Being able to understand a company’s financial position and net income or loss is a critical part of running a business. Without this information, it’s virtually impossible for stakeholders in a business to make informed decisions about strategy and day-to-day operations. In addition to supplying important information to ownership, bookkeeping helps managers run a business efficiently and effectively.
Accurate Financial Reports
Financial reports such as the balance sheet, income statement and statement of cash flows are critical for ownership and executive leadership. The balance sheet illustrates assets, liabilities and capital structure, while the income statement details revenue, expenses and net income. The cash flow statement delineates operational, investing and financing cash inflows and outflows. All of this information comes from the general ledger system, which is updated by the bookkeeping process.
Accurate financial reports allow business owners to make strategic decisions in a confident manner, and they also help keep a business alive. If there isn’t enough money to make payroll or meet the obligations the business faces, business owners must know and take the appropriate steps to correct the situation. Without accurate reporting, a business can become off course and management won’t know until it's too late. This is especially true when it comes to capital structure and cash flow. Too much debt and high payments can spell disaster for business. Bookkeepers are essential for tracking issues.
Keeping on top of money owed to a business is extremely important, especially if the company is short on cash. Bookkeepers can generate accounts receivable reports that detail the aging of accounts receivable. These reports can help managers gauge cash inflows, along with the potential for collectability. Without bookkeeping and the deposit of checks in banks, and the closing of receivables in the general ledger system, it would be very difficult to track receivables.
Similar to accounts receivable, bookkeepers can create accounts payable reports that illustrate the money a business owes to third-parties. If a company doesn’t have enough money to pay its payables in a timely manner, it’s possible that the business may need debt financing or other sources of capital. Payables must be managed in such a way that a business doesn’t run out of working capital, while at the same time not missing critical obligations that can impact he long term success of the business.
Payment of Taxes
When bookkeepers update the general ledger and financial statements are prepared, it becomes possible to pay estimated tax payments. It also becomes possible to fill out year-end tax returns. Estimated tax payments are based on net income, while tax returns itemize the gross revenue and expenses to arrive at net income. Without bookkeeping, state and federal agencies would not get the proper amount of tax due. Tax troubles could ensue, if accounting records fail to illustrate the activities of a business accurately.
Payment of Employees
Bookkeeping also helps facilitate the payment of employees through accurate record-keeping, bank reconciliations and communication with the payroll function. If there isn’t enough money to make payroll or pay the appropriate business entities, then bookkeepers can assist management with determining how much money is needed, and when it needs to be sent to the appropriate parties. Without having an effective bookkeeping and payroll process in place, a business will fail to survive.
Bookkeeping is a critical process that can make or break a business, which is why it’s important to understand the accounting cycle, how financial consolidation works, and document retention standards. There is no reason to let a great concept fizzle or a fledgling business shut down, because financial reporting and record keeping isn’t sufficient.