budget more effectively. Knowing how much money you have coming in and what your ongoing expenses allow you to schedule your outgoings, including payments to suppliers, payroll, utility bills, etc. By doing so, you can avoid late payment fees and maintain good relationships with your staff and suppliers.
You’ll also gain an understanding of whether your company has enough money to meet its financial obligations or if you’ll have to seek additional financing from external sources, e.g., a loan. With up-to-date financial records, you can determine this ahead of time and take the appropriate action – before it has the potential to evolve into a full-blown crisis.
Regular bookkeeping also maintains a realistic picture of the financial resources you have on hand: namely, how much cash you have available, in addition to assets or investments that can quickly be converted to cash, if necessary. You’ll also have an idea of how much income you’re likely to receive in the near future, i.e., accounts receivable. This is especially important when it comes to your company’s long-term growth plan, as you’ll need to know if you can fund your expansion plans.
Reporting and Analysis
With the consistent financial data provided by regular bookkeeping, you can generate reports from which to analyse your company’s performance.
Firstly, your bookkeeping records will allow you to create your company’s main financial statements (balance sheet, income statement, and cash flow statement). These provide a snapshot of your business’ current performance and financial health and allow you, as well as accountants, potential investors, etc., to analyse your company’s strengths and weaknesses. Additionally, you use the data from your accounts to generate a range of custom reports that hone in on any particular aspect of your business you need to analyse.
Let’s say you wanted to analyse your income, for example. You could use reporting to determine your main sources of income and how those could be better capitalised on to increase profitability. Similarly, are there sources of income your company isn’t putting enough emphasis on that could be better exploited?
Conversely, you could analyse your costs to find ways to become more efficient. For instance, are there any areas in which you’re overspending? And, subsequently, what can be done to potentially reduce those costs? I.e., finding new suppliers, sourcing alternative raw materials, etc.
Easier to Plan and Set Growth Targets
Because accurate financial records both enhance your ability to budget and analyse your company’s performance, it’s also easier to plan ahead and set appropriate growth targets. You’re able to set appropriate revenue targets based on your company’s current and prior performance, determine if you achieved them and, if not, identify the reasons why.
Subsequently, if you can identify why you didn’t hit the targets you set yourself as a company, you have greater insight into what you need to improve to do so in the future. This may include increasing or changing your marketing efforts, hiring more staff, training your existing staff, etc. Just as importantly, by knowing your current financial position, you can also determine if you have enough capital to finance such initiatives.
In contrast, incomplete or inadequate financial records prevent growth: without accurate data to analyse, it’s harder to set achievable goals or your company’s performance in attaining them.
With a bookkeeping process in place, you’ll have financial information ready to complete your tax return. Instead of sifting through filing cabinets and drawers for an assortment of invoices, receipts, and other financial documents, you can simply hand your accountant a set of detailed, accurate records. That will allow them to submit your tax return on time, so you can avoid the penalties and fees for late submissions.
Better still, as they don’t have to rush, your accountant has sufficient time to review your business transactions and identify potential tax savings that will further reduce your tax bill. Also, with a better budgeting process in place, you can better ensure you have money set aside to pay your taxes on time – allowing you to avoid stress and incurring fines for late payment.
You’ll Learn More About Your Business In The Process
Through the process of regular bookkeeping, you’ll inevitably learn more about your business’ finances and operations. You’ll likely find patterns, or even a narrative, in your financial data – and that the numbers tell a story.
You could, for instance, identify periodic, or seasonal, sales cycles and better capitalise on them: generating more income at the peak of those cycles and better preparing for the low points. Similarly, you could discover that the bulk of your income comes from a single product – or a single customer – and how that could make you vulnerable. Knowing this, you can take the steps to diversify your offering or concentrate on opening more customer accounts.
With accurate and current financial data, you can make smarter business decisions in less time and with less deliberation.
Greater Peace Of Mind
Running a business is challenging enough without the stress and uncertainty that accompany poor bookkeeping habits. However, while many of the factors involved in the daily running of your business are outside your influence, keeping accurate financial records is completely within your control.
Consistent, quality bookkeeping gives you a far better awareness of what’s going on within your company, as well as the time and space needed to deal with issues as they arise. This then gives you the peace of mind necessary to focus on high-value activities that will allow your business to grow.
- Bookkeeping is the practice of recording and tracking a business’ financial transactions. This is carried out by a bookkeeper or accountant.
- A bookkeeper’s core responsibilities usually include:
- Data entry
- Bank reconciliation
- Generating reports
- While additional bookkeeping responsibilities can include:
- Accounts receivable
- Accounts payable
- Filing taxes
- Preparing financial statements
- Staff training
- Business strategy
- Acting as a liaison
- Reasons why bookkeeping is important to your business:
- Allows you to maintain organised and accurate financial records
- More accurate budgeting
- Reporting and analysis
- Easier to plan and set growth targets
- Tax preparedness
- You’ll learn more about your business in the process
- Greater peace of mind
If you want to know about improving your company’s bookkeeping accounting – or want to talk over any aspect of your company’s finances or tax planning, please don’t hesitate to get in touch.