This article is written by Aditya Saurabh pursuing Diploma in Business Laws for In-House Counsels from LawSikho.
Table of Contents
Introduction
Setting up a business may sound easy, but any large or small business has numerous moving parts that can be difficult to manage. Having a clean set of financials to assist run and manage a business is arguably one of the most critical moving components of a firm. The finance aspect of operating a company may be complicated like no other, and you may need to seek advice from a professional at times. Accountants can assist you in keeping your money in order, but bookkeepers are also crucial.
Bookkeepers may assist you in keeping track of your finances, which can be a time-consuming task! Even if you’re used to handling many activities like keeping things operating, generating income, keeping customers satisfied, and managing finances, everyday bookkeeping can mean the difference between success when it comes to evaluating and comprehending it. A developing business can use bookkeeping to be funded, manage cash flow, stay tax compliant, and organise operations. Bookkeeping is an essential aspect of any organisation; while it may not be done in the same way in every industry, it is unquestionably crucial to the growth and functioning of any company.
As a result, bookkeepers are unsung financial heroes. They keep your money moving, protect your finances from becoming a complete nightmare, and ultimately help you operate your business with clarity. The fact of the matter is that if you want to operate your business efficiently and see it expand, you’ll need a bookkeeper.
What is bookkeeping?
In small businesses, bookkeeping is basically documenting and recording financial activities such as incoming and outgoing cash, or cash flow, on a regular basis or accrual basis. This method entails keeping track of all financial activities in the business, including expenses such as goods, services, and wages, as well as income such as payments for goods and services from customers or clients. As a result, it is the beginning point for accounting and the establishment of a “database” with which businesses may manage all information on their books in order to make crucial operational, investing, and financing choices.
Bookkeeping used to be a time-consuming and repetitive activity that required physically recording all transactions. Bookkeeping is now an easier procedure thanks to recent cloud-based technologies, and it won’t take up hours of your time during tax seasons. While having an in-house bookkeeper is crucial, outsourcing bookkeeping to an online bookkeeper is a more cost-effective option for organizations of all sizes.
Even if you’ve just started a home-based business, you can still profit from bookkeeping by using online and cloud-based services. Before you dive too deep into new financial activities, using online bookkeeping for your small business can help you figure out what’s working and what isn’t. It’s easy to use, economical, and expandable as your company expands.
What do bookkeepers do?
Within a small business, bookkeepers are responsible for a variety of tasks. However, as part of a small business’s operational existence, the key emphasis is on arranging, documenting, and reporting financial transactions. In recent years, some bookkeepers have expanded their scope of work to include things like teaching clients how to use accounting software, implementing records management and stock control processes to improve operational efficiencies, implementing point-of-sale systems to grasp daily transactions in the retailing industry, and developing, implementing, maintaining, and reviewing business processes.
Some of the most important things a bookkeeper will do to keep business running properly are listed as follows:
1. Maintain track records of day-to-day transactions
It’s critical for a business owner to understand where his money comes from and goes. By handling the documentation of day-to-day financial transactions, a bookkeeper assists you in properly understanding this. You may easily identify how much you ended up spending on office supplies if you’re wondering. Alternatively, could also compare the profitability of your new clients to your existing clients.
Furthermore, if your accounting software includes everyday automatic bank feeds, your bookkeeper will benefit greatly from this feature. It is a lot easier to maintain track of cash flow when your bank statement lines are loaded into your accounting software, and it also improves efficiency on data entry. Also, when it comes to resolving differences between employees, vendors, and consumers, accurate records can help.
2. Manages the accounts receivable ledger and the accounts payable ledger
The bookkeeper’s job typically includes preparing bills and sending them to clients. The bookkeeper is likely to be in charge of the accounts receivable ledger, as well as following down late payments. Also, up to a certain level, bookkeepers are usually the ones who make payments on behalf of the company. Payment of supplier invoices, costs, and petty cash are all included. You should pay your business’s accounts payables without jeopardising your working capital, and bookkeeping can assist you in doing so.
3. Takes care of record-keeping for employees
A reliable bookkeeping system can assist you in better facilitating employee payments, as bookkeepers handle bank reconciliations and connect with the payroll function. It ensures that your company does not underpay employees by calculating the exact amount of money required to cover their wage and determining when the payroll should be delivered to the proper parties. You’ll struggle to maintain an accurate payroll procedure if your company’s bookkeeping isn’t up to par, which will lead to employee dissatisfaction.
4. Organises business finances and observes the cash flow
One of the most crucial responsibilities of a bookkeeper is to ensure that business does not run out of money used on a daily basis. They can do so by keeping an eye on the revenue-to-expense ratio. They can then take action or offer advice if it appears that the company requires additional immediate cash. The fine balance of cash intake and outflow that keeps business running is maintained by a bookkeeper.
5. Prepares the transactions’ books for the accountant
When the accountant requires the accounts, it’s the bookkeeper’s responsibility to ensure they’re valid and updated. This enables the accountant to make business advice, report to the board, and file corporate tax returns using their skills and knowledge.
In essence, the bookkeeper is responsible for handling daily operational tasks so that the accountant can engage in comprehensive financial operations. As a result, bookkeepers play a crucial role; without them, accountants would be unable to do their duties correctly.
Business needs both bookkeepers and accountants
Bookkeepers detect and document financial transactions in journals according to the rules, and create a ledger account and trial balance, whereas accountants consolidate, evaluate, and analyse financial data before reporting it to the appropriate authorities. As a result, bookkeeping alone is insufficient for assessing and comparing a business’s financial status on a yearly basis, as well as a tax payment. Accounting is also required for the accurate interpretation and synthesis of raw financial data into financial statements that give a clear picture of the business’s financial situation.
As a result, a well-run company will almost always employ both accountants and bookkeepers. The division of labour must be done in a rational manner in order to reduce workload and save money. The accountant performs the tasks for which they were hired, while the bookkeeper supplies the essential financial information. Here’s how it might go:
1. For establishment and operation of the business
You should hire an accountant to assist you with the formation of your company. Accountants can assist you in developing a business plan and establishing a company structure that is appropriate for your organisation. With the correct accounting software, a bookkeeper can concentrate on maintaining your company’s books updated on a daily basis once the business is up and running.
2. For analysing and creating financial reports
The accountant and bookkeeper should meet once a month, either physically or remotely utilising cloud accounting software with shared access. In either case, the accountant will examine the accounts’ data, while the bookkeeper will clarify any numbers or decisions that are unclear.
3. For reporting and planning
The accountant will provide the business owner and board members with up-to-date numbers so that the board and owner have a comprehensive view of the company’s financial health. The accountant will then make appropriate recommendations to the business owner and board of directors, as well as provide guidance on any expansion plan and investment. They will also provide recommendations on whether the company can manage to expand into new areas and other financial plans.
A bookkeeper can also provide management accounts, which are less formal and more frequent reports from a bookkeeper. These reports are frequently utilised by business owners as weekly milestones to assess where the company is headed. Investors use these reports to understand the company’s financial performance in order to assess the value of their investment. The balance sheet, cash flow statement, and income statement are all financial statements that show the position of a business. Bookkeeping is important not just for present investors, but also for future ones. When you have structured financial information, prospective investors are more inclined to invest in your company.
4. For legal compliance
The accountant will produce business reports based on the information provided by the bookkeeper, which will contain information on revenue and cost, net profit, assets, liabilities, and tax. The accountant will also prepare and file tax return forms for the business, for which the bookkeeper will give the required financial information.
Ways in which a bookkeeper can assist the business
You could be the bookkeeper if you operate a small business – at least unless you can afford to pay someone else to do it for you. However, when your business expands to such a size, it makes sense to hire someone to handle your bookkeeping because there are some areas where a bookkeeper is indeed necessary to assist you, which are:
1. Helps to budget accurately
Bookkeeping is essential for every business since it makes budgeting much easier because it organises your revenue and spending so that you can easily examine your financial resources and costs. Your business’s financial path is created by a budget with which you can prepare for future costs for your business to aid with development. Also, before preparing next year’s budget, review the financial accounts to see how things went this year. You could uncover fresh information that allows you to quadruple or treble your earnings. It’s far more difficult to establish an accurate budget if you don’t maintain proper and updated records since then it’s just guessing.
2. Allows forming business strategies
Every business desires to expand, but inadequate financial records might prevent this from occurring at the desired rate. It’s difficult to create growth objectives and plans when there are no precise numbers or data to analyse. Bookkeeping can help you to figure out scenarios like when your firm doesn’t have enough money in the budget to pay specific accounts on schedule, giving you the opportunity to seek new sources or use other finance sources as a temporary answer to the crisis. You can also identify which goods, services, or sectors are helping you produce the most income by looking at financial statements. You can reposition your small business if required to boost profits even further.
As a result, bookkeeping entails keeping track of minute details and documenting them in accounting software, which can make it difficult to see the broader picture at times. As a result, it’s typically preferable to delegate this task to someone else.
3. Reduce your accounting costs
As previously stated, there is a distinction between the job of an accountant and that of a bookkeeper. So, if you’re employing an accountant to handle your daily transactions (who, of course, can do it) and run your monthly payroll, terminate them and hire a professional bookkeeper instead. You may save a lot of money by hiring a bookkeeper to handle the work efficiently and more cost-effectively than an accountant. Furthermore, because they have expertise in bookkeeping, a bookkeeper can do the task fast.
4. Saves your business money
It’s critical to understand how much your company spends and how much it earns. Because a skilled bookkeeper can assist you in keeping track of all your incoming and departing funds. They can assist you in making and saving money by helping you pay your bills on time. They may also assist you in collecting overdue payments. Interest and late fees are wasteful company costs that may be avoided by paying invoices on time. Some suppliers may even give you a discount if you pay your account promptly; if they don’t have to track you down for payment, they will be more likely to give you a discount. This is a simple method for your company to save money.
It can also assist you in identifying costs that formerly made sense but no longer do. Newspaper advertising, for example, was once a significant emphasis for small businesses, but in today’s environment, it may fall flat. Alternatively, you may discover that it is time to reduce a portion of your marketing budget in order to strengthen other areas. It is their responsibility to keep your company’s finances in order. In general, a bookkeeper is beneficial to every business and should be regarded as a required expense.
5. Accurately monitor your cash flow
If you don’t want to run out of money unexpectedly, keep a close eye on your financial flow. The number one challenge that small company owners confront on a daily basis is cash flow. Paying attention to the significance of bookkeeping may help you avoid this problem by keeping track of the money that comes in and goes out of your company. You can check how much profit you’ve made and if it’ll meet your forthcoming costs using a cloud-based bookkeeping tool. If it doesn’t, you may prepare for it by asking for a small company loan or line of credit ahead of time. Visualizing this data will provide you with the confidence you need to make sound financial judgments.
6. Get quick access to vital figures
It is critical to have an accountant handle your monthly business balancing and reporting. But what if you require financial data in the middle of the month? Last-minute stress from attempting to locate a critical piece of business might result in missed commitments and minor mistakes. Businesses of all sizes can’t afford to make errors, and regular bookkeeping may assist. Without waiting for your accountant to react, bookkeepers may provide you with the information you want fast.
You can keep organised records by completing your books frequently, getting on top of them, and not leaving it until the last minute. It will become much easier to discover the chunks of information you want in a brief span of time as time goes on.
7. Useful in filing taxes
In most circumstances, your company is required to file an annual tax return. Every year, millions of company owners scurry through their desks looking for lost documentation, making tax preparation unpleasant. Simply having an accounting department inside your business might make the tax filing process more effective. Rather than searching through a stack of paperwork to get the information you need, bookkeeping ensures that everything is appropriately arranged ahead of time. You’ll have all of your receipts ready to go, and you’ll be able to see any possible tax write-offs.
Bookkeeping is also necessary when it comes to submitting your personal tax return. A major portion of your revenue as a business owner originates from your company. To figure out how much you made, you must first figure out how much your company made. All of your financial information is organised on one central system when you use a bookkeeping system.
8. Helps in tracking profit and growth
Bookkeeping is crucial since it reveals the profitability of your company. The income statement, for example, is one of the financial statements generated by your bookkeeping. You can assess if your company is profitable or not by looking at the income statement. It’s hard to determine how well or poorly you’re performing without this information. Bookkeeping aids in the tracking of growth with the help of months and years of data built over time. You may use this information to spot trends, acquire a better knowledge of your business cycles, and compare results over time.
9. Keep control of your financial data
Because few smaller companies can manage to retain their own accountant, most accountants serve their customers part-time. It is considerably easier to collaborate if they utilise good online accounting software to handle their finances. Good software allows bookkeepers and accountants to operate on the same data set, on which they can collaborate to achieve the finest results and help your company develop.
10. Helps in maintaining the corporate veil : the requirement under the law
The corporate veil, which is one of the major reasons for incorporation, is substantiated by keeping a separate cheque book. Having a separate cheque book demonstrates that you see the firm as a separate entity. Separate cheque books and bank accounts will also urge you to keep your personal and work finances separate. Otherwise, it might lead to a financial disaster and put your personal assets at risk in the event of legal difficulties.
Last but not least, the law mandates that you preserve financial records for your business. The law may compel you to maintain financial records separate from personal spending, depending on your legal structure. Failure to do so may result in the closure of your company.
Conclusion
If you want to focus on the relevance of bookkeeping in your business, you’ll need to move quickly because bookkeeping is a crucial function in any corporation. This holds true whether you perform the work yourself or engage someone to do it for you. While employing an in-house bookkeeper can assist you in checking off the box, it may not be the most cost-effective option. You’ll have to cover the extra expenditures of hiring an employee in addition to salary or hourly compensation and insurance. You may benefit from bookkeeping without incurring exorbitant expenditures by using third-party online bookkeeping software.
Bookkeeping is necessary in order to keep correct financial records. Despite this, many companies fail to implement this critical procedure. One of the most common causes for business failure is that without proper bookkeeping, you are running your company blindly. Keeping track of your income and spending digitally reduces mistakes and ensures accuracy. It’s that simple. Whenever you have a question concerning cash flow, you may get quick answers using a desktop or mobile site. As a result, your accountant will have a comprehensive view of your company’s finances, and you will be able to make informed business decisions.
Neglecting the bookkeeping system has a direct negative impact on the business. As a result, even smaller companies must keep books of account in order to meet tax and regulatory responsibilities, maintain correct price-fixing, prepare financial statements, and improve financial management. Bookkeeping will assist you in running your business more effectively while also providing you with valuable information on the financial health of your company.
References
- https://www.theadvocate.com.au/story/6583905/why-bookkeeping-is-so-important-for-any-business/
- https://www.affinityassociates.com/top-5-ways-professional-bookkeeper-can-help-business/
- https://lyfeaccounting.com/blog/bookkeeping-is-important/
- https://www.virginstartup.org/how-to/how-bookkeeping-can-help-you-run-your-business
- https://corporatefinanceinstitute.com/resources/knowledge/accounting/bookkeeping-definition/
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