Bookkeeping is a process that helps a business in maintaining its financial records accurately. It is the assimilation of all financial information in one place. Even though every business is required by law to maintain their books of accounts, sometimes small businesses fail to incorporate this system as part of their accounting process. Bookkeeping not only makes the task easier for businesses by giving them an accurate picture of the transactions and financial position but also contributes to their success.
It helps a business to go on the right track and it is a critical process for small businesses. Let’s give you the top 9 reasons that support its importance.
Backbone for creating the budget
Bookkeeping helps a business in drafting its budget for a financial year. Accurate documenting of the income and expenses gives a clear picture of the financial position of the company. Forecasting future expenses and incomes based on the accounting books gives estimates that are used for budgeting. Bookkeeping is a reflection of the past financial performance of your company and helps in planning for the future. Past information like expense trends helps in making provisions for them in a budget. Reallocation of funds can be done from non-productive accounts to profitable ones. Even the provisions for small expenses like travel, lunch, etc depend on accurate bookkeeping and the analysis of financial statements. A provision can be made for expenses that provide tax benefits.
All businesses need to file a tax return every year. At the time of year-end, a good bookkeeping practice can save a lot of last-minute paperwork. Regular bookkeeping can make the process of tax filing efficient and hassle-free. Inability to produce accurate financial information can result in tax penalties and fines. Bookkeeping also helps in the filing of personal tax returns. For a small business, a large part of the owner’s income is generated from the business. For calculating personal income, the business income needs to be calculated first. Bookkeeping provides requisite information for categorizing revenues and expenses. Detailed bookkeeping provides updated records that come in handy for taxation and audits. It gives ready financial information and there is no need for a last-minute compilation of receipts or invoices.
Organized financial information
Bookkeeping helps small businesses maintaining their records in an organized manner. It goes a long way in the success of a business and in making a small business grow in size. Accurate records that are organized methodically help in locating any financial record at any time. The financial records of a company are useful for many people like its employees, investors, customers, debtors, auditors, and IRS. A business should be able to produce its financial information for its stakeholders. This information is also useful in running the operations of the business. Debtors of a business may require financial records to judge if the financial position of the business is sound. Lenders and financial institutions also require this information before lending money to a business. For a better relationship with all related parties, a business must be ready to produce all financial records when required. This is where updated bookkeeping comes in handy.
Bookkeeping is the tool that aids in the analysis of the finance of a business. It provides a bird’s eye view of the financial transactions and position of the business and helps to evaluate its performance. It helps in the preparation of financial statements like the balance sheet, income statement, and cash flow statement that are used for financial analysis. It also helps in tracking all inflows and outflows by cross-checking each entry with the related invoice, receipts, etc. Sound financial analysis is only possible when the records are maintained accurately through bookkeeping. Financial statements also help the business owners to focus on maintaining a balance between the assets and liabilities of a small business.
Decision making and strategic planning
A sound financial analysis leads to good decision making which can lead to the growth of a small business. Bookkeeping provides all the variables required for making these decisions. Any business requires strategic planning at its core for its strong operations and steady growth. Bookkeeping helps a small business stay on track with its short and long-term goals. The centralized information can be used to formulate strategies, make key decisions, and follow them. Tracking the goals and adjusting the strategies accordingly can also be accomplished with bookkeeping.
Maintaining Investor confidence
Investors in any business want to stay informed about the financial performance of the business. They want to ensure that the investment made by them in the business is growing in value. Financial statements give them information about the soundness and growth potential of their investment. Only updated bookkeeping can help in the generation of accurate financial statements. These statements present the value of a business to the investors and give a boost to their confidence in the business.
Bookkeeping is the source of up-to-date and accessible information to investors. It gives the existing customers faith to retain their investment in the business and helps the new investors make well-informed decisions about investing in the business. Prospective investors would be keen to invest in a business only when they get past financial information and are assured of getting the same in the future. Organized bookkeeping will help a business in preparing organized financial records.
Accessing the profitability
The profitability of a small business can be accessed through the financial statements. For a small business keeping a track of its profitability is critical. It is a benchmark of the success of the business and an indication that there is a scope for scaling up the operations of the business. A profitable business can be expanded since getting the investors and lenders to extend resources becomes easy. Bookkeeping keeps a track of the profitability at every stage and the accumulated past data can also be analyzed to observe trends and business cycles.
Cash flow management
Through a regular recording of the revenues, expenses, receivables, and liabilities, bookkeeping helps in cash flow management. Tracking customer and vendor invoice payments is a critical use of bookkeeping. Timely payment of vendor invoices saves the business from incurring any late fee penalty. Bookkeeping puts into place an effective system of keeping a tab on any outstanding invoices by entering into the record all details in a systematic manner. Deciding the amount of time that needs to be given to customers for payment and the right time to pay the vendors are some important cash flow decisions that can be made with bookkeeping.
Faster response to changes
With digitized bookkeeping, access to information is easy and this reduces the response time to any changes. At any point in time, information about the available resources is available. This makes it easy to make decisions like whether the business can or should respond to any changes in the market trends or change the current strategy.
There are umpteen numbers of benefits and not one disadvantage of bookkeeping for a small business. The business is well prepared for any contingencies and is in a position to gear itself for growth through effective bookkeeping.