Bookkeeping is the management of financial records of an entity. it is important because it helps the management to have an actual analysis of a business. It is an instrument used by management for analysis of business growth and its performance at any given time. The financial statements are the outcome of bookkeeping. When you do an analysis of financial statements, you can track the inflows and outflows of cash within a business
Bookkeeping was a complex procedure in the past, back then all the books have to be maintained manually. But now there is no such complexity remained. As specialized bookkeeping software has been developed. For example, a person with little bookkeeping knowledge can run the accounting software to keep the record for all financial dealings of the day like invoices and vendors records, etc and the software will automatically update the accounts in the journal and ledger. Once the format of all the accounting records sets in, then the financial statements are hardly a click away. This is how accounting software has evolved and is accessible to every business out there.
Businesses with a greater turnover must establish a whole department that caters to bookkeeping and deals with other financial matters. Keeping a whole record of financial dealings is what helps to analyze a business’s performance.
Businesses with smaller turnover do not have to establish a whole dedicated department for bookkeeping. As in today’s era, you can simply hire an accountant or accounting firm. These firms will provide you with all accounting services like, payroll bookkeeping and filing tax returns, etc.
Bookkeeping is important for businesses
Bookkeeping is definitely very important but many businesses do not pay much attention to this aspect of their business. Here are some reasons why bookkeeping is so important for businesses.
1) Preparing budget
A budget is an assessment of the income and expenses of an entity, over a specific future period of time and is usually compiled and reassessed on a regular basis.
Preparing the budgets by keeping in considerations the inflows and outflows of a business is too important and bookkeeping helps with preparing budgets. This helps the management to analyze the actual financial condition of a business. On such a basis, investments are made. It gives a future overview, how and where money should be spent.
2) Tax preparation
A tax is an unavoidable financial charge imposed upon an individual or a legal entity by the government, based on the yearly income of that individual or entity.
Every listed company has to file a tax return at the end of each financial year. Tax calculation can only be done accurately when your financial accounts are up to date and properly managed throughout the year. Due to maintained records, a company would not have to pay even a single penny more than what its actual tax is. But not maintaining financial records can lead to paying more taxes than actual ones.
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Bookkeeping helps the management to have an overall analysis of the business. Whether the business is profitable or not, what is the overall growth percentage, and what is the profit ratio over the period of time. Eventually, bookkeeping will help the management to know what are the loopholes and how to avoid them in the future.
4) Better Decision Making
With the analysis of financial statements through bookkeeping, comes better decision making. This gives you an oversight of where and how much a business should be investing in order to generate maximum profit. For that effective decision making, you need to have all clear financial data at your hands, that you can gain from bookkeeping. How can you anticipate to make profitable decisions without financial records to back them up?
5) Investors Interest
Those businesses that are backed up with up to date financial records are more likely to gain investor’s trust as investors would like to invest in such a business that has a clear financial position rather than investing in a business that’s financial position is not clear and data and profit visibility are less.
6) Easy Audit
When financial accounts are properly managed through bookkeeping then it is easy to conduct an audit of such financial records. There will be less chance of mistakes and errors in such financial records. This will lead to a good audit report which is basically what a business needs for its appraisal. Favorable audit reports attract investors and it eventually helps a business to grow. The audit report covers a company’s assets and liabilities and presents the auditor’s true assessment of the business’s financial position and future.
7) Profit and Growth
By keeping your business accounts up to date you can track the profit and growth ratio of your business.financial statements show clearly how much profit a business is earning and what is the growth rate. It also anticipates the growth of a business in the coming future.