To the untrained observer, bookkeeping might seem like a simple task, easy to fit into any schedule, or, if necessary, do your own bookkeeping with bookkeeping software. Yet for the small business owner, managing and monitoring outlay and receipts are both time-sensitive and crucial to best practices, even solvency. Why is bookkeeping important for a small business? This post explores why hiring an outsourced bookkeeper might be beneficial for your company.
The Importance of Bookkeeping for Small Business
Bookkeeping goes to the heart of management, investment, and reporting. Without managing cash flow and asset reserves, it is impossible to make decisions about leasing space, purchasing office supplies, taking on new talent, or entertaining vendor bids, for example.
Just as serious, a company will not accurately report receipts and expenditures to state and federal taxing authorities. Hence, bookkeeping is important for financial management purposes.
Salespeople with expense accounts report, ideally, their payments for hotel accommodations, food, beverages, rental cars, and other aspects of client entertainment. Bookkeepers must record these costs to the penny because the company pays for them.
In addition, the bookkeeper must organize this type of expenditure by category and by an individual. Should these expenditures come under scrutiny, they must be retrievable quickly and easily. This is why bookkeepers maintain accurate records of gross receipts, tax obligations, purchases, and financial assets as well as expenses.
What Does a Bookkeeper Do?
Organized maintenance of financial data is foundational for budget allocation, raising capital, strategic analysis, and future expenses. Though practices may vary by individual, most bookkeepers share the following duties in common:
- Maintenance of a general ledger in which all credits and debits (revenue and spending) are documented and tabulated.
- Reconciliation of company books with monthly statements from banks and investment funds.
- Recording, or making, remittances to vendors, lenders, and, if applicable, the accounts payable department.
- Generation of invoices for clients/customers and integration of receipts from accounts receivable.
- Periodic audits of inventory and supply.
- Composition of balance sheets, profit & loss statements, and other reports documenting the firm's financial status.
A bookkeeper's duties may be wider or narrower than this list, depending on the business owner, the particular bookkeeper, and what sort of accounting operation exists.
Four Signs that Your Small Business Needs a Bookkeeper
You may think you can do just fine without a regular bookkeeper. Yet there are a few tell-tale signs indicating future problems without one. Here, we answer the question, how does bookkeeping help a business?
Your Books Are Not Current
The true state of a firm's finances and cash flow is always in flux. In a sense, accounting books represent a snapshot in time, but only if they are updated often. If a company is taking in little, an owner must take action to increase income. If it is doing well, the owner knows to double down on certain policies. Still, the owner acts dangerously if he or she does anything out of ignorance, and business performance may suffer.
Disconnect between Sales and Profits
If sales are surging while profits are stagnant, there is a problem demanding a remedy. In such instances, the financial reporting that a bookkeeper provides is invaluable. These financial statements can reveal exactly where you need to reduce outlays, on the one hand, or raise prices on the other. With a competent bookkeeper available, these reports can track accurate financials.
Cash Flow Is Unstable
If monthly cash flow proves to be erratic, so you have no assurance about cash on hand, a picture of the influx and outflow of money can help to stabilize the situation. The cash flow statement (CFS) measures how well a company supplies the funds necessary to meet its operating budget and pay its debts. The CFS also reminds a business of what receivables are due yet unpaid.
Bookkeeping Is Becoming a Time Suck
They might be smart and good with numbers, but many business owners soon discover how tedious and protracted bookkeeping can be, leaving little time for strategy, forecasting, and team-building. Calculating the hours you spend on this activity can help to determine whether do-it-yourself bookkeeping is an effective use of valuable time.
Seven Ways Bookkeeping Benefits Small Businesses
Records Are Organized, Accurate, and Accessible
Not only do business leaders need to know how much money ebbs and flows through a company, but they also need to know the sources and destinations of these funds. The frequency of payables and receivables is also crucial to making decisions, as are other discernible patterns.
Comparing and contrasting the cost of doing business with multiple vendors requires comprehensive documentation of transactions. Moreover, internal and external disputes are best resolved with recorded evidence, and with recorded evidence, disputes will be solved much faster and more efficiently.
Keeping Payroll Straight
Remunerating staffers for their labor is among a company's largest expenses. Unlike paying vendors or buying supplies, however, this goes beyond the cutting of checks. Holding back federal and state taxes, unemployment and workers' compensation insurance, health and dental coverage, retirement account deductions, vacation pay reimbursements, and stock/ownership contributions, in some cases, can be a complex exercise, calling for meticulous checks and re-checks.
In addition, these figures require rigorous notations for the record. The chart of accounts set up by a knowledgeable bookkeeper helps to manage these myriad numbers and serves as a necessary record if an employee contests a paycheck.
Using Sound Figures for Budgeting
Every business worth its salt works from a well-devised budget. The prerequisite for any budget discussion is a timely awareness of income, spending, and assets. With precise numbers to work from, company leadership can decide about future investments, purchases, raises, and other expenditures.
It can also resolve whether or not to increase its own compensation from clients or customers. Nevertheless, none of these conclusions are made in a vacuum as factual numeric information must buttress the financial decisions of every small business. Such data is compiled through bookkeeping.
Getting a Better Handle on Cash Flow
Without an intimate knowledge of the dynamics of your cash flow, every slow-paying client, and quick-invoicing creditor, becomes an occasion for anxiety, and it can be a tedious and monotonous task.
Quarterly tax estimates come due and the rent goes up, each adding to the stress level. Still, with proper cash flow management, when your books and ledgers are up to date and systematized, there are far fewer question marks over which to worry. You know the funds that are available and where they fall short. The news is not always good, but at least you know it.
Getting Ready for Tax Season
Tax planning can be vexing and intimidating to owners, but accurate bookkeeping can help with everything, including the tax filing process. The maze of deductions, credits, exceptions, schedules, and, of course, penalties, is enough to simply surrender to the IRS, without a body of well-organized documentation to support your claims.
This is why a dedicated bookkeeper is invaluable to a small business and is worth his or her weight in gold. That business dinner deduction is backed up by receipts, names, and dates. Those charitable contributions are all enumerated and accompanied by information on the charity and its payment information.
Having this information in order and close at hand lets you file your tax return with ease. Remember, the federal government doesn't mess around when it's time to file taxes.
Protecting Against the Internal Revenue Auditors
To be sure, a business can do everything right and still be subject to an IRS audit, as many already know. In this case, bookkeeping helps. Your business return makes claims and representations and the audit aims at verifying them. Good bookkeeping is all about connecting the dots between those representations and reality.
When auditors can follow the information on a ledger to receipts, bank statements, and pay stubs, to name a few documents, they quickly learn of the competency and integrity of the business organization. IRS audit services assist businesses in gaining that reputation.
Setting Goals and Reaching Them
In the same way, haphazard bookkeeping adds to stress and anxiety, it also blinds business owner's to the potential they can realize in the long run. Without the information to see where you are, you are hard-pressed to set a destination.
Only with understandable, detailed, and factual data can a business owner or management team plot a course for future success. Will you need more staff? Can you afford more staff? Will you need financing? What is your debt situation now? A contemporary arrangement and distillation of cash flow, assets, and obligations is key to setting a path forward.
Is a Bookkeeper Sufficient? What about an Accountant?
Business owners know best whether a bookkeeper, accountant, or both, is the right solution. Both make important contributions to an organization, though they are not the same profession.
Whereas a bookkeeper can gather and organize the information needed to support tax preparation, an accountant is better suited to prepare the return itself and really analyze the income statement. One reason is that those who follow proper bookkeeping transactions track profit and cash inflows. Meanwhile, accountants organize and measure financial trends, manage cash flow, and evaluate financial performance, largely based on information obtained from bookkeepers.
Accountants can also serve as chief financial officers (CFOs), advising and collaborating with small businesses, and can help guide the long-term strategy of the company. Just like with a bookkeeper, you can find your perfect accountant in an outsourcing company.
Chicago CPAs Are Ready to Help You with Bookkeeping
There are enough tasks diverting small business owners from taking their business where they want it to go, and it is time-consuming to maintain accurate financial records and track business finances. Registering cash flow and managing the company's books is best performed by proficient professionals while you expand your client base and recruit outstanding personnel. This ideal scenario is yours at a reasonable rate. Contact us to hire a bookkeeper today.
