- Lighthouse Financial Solution
5 Reasons Why Bookkeeping is Important
Updated: Aug 17, 2020
Quite simply, maintaining accurate financial records is a critical part of any successful business.
Bookkeeping is an effective tool that is used to maintain accurate financial records which is a critical part of any successful business. Not only is it required under law to maintain accurate books and records, bookkeeping also helps you proactively stay on top of your business.
Maintaining accurate financial records is a critical part of any successful business. Bookkeeping is an effective tool that not only allows you to meet the requirements under law to maintain accurate books and records, it also helps you proactively manage your business.
Below are 5 reason as to why your business should be focusing on bookkeeping:
1. Bookkeeping Helps You Budget
Bookkeeping is important because it helps you budget. When income and expenses are properly organized, it makes it easier to review financial resources and expenses. A budget creates a financial roadmap for your business. With a budget, you can plan for future expenses and the anticipated resources that would cover those expenses.
2. Tax Preparation
Every year at tax time, millions of business owners are scrambling through their desk to find missing paperwork. Sound familiar? The tax filing process can be made more efficient by simply having a bookkeeping function within your company. Bookkeeping is important for filing your personal tax return too. As a business owner, a large part of your income comes from your business. In order to know how much you earned, you have to know what your business earned first. With a bookkeeping process in place, you can have financial information ready for tax time. Instead of scrambling for receipts or invoices, all of your financial information is organized on one central system.
There are a few parties that are interested in your company’s financial records – the IRS, employees, customers, investors, and lenders. Being able to provide the information requested by these parties are vital to your ongoing operation. If you do not provide records requested the IRS, that could mean penalties and fees. If you don’t provide records requested by investors or lenders, that could mean a stoppage of cash flow and so on. Being disorganized with your books could cause your relationships with these parties to be compromised or terminated altogether. By definition, bookkeeping is the organization of financial information. Keeping your financial records organized makes it easier to locate and provide to appropriate parties.
4. Analysis for Decision Making
Bookkeeping is important because it helps with business analysis. It is a tool used by management to analyze business performance. The product of bookkeeping is financial statements. Financial statements should be regularly generated and used for analysis. While analyzing financial statements, you can track your cash inflows and outflows. Bookkeeping gives you information on which business lines are working or not working. This type of analysis allows to focus on your company’s strengths and improve on its weaknesses. With analysis comes better decision making. In order to make the best decisions possible, you need to have access to all available information. Bookkeeping provides this information. How can you expect to make profitable decisions without financial information to back it up?
5. Tracking Profit, Growth, and Cash Flow
Bookkeeping is important because it shows your business’ profitability. For example, the income statement is one of the financial statements that is prepared from your bookkeeping. On the income statement, you can see if your business is profitable or not. Without this information, it is impossible to know how well (or not so well) you’re doing. Bookkeeping also helps with tracking growth. Over time, you will accumulate months and years of data. With this data, you can observe trends and gain a greater understanding of your business cycles and compare results across periods. Bookkeeping provides information regarding your outstanding invoices – customer/vendor name, amount, date issued and due date – which can be used to implement better cash flow policies.Some examples are shortening the amount of time you allow your customers to pay you. On the flip side, you can delay the payment of vendor invoices by waiting until a day or two before the due date. By doing so, you are increasing the average amount of cash you have on a hand at any given time.