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Bookkeeping is one area most small business owners would love to forget about. Unfortunately, some of them actually do forget about it, resulting in mad scrambles for receipts and other financial information at tax time and the close of fiscal year. The trouble typical business owners have with bookkeeping is the time and effort involved. In small business settings especially, owners are so wrapped up in attending to every other aspect of running the day to day operations of the company that there is simply no time left over for bookkeeping. Inadequate bookkeeping is often the product of overworked entrepreneurs. But in spite of the fact that it gets ignored completely so often, this area of small business financial management is among the most critical.
Definition of Bookkeeping
To understand the importance of bookkeeping in business finance, it is good to take a look at its definition and provide some background information on the matter. Many company owners and self employed entrepreneurs avoid things like debits and credits or journal entries like the plague. But this attitude only ends up costing them money in the long run, meaning they have to work even harder to keep up simply because they're robbing themselves of cash flow that could be gained with greater efficiency.
Bookkeeping is something no company ought to ignore. As a matter of fact, it's an area that can't be ignored for too long without major financial repercussions. To get a sense of why this is so, we need to look at what it means to keep the books and how this works impacts the operations of a company.
A simple bookkeeping definition might go something like this: bookkeeping is the recording of the financial transactions of a business. In accounting terms, it is the very first step in the whole bookkeeping process. If this step is not attended to, things like paying taxes can become a real challenge. When bookkeeping is done well, the accountants have the ability to perform reporting, classifying, and analyzing a company's financial data as well as these other tax related activities. Without accurate and detailed bookkeeping efforts, it is hard to know what kind of financial shape a business is in. Owners can't really devise long term plans or set goals without a sense of the direction things are going financially. So, accurate bookkeeping is essential to a company.
Bookkeepers have many responsibilities, some of which may vary depending on the situation. In some cases, paid bookkeeping professional do only some of this work and give the owner the raw data needed to do the remainder of the bookkeeping. In any case, their job typically consists of organizing and tracking receipts and making sure expenses are properly noted as soon as purchases are made. Bookkeeping involves tracking canceled checks and other records that are created as a result of transactions by the company. They record transactions in a chronological fashion, whether cash disbursements or sales, and keep them all in a journal. Bookkeeping then takes these journal entries and places them into a general ledger of accounts. Often accountants take over from there and use these account records to prepare monthly statements for the company.
Advantages of Good Bookkeeping
Bookkeeping does not directly contribute to the profits of a small business (although some bookkeepers would argue otherwise), but the work of bookkeepers is extremely important to the financial well being of companies. The services of a bookkeeper help the books to stay organized and to remain up to date. There are many other important reasons to make sure bookkeeping is done right.
For one thing, if you hope to borrow money for a venture, you need to have solid bookkeeping records. Lenders will expect to be able to take a look at them and analyze a business' solvency before granting loans. Bookkeeping professionals thus are charged with work that not only keeps track of the money you have, but also may determine whether you'll qualify for money in the future. Companies that rely on outside financing to survive must regard this as the top reason to focus on organized bookkeeping.
Accurate bookkeeping also generates the data owners and managers need just to manage their companies on a daily basis. Up to date general ledger details will indicate accurately which customers are past due on the monies they owe and which ones are carrying balances on their lines of credit. Without this information, the financial arm of business is hamstrung and cannot respond effectively to patterns of late payments or nonpayment by customers. And these losses over time will eventually hamper companies' ability to even stay afloat.
Businesses also use these bookkeeping ledger accounts to determine how they are doing financially. They can see if their gross profits are in line with projections and if the prices they are charging for their services and products are sufficient to cover their costs. Without this important data in your bookkeeping, it could be very easy for cash flow problems to pop up at your company. This same principle applies to tax work as well. An accurate sense of income and expenditures is needed for companies to accurately figure their tax liabilities to the IRS. Good record keeping ensures reduces the chance of an audit and helps ensure that you're prepared for one if it does occur.
Many owners hire an accountant or a bookkeeping professional to manage their books for them. But some cannot afford this luxury. There are other options for those who do not wish to hire an accountant or who cannot afford one. Most community colleges offer courses in basic bookkeeping. Many companies who do most of this work themselves do it manually, but more and more are choosing to add computerized bookkeeping software to the mix. Desktop accounting and bookkeeping software simplifies the process and helps the user make entries into computerized ledgers. There are even options for double entry accounting for those who are interested and have a need. Most of the computer programs are capable of helping the user to set up ledger accounts, post entries to those accounts and create and print financial statements on demand.
These days, managers and owners can also find many online options for keeping track of financials. Online based applications allow multiple users from different machines to access and input data. These options use secure servers for the storage of data. Users access those servers by entering a password and username. But these options lack in the critical area of accountability.
One of the main purposes for bookkeeping is cash flow management. Making sure you are on top of your books helps you ensure you have the necessary cash flow to support the day to day activities of the company. Many of the most popular computer and online accounting systems and bookkeeping software support the kind of analysis that allows you to stay on track and to maintain adequate cash flow to keep things moving forward.
Some companies choose not to hire out bookkeeping services because they do not feel that it is something they can afford financially. But the truth is that a talented and dependable bookkeeper ought to actually help you increase your cash flow and create more breathing room financially for your company. Learn more about bookkeeping software and bookkeeping professionals and how these steps can help make your business more successful.