Bookkeeping—the systematic recording and organization of a company’s financial transactions—plays an essential role in any business’s financial health. A clear understanding of your finances empowers business owners to make informed decisions and reduces the risk of mismanaging funds. Even so, it’s a tedious, complicated, and often dreaded task. If you’re not a trained bookkeeper, yet trying to manage your business’s books, there are quite a few bad bookkeeping habits that are easy to fall into. Without proper training, it’s challenging to navigate which accounting methods to use, how to manage cash flow, or even understand the key accounting metrics that can set your business up for success. That’s why so many businesses, especially small businesses, look to automated bookkeeping services (more on that soon).
So why is bookkeeping so important?
Bookkeeping, producing financial statements, managing cash flow, and tax compliance are inextricably linked, with accurate bookkeeping laying a solid foundation for the rest.
Bookkeeping provides key insights into the overall health of a business
Bookkeeping enables businesses to produce financial statements, which collect financial data and paint a clear picture of how your business is really doing. These statements help you manage cash flow, which is essentially how much cash is coming in and leaving your business at a given time. Cash flow projections are pivotal to the growth of a business, as they can entice potential investors and satiate existing ones. Understanding your business’s financial health eases making future plans involving hiring, expansion, and day-to-day operations. Financial statements, such as your balance sheet or income statement, give you the information you need to make decisions from an informed perspective rather than a taking a gamble.
Bookkeeping makes tax filing less complicated
When tax season rolls around and you must provide your accountant with the necessary documents for filing business taxes, having clean books substantially cuts down on the time it takes to prepare tax documents. Rather than rummaging through your business receipts, the accountant can focus on finding possible tax deductions, saving their time and your money.
Bookkeeping lessens the pain of an audit
Businesses always run the risk of one day being audited. While it’s not something to look forward to, it’s definitely worth preparing for. Having all your bookkeeping organized and in one place will make it easier to retrieve your business’s financial information and can help avoid penalties or late fees.
What exactly does bookkeeping involve?
Okay, so bookkeeping is important. But what exactly does it entail? The elements of bookkeeping include:
Maintaining the general ledger
The general ledger, which is made up of sub-ledgers, records what your business has earned and spent. The information gathered in the general ledgers is used to create financial statements and file taxes.
Tracking income and expenses
Bookkeeping records income, as well as expenses incurred by your business, including but not limited to rent, employee salaries, office supplies, and insurance.
Managing bank reconciliations
An unfortunate reality of bookkeeping is that there will be instances where your bank account doesn’t align with recorded transactions. In these instances, reconciliations, where you compare bank statements to bookkeeping records and not discrepancies, are necessary.
Staying on top of accounts receivable and payable
Accounts receivable includes money that your customers owe to you for services or products sold, whereas accounts payable includes money your business owes to vendors, suppliers, the government, etc.
Providing financial statements
As mentioned previously, bookkeeping includes providing financial statements, such as income statements, balance sheets, cash flow statements, and statements of changes in equity.
What does a bookkeeper do?
Bookkeepers are responsible for maintaining a business’s books, which track financial transactions. Most bookkeepers rely on cost-effective software to organize and manage details such as credits and debits, the chart of accounts, payroll, sales, and accounts payable procedures. The specific responsibilities of a bookkeeper will vary depending on the business size and type. Accountants typically oversee a bookkeeper’s work.
What’s the difference between an accountant and a bookkeeper?
There are major differences between an accountant and a bookkeeper. Whereas bookkeepers deal with consistently recording daily transactions and organizing financial information, accountants use this information to easily discern a company’s financial standing. An accountant, who is usually a CPA (Certified Public Accountant), takes the information compiled by the bookkeeper to produce financial models and statements, analyzing the cost of operations and completing tax returns. Bookkeepers often don’t have current tax law knowledge or expertise to work with the IRS need be.
Why so many businesses opt for automated bookkeeping
Bookkeeping is incredibly tedious, and poor bookkeeping can have dismal results. Leveraging automated bookkeeping is simply easier and less expensive than trying to do it yourself or adding another salary to your roster. Essentially, it negates the possibility of human error, saving businesses time and money. Online bookkeeping services that automatically categorize expenses and provide real-time financial data in a visual, easy-to-digest manner give accountants and business owners the tools they need for success. The last thing a business needs, especially a small and growing business, is blind spots in its financial health. Learn more about how online bookkeeping can make your job easier here. Regardless of the size or focus of your business, online bookkeeping allows you to spend less time stressing about tracking your business’s finances and more time focusing on meeting your goals. Want to learn more about automated bookkeeping? Contact a ScaleFactor expert to schedule a demo today.