Importance of Accounting and Bookkeeping for your Business
Accounting and bookkeeping is an integral part of any business. As a business owner, you need to make sure that the profit you are making is more than the expenses. It’s only possible when you keep a clear track of all your income and expenses. This is where the importance of accounting and bookkeeping comes in. You cannot ignore its importance as it is the fundamental tool to sustain a business venture.
Bookkeeping and accounting are the two terms that are used in place of each other in the accounting process. Though they belong to the accounting process they perform different roles in business. Let’s understand the difference between bookkeeping and accounting.
Bookkeeping: Bookkeeping is the process of recording transactions in the financial records of a business entity.
Accounting: Accounting is the process of keeping a track of business financial status based on the data collected in day-to-day bookkeeping.
Why Accounting and Bookkeeping is Important for your Business
Many important reasons are there due to which your business needs to get the focus back onto accounting and bookkeeping. The top six reasons are:
Projects Financial Health of your Business
It works as a business analyzer tool and provides financial information about your business. This projects the financial health of your business. Based on which you can analyze your business strategies and do the necessary changes.
Better Financial Analysis and Management
Cash flow management is crucial for the growth of your business as they attract new investors and please the existing ones. Organized account management makes it easier for you to plan and predict the future rather than taking a gamble.
Detailed recording boosts your confidence which further helps you to solve issues quickly and grab any opportunities that present themselves. This is only possible due to proper accounting and bookkeeping behind the scenes.
Makes the Tax Filing Easy
When the time for filing tax returns comes, you need not rush for any information and documents. With bookkeeping your books are clean that cuts down on the time required for preparing tax documents. Thus it sorts out all your queries related to cash flow, profit, and loss, and provides you enough time to focus on tax savings and financial management.
Reduces the Pain of Audit
Businesses run the risk of being audited one day. With bookkeeping all your financial data is kept organized and in one place. In such a case you can produce the financial statements very fast and easily.
This makes easier for an auditor to access the detailed balance sheets and compare them with the statements to know exactly what was done. Thus updated and well-organized data helps in avoiding penalties or late fees during the audit time.
Good Relations and Easy Reporting to your Investors
Investors, lenders, financial institutions or governments always look for accurate and clean data for investment decisions. Having a clean book of accounts makes the report generation and gauging the company’s financial status easy.
Once the banks see that your company is thriving then they will provide you with more affordable loans. When an investor shows an interest in the health of your company. At that time you can just show the current detailed sheets and prove that the company is making major success. Investors will immediately start trusting your company.
Instant Reporting and Faster business response time
With bookkeeping, you will always have an updated balance sheet to inquire about the current state of accounts. With this real-time information, you will be able to react quickly to any changes to your business. This will provide you the exact data of how much cash is coming in and outgoing.
Problems Faced in Manual Accounting
Having a strong and organized accounting system is an important requirement for your business. It doesn’t matter whether you use a manual or computerized accounting system. What matters most is an effective accounting system. As long as we get the quality of data an accounting system is effective else it is ineffective.
The manual accounting system offers facility and ease but may fall short when it comes to generating reports and connecting dots. The biggest problem of manual accounting is the chances of human error which we can’t avoid. The five biggest challenges which weaken the manual accounting activities are:
Time taking activity
Manual accounting uses paper and journals for recording financial transactions that are a very tedious and time-consuming process.
If any changes are required in entries then either you have to erase it or cross out the old entries to make new ones. Though it shows the evidence of having been changed it takes more time to do it manually.
Reviewing the data and checking account balances is also difficult. Accountants need to go through multiple documents in locating information which is again time-consuming tasks.
Subject to Human Error
When accountants complete the tasks manually there is always a possibility of error. Though they are reliable and efficient but may do minor mistakes that could have far-reaching consequences.
Errors, in addition, incorrect recording of data, incomplete recording of data, recording data in reverse. These errors can happen in modern accounting systems also but manual accounting systems have no checks and balances in place.
On the other side finding a mistake and correcting entries take several hours. Many times it proves to be difficult and requires an accounting expert to find mistakes and fix them.
Lack of Security, Data Storage, and Management
Financial records in paper ledgers and journals are not secured. It’s difficult to prevent employees from reviewing sensible data in the manual accounting. These physical books are prone to lose.
It may get damaged by water, fire and stolen also. In such cases, a complete company’s accounting data is lost. There is no possibility of recovering the copy of lost data.
Duplicating and storing the ledger off-site can be a time-consuming task as compared to the digital storage options. Though digital data can be corrupted but effective back-ups can protect data, including copies off-site such as in cloud server storage.
Account integration with other business
Accounting is not an isolated activity. It is interlinked with many business processes like sales, purchases, banking, taxation, etc. In manual accounting when a single transaction affects different processes. You need to record it at many places to ensure all the relevant ledgers are affected.
- Longer Time to Generate Report
In a manual accounting system, compiling the data from different books takes time. We collate the data, add it and then compile to generate a report.
How Bookkeeping benefits you in managing and growing a business?
If you have huge amounts of capital and a large customer base but you don’t have effective bookkeeping skills then your business won’t flourish. In such cases, you should try to handle the financial side of things or take the help of someone to maintain your bookkeeping service.
No need to hire an accountant full time for this activity. Outsourced accounting bookkeeping services is the preferred way of managing financial data, especially for small and medium enterprises. It will save you precious time so you can focus on other important business activities. The benefits of outsourcing accounting and bookkeeping services for your business are:
You will Get an Unbiased Financial Opinion
An external bookkeeping service doesn’t interfere in your business but they give a clear insight into how your day-to-day business is financially positioned.
A bookkeeping service only does the accounting work to keep your business up and running. It shows your financial strengths and weaknesses and thus analyzes your business performance. It doesn’t hide anything and gives you a clear picture even if things are not going ok.
You will Avoid the Conflict of Interest
Entrusting the accountant can be very risky for some business especially when a business is run on partnerships. Blaming someone for doing some wrong thing can ruin the business relationship, even an error in record keeping is unintentional. A situation may arrive where an owner has to take the call what is best for himself and for the company.
Being an owner he should put the business first but others within the company may wonder of his intentions if something goes wrong. Thus opting for an independent bookkeeping service avoids this drawback and gives confidence to the owners that their accounting are handled without any error and bias.
You will Lower the Operation Cost
A business owner’s goal is to reduce the operation cost. This is possible only when an owner employs fewer people in operating the business. In this way, he can control the wages and salaries of the employees and hence reduce the total incurred cost.
A business can run without a bookkeeper also. The only thing is an owner has to collect the invoices, payments, credit sales and other financial information. Later he can hand over the necessary documentation to the external bookkeeper for accounting purposes. This will reduce the cost significantly than employing a full-time bookkeeper.
Accounting and bookkeeping allow the business to become more efficient and focus on business growth. Without bookkeeping it is not possible to run a successful business. If you are still lost then start taking accounting and bookkeeping serious else you may end up with unexpected challenges and some important outcomes.
If you are looking for a trustworthy bookkeeping accounting service for your business then outsource your accounting and bookkeeping services to pay square. They are the leading end to end accounting and bookkeeping service provider in Pune. They adopt a personalized approach and can help in keeping your financial records up to date.