You hear people talk about it all the time, but what the hell is bookkeeping? You know it forms an important part of the financial side of your business, but that could be as far as your knowledge stretches. Some of you may know what it is and how to do it, yet you’re still unsure as to why it needs to be done or why it’s supposedly so important.
Therefore, today’s post will guide you through everything you need to know about bookkeeping. By the end, you’ll understand exactly what it is, what the process entails, and why it is a critical aspect of every successful company.
What is bookkeeping?
In all honesty, bookkeeping is one of the least glamorous tasks a business will have to perform. It is the systematic recording of all the financial transactions a company has. These transactions will be recorded and organised every single day, including both outgoings and incomings.
Who handles bookkeeping & how is it performed?
The handling of bookkeeping can be assigned to anyone in the business. However, it is typically outsourced to accountants, or a licensed accountant is hired to take care of it. The way it is performed will vary slightly depending on who is managing the books. Traditionally, it was done with actual books where transactions were jotted down - hence the term bookkeeping was born. Nowadays, it’s usually done via some type of accounting software that lets businesses track all of their transactions on a daily basis.
Why is bookkeeping important?
The purpose of bookkeeping is mainly to help you see the financial state of your business. It gives you an overview of your accounts, showing what you’re spending and what you’re gaining. Nevertheless, it is far more important than just a way of showing your total accounts. With bookkeeping, you benefit from the following:
Tax preparation and accuracy
Every business needs to pay tax and bookkeeping is a way of making the entire process a lot easier. Tracking your comings and goings lets you see how much money your business has made in the last fiscal year. In turn, this can help you understand how much tax you may have to pay. Keeping a note of your expenses will also let you know what can be put down as a tax-deductible business expense, further reducing your tax bill.
Consequently, you can prepare your taxes a lot sooner than normal, allowing your business to plan for the bill. It means tax bills never come as a surprise and you’re always in a strong financial position to pay them on time without getting any penalties.
Budget creation
Likewise, bookkeeping lets you create a budget that will work for your business. After all, what do you need to know to create a budget? That’s right, your outgoings and incomings. Bookkeeping shows you all of this, so you can start working around the transactions to conjure up a budget that you’re able to stick to.
It should mean your business stops spending too much money and will widen its profit margins. By curbing your spending, you can make more money each month, which will always benefit your business on a financial front.
Tracking payments from customers
Having a history of payments from customers is very important for your business. From one perspective, it lets you see if someone has paid for something. Thus, if they ask for a refund, you can quickly check to see if the money ever entered your account. You’ll be surprised at how many customers and clients will attempt to scam businesses out of money by asking for refunds when they didn’t pay in the first place. Bookkeeping prevents this as you have clear evidence of all the payments made to your company.
Furthermore, bookkeeping also lets you see if customers haven’t paid yet. Okay, this sounds like a repeat of the previous point, but there’s a nuance to this. In this scenario, your customer isn’t attempting to get a refund at all. You’ve completed a service or delivered a product, but they still haven’t paid. Naturally, delayed payments interrupt your cash flow, so you want to chase people up. A good bookkeeping system lets you find all the leaks in your cash flow, allowing you to notify customers that they still need to make a payment. From here, you can plug up the leaks as the money finally comes through.
Easier to gain funding
For whatever reason, your business may require some extra funding. As a result, you will need to talk to lenders and put forward an application for a loan. Or, you may look for investors that are willing to pump some money into your company. In either case, having clear financial records helps demonstrate the health of your business. It can show lenders or investors that you are clearly thriving, making it more likely that funding will be granted.
This isn’t possible without bookkeeping! If you don’t keep track of all your comings and goings, you’ll never be able to produce financial statements or demonstrate the financial health of your business. Unfortunately, this will make it so much harder to gain funding.
A faster response time
There are instances where things happen and your business needs to react. Without bookkeeping, you will find it hard to react quickly to these situations as you don’t have an accurate report of your finances. With bookkeeping, you’ll know if your business is financially capable of reacting in a certain way. For example, during the first lockdowns, businesses that used bookkeeping faired a lot better because they knew the financial state of their companies. They were able to see where the money might dry up and what they can afford to do to stay afloat.
In conclusion, bookkeeping is a vital part of your organisation. It’s not the most glamorous or enjoyable task, but it can yield a whole host of benefits. Consequently, every small business owner needs to find a way to keep track of all financial transactions each day.
