Here is our list of reasons why bookkeeping is important.
There are so many reasons why bookkeeping is important, beginning with a critical aspect of the job – maintaining accurate and up-to-date financial records for a company. Other reasons include keeping organized documentation, making informed decisions, and preparing for tax season. Understanding the importance of bookkeeping can help business owners implement best practices in their businesses.
This list covers:
- small business bookkeeping
- bookkeeping purpose
- accounting importance
- hiring a bookkeeper
- bookkeeping basics
Let’s get to it!
List of bookkeeping importance
Proper bookkeeping is crucial in helping a company stay on top of its finances, tracking all financial transactions and data. Bookkeeping is often considered the foundation of a company’s success, serving as the backbone of a solid financial structure for a business. Failing to implement bookkeeping can lead to negative consequences, including business losses and legal repercussions.
Here are the top reasons why bookkeeping is essential for all businesses.
1. Maintains organized financial records
Planning and preparation go a long way in setting a company up for success. Any business large or small cannot afford to make mistakes in financial matters. So when it comes to bookkeeping and accounting importance, staying organized is critical.
There are many benefits of keeping financial records organized, such as:
- Easy access to financial data
- Efficient tax preparation
- Deep insights into financial health and standing
Having a bookkeeper who consistently stays on top of the books will help ensure that no transactions or data falls through the cracks. This employee will do everything they can to keep the company’s records as organized as possible.
Keeping all records and financial data in one place is especially useful in ensuring that all information is secured. If a business leader needs to look at financial records from the last quarter, the company’s bookkeeper will help track the data down and explain the complex information in a simple manner.
2. Provides awareness of a company’s financial performance
An important bookkeeping purpose is that this practice gives business owners a reliable measure of the company’s financial standing. Without bookkeeping, owners, investors, and shareholders would not have the tools needed to see where a company stands financially. Instead, details about a company’s financial health, including daily transactions and expenses, would be a mystery.
Access to reliable financial data is essential for both internal and external purposes. On an internal level, this information helps business leaders and employees make strategic decisions on behalf of the company. The best part is that these decisions are backed by accurate and reliable data.
Externally, bookkeeping allows investors and shareholders to make the best investments and lending decisions based on how the company is doing financially. Additionally, exceptional bookkeeping practices can bring in new investors, lenders, and shareholders, which will help the company grow.
3. Helps companies stay competitive in the market
Accurate bookkeeping plays a pivotal role in enabling informed decision-making, which, in turn, allows the company to remain competitive in the field.
Bookkeeping basics take the following aspects into account:
- Cash flow management
- Tax return preparation
- Financial reports
- Expense reduction
- Revenue increase
Hiring a bookkeeper to manage these areas is one of the best decisions a business owner can make. In addition to the daily responsibilities, a well-rounded bookkeeper can help companies identify areas of improvement, such as deciding to reduce expenses and/or increase revenue.
Having a team member who specializes in bookkeeping can be a huge benefit in allowing a company to stay competitive in today’s market.
4. Assists in making informed data-backed decisions
In today’s world, businesses rely heavily on a company’s financial records to make the best business decisions.
Bookkeepers are tasked with monitoring cash flow and creating detailed financial reports with critical information on a company’s transactions. These financial reports include balance sheets, cash flow statements, income statements, and end-of-year financial reports, among many others.
The information outlined in these reports plays an important role in providing the information needed for leaders to make informed decisions that drive the business forward. For example, after going through a quarterly report, leaders can develop a comprehensive strategic plan to take the company through the next quarter, while also setting realistic objectives and milestones.
5. Aids in budgeting and forecasting
An essential bookkeeping purpose is helping companies forecast their finances and budget expenses. Analyzing financial data can give businesses valuable insights, allowing them to make decisions that lead to achieving financial goals and objectives.
Maintaining accurate financial records can help business owners make important decisions related to future finances. For example, by diving into financial records, business owners can anticipate the company’s cash flow for the next few quarters. Having a sense of future cash flow is a big help when budgeting and planning for upcoming expenses.
6. Ensures that a variety of tasks are cared for
Bookkeepers can take a huge weight off the shoulders of business owners and leaders when it comes to the company’s finances. Most business owners can rest assured knowing that bookkeepers care for a variety of tasks and responsibilities to ensure that the company remains in good financial standing.
Bookkeepers ensure that a variety of important tasks are completed, including:
- Monthly reporting
- Data entry
- Tax returns
- Balance sheets
- Financial statements
- End-of-year reporting
Hiring a bookkeeper is one of the best ways to stay on top of a company’s finances while ensuring optimal financial health.
7. Ensures that a business is prepared for tax season
Tax season is on the minds of business owners everywhere. Hiring an accountant or bookkeeper who maintains accurate financial records all year long is a big advantage during tax season.
For example, bookkeepers maintain essential records needed for tax season, such as:
- Quarterly and annual financial statements
- Income, revenue, and expense records
- Receipts and invoices
- Bank statements
- Credit card statements
- Payroll records
Instead of scrambling to find the right documents needed to fill out taxes, a bookkeeper who regularly updates financial records will have all of the essential information readily available. Having these critical documents and records easily accessible will save you from a headache when tax season comes around.
Keeping records up-to-date year-round can ensure that a company is set up for success with all the documents and information needed to file taxes.
8. Protects businesses against audits
Accurate bookkeeping can help your business avoid audits if conducted properly. An Internal Revenue Service (IRS) audit is a review or examination of financial information that has been submitted to the organization. The goal of an audit is to ensure that all information is reported accurately per tax laws. Audits also serve to verify that companies and individuals are being taxed correctly.
It is important to note that companies can do everything correctly and still be subject to an audit by the IRS. Having a thorough bookkeeper, however, makes the auditing process much smoother. For example, a skilled bookkeeper will have all of a company’s books in order. All reports are organized so auditors can gather the documents and information needed for an audit quickly, keeping the IRS satisfied with the information that is needed.
9. Ensures compliance with tax laws
Tax laws change frequently. Maintaining accuracy in bookkeeping and financial recording can ensure that businesses remain compliant with the various tax laws and regulations. Maintaining compliance with tax laws will ensure that a company does not face penalties or consequences, saving time and money in the long run.
Additionally, bookkeeping can help businesses comply with government regulations, such as the guidelines set forward by institutions like the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA). If a company fails to comply with guidelines like these, it can face legal consequences, large fines, or even the loss of its license.
10. Get ahead of financial issues
Staying on top of finances is a must for all types of businesses. A bookkeeper can help business owners spot potential financial issues, such as inaccurate records or missing information before the problem escalates.
For example, while overseeing financial records, a bookkeeper may spot issues like duplicate payments or irregular records – these are issues that may be overlooked by an employee who is not skilled in balancing the books. The bookkeeper can then guide and advise business leaders in taking the right steps to fix these problems before they grow.
By getting ahead of issues with reporting and billing, bookkeepers can help businesses resolve these problems before they grow, potentially affecting the company’s financial standing or causing tax complications.
11. Keep seasonal trends top of mind
As they work on financial reports and documentation, bookkeepers can help business leaders make note of any trends. For example, if there is a slow period during a specific season, business leaders can effectively plan for the slow season. Leaders can make sure to have employees focus on completing backlogs and outstanding work during the company’s slow periods in preparation for the business’s busy season.
With years of experience, bookkeepers can spot trends like these and help businesses anticipate and prepare for these moments.
12. Create transparent stakeholder relationships
To succeed, most businesses need funding and support, which can come from grants, business loans, and investors. However, finding shareholders to invest in your company can be a lengthy process. One of the best ways to secure funding for your company is by being transparent about your business’s finances – this is where bookkeepers can help.
Bookkeepers create detailed financial reports that outline all of a company’s transactions. The information outlined in these reports can help business owners highlight the company’s financial standing.
Giving investors a sense of your company’s financial health is a valuable first step when they are deciding whether or not to invest. For example, an investor may choose to invest in an established and well-known company that earned an additional 10% in revenue versus a new company that reported severe losses in the fourth quarter.
Keep in mind that in order for this data to be the most valuable for potential shareholders, it needs to be easily accessible at all times. Bookkeepers aid in keeping all documents organized and easy to find, ensuring that they can provide reports and data as quickly as possible.
13. Sets a company up for financial success
Understanding bookkeeping and accounting importance is a crucial step in setting your business up for financial success.
These are a few ways effective bookkeeping practices can help a company achieve success, including:
- Keeping accurate financial records easily accessible
- Facilitating informed decision-making
- Maintaining efficient cash flow management
- Avoiding risks associated with financial irregularities and discrepancies
- Ensuring compliance with tax laws and federal regulations
- Increasing investors’ trust and confidence in the company
Accurate bookkeeping can provide a strong financial foundation for a company. With the right tools and resources, implementing bookkeeping into your daily practices can help ensure that your company is best positioned for future financial success.
Bookkeeping is essential for all businesses, large and small. Implementing this practice is a must, and seeking skilled and experienced professionals in the field can greatly benefit a company. Even the smallest errors can lead to big consequences for a company, which is why it is important for businesses to hire seasoned and experienced bookkeepers to balance their books.
Investing in a bookkeeper is one of the best ways to ensure a company’s success. After all, bookkeeping provides a strong financial foundation that can allow a business to thrive.