Bookkeeping, in simple terms, means the daily recording of financial transactions with the intention to prepare financial statements later. It is the foundation of creating the book of accounts. There are various ways of bookkeeping with the most popular being single-entry and double-entry systems. Today, we are going to look at the importance of bookkeeping for businesses.
Importance of Bookkeeping #1 – It helps in budgeting
Bookkeeping helps you organize the expenses and income of your business. Hence, you can easily review your finances while creating a budget.
Importance of Bookkeeping #2 – Prepares you for filing tax returns
Every business needs to file taxes every year. By the end of the financial year, many businesses are in a mad rush to find the required paperwork to file returns. An efficient bookkeeping process can ensure that you don’t run around for missing papers at the end of the year. Also, as a business owner, since most of your income comes from the business, it can help you file your personal tax returns too.
Importance of Bookkeeping #3 – Organizes the financial records of your business
As a business owner, you need to have access to information about your business at all times. It helps in better management of business and compliance with the laws and rules. An efficient bookkeeping process can help organize the financial records of your business effectively.
Importance of Bookkeeping #4 – Helps make better business decisions
Bookkeeping is an important tool that you can use to analyze the performance of your business. Although not directly, but since it forms the basis of financial statements, it contributes majorly to the analysis process. Also, the analysis of your business can help you make better decisions.
Importance of Bookkeeping #5 – Helps create a roadmap for the future
There are numerous benefits of having structures financial statements. Planning is one of them. Also, good planning is usually derived from a good analysis of the past. Bookkeeping helps you get prior records with ease. Using these records, you can create an expense structure that is more profitable for your business.
Importance Number #6 – Creates an investor-friendly environment
All existing investors in your business would want to know the value of their investment. They can do this by analyzing the financial performance of the business. Bookkeeping helps create structured financial statements that can help them get the answers they seek. Also, prospective investors tend to prefer businesses that have organized information about their finances. Overall, it helps in creating an investor-friendly environment.
Importance Number #7 – Makes auditing easier and effective
Whether you are conducting a statutory audit or a voluntary one, having organized information makes it easier for the auditor to get the information he seeks. This saves time and makes the entire process of auditing more efficient.
Importance Number #8 – Helps you focus on your business
Maintaining accounts is a time-consuming process if not approached right. With a bookkeeping process in place, your financial accounts are well-maintained. This allows you more time and bandwidth to focus on growing your business.
Importance Number #9 – Improves cash flow
One of the biggest benefits of bookkeeping is that it allows you to track the influx and outflow of cash. As a business, you would not want to delay invoice payments to your vendors to avoid late fees. Further, since it also provides information regarding pending payments expected from your customers, you can push them to pay you sooner and delay the payment of vendor invoices, creating positive cash flow.
Importance Number #10 – Track the growth of your business
Bookkeeping helps you understand the profitability of your business. In simpler terms, you get a clear picture of the growth of your business. Without this information, it is difficult to drive the business forward. Bookkeeping also helps you track growth, observe trends, and compare results of different policy decisions.
As you can see, the importance of bookkeeping cannot be understated. It provides a platform for structured accounts and a resilient business environment. It also empowers you and offers better control over your business. Ensure that you have an efficient bookkeeping process in place to get the most out of it.