Why Is Bookkeeping Important? Essential Tips & Benefits

Bookkeeping is essential to the success of any business, whether just beginning or already established.

Unfortunately, however, bookkeeping can often be neglected in smaller and mid-sized firms that struggle to manage this aspect in-house; tracking daily transactions can take up too much of an employee's time that could otherwise be spent doing other important business activities.

In this article, we explore why is bookkeeping important and provide strategies to manage it effectively.

What Is Bookkeeping?

Bookkeeping refers to recording financial transactions such as sales, purchases, income, and payments by an individual or organisation in an organised fashion to assess its financial health and future decisions affecting that health.

The primary aim is to accurately account for these activities to assess business finances.

Bookkeeping vs Accounting

While bookkeeping and accounting are two terms often used synonymously, they are two distinct processes. Bookkeeping involves writing down business transactions systematically, while accounting involves analysing, classifying, summarising, and communicating financial information for decision-making.

Bookkeeping ensures that all records are accurate and up to date while accounting provides you with a picture of your financial status to make decisions while bookkeeping ensures that your records are up to date.

Types of Bookkeeping

There are two primary types of bookkeeping:

Single-Entry Bookkeeping

Single-entry bookkeeping is simple and appropriate for small businesses; each transaction is entered only once as either an income or an expense. Like handling a cheque book, this method is simple but may not paint a true picture of the financial position of an organisation.

Double-Entry Bookkeeping

Double-entry bookkeeping is a more complicated method that gives a more comprehensive picture of the company’s financial situation. The principle of double entry means that every transaction is recorded twice, once on the debit side and once on the credit side. This reduces the possibility of errors while at the same time providing better understanding of the financial activities.

Importance of Bookkeeping

Accounting entails the systematic recording of all financial activities, which helps prepare a financial map of the business and assists in decision-making.

1. Tax Obligations

Record keeping is crucial in ensuring taxes are paid as required and at the right time. Accounting assists in making sure that all the sales and payroll taxes are recorded correctly to avoid legal issues and penalties during the tax season, thus promoting compliance with the laws and regulations.

2. Accurate Financial Reporting

Proper record-keeping helps prepare accurate financial statements that depict the company's financial position and is very useful in decision-making and strategic planning. Timely and accurate reporting is important in determining profitability and making the right business decisions.

3. Organisation and Record-Keeping

Documentation is very crucial in any business organisation since it helps the employees to access information easily and at the same time, it helps the business to adhere to the legal requirements. Well-organised records also facilitate audits and reviews, and this will also help in saving a lot of time and money.

4. Business Planning and Analysis

Accounting is essential to business planning and assessment because it offers data on financial outcomes and attainable goals. The evaluation of financial statements is crucial in assessing trends, future growth development and planning.

5. Compliance With Legal Requirements

It assists in compliance with various legal requirements, which reduces audit risks and fines for noncompliance. Bookkeeping promotes credibility among the stakeholders since it involves proper record keeping and adherence to the financial laws.

6. Better Cash Flow Management

Accounting is a critical activity in managing cash, which ensures that all due payments are honoured and that a business does not face cash flow issues.

7. Maintaining Profits

To fully understand your business's profitability, it is important to keep proper accounts. Bank statements are insufficient – income and expenditure records clearly show its financial position.

8. Attracting Investors

As your business expands, you may require additional capital from investors or banks. Record keeping helps you to present your financial position within a short time while records that are well presented in the form of charts and graphs make your company more attractive to investors and creditors.

However, it is necessary to mention that accurate record-keeping is essential when it comes to taxes.

9. Paying Taxes

Bookkeeping is useful when filing your taxes on time and when looking for bills and invoices at some point. It assists in preventing legal problems or penalties relating to the failure to report sales or payroll taxes by maintaining records of sales and payroll taxes.

10. Financial Management

Cash management is one of the most crucial aspects of any business venture that any entrepreneur should consider. Bookkeeping helps you predict revenues and expenses in advance, which in turn helps in decision-making and the management of financial resources. The lack of such records makes it difficult for an organisation to make strategic decisions.

Should You Do Your Own Bookkeeping?

Do You Have Enough Time for It?

Time is a critical factor in any small business environment, and more so in bookkeeping, which consumes a lot of your time in addition to marketing, sales, and customer service.

Hence, business owners must assess whether they have adequate time for all the activities involved in the management of the business, including bookkeeping, which consumes time that could have been used in marketing sales and customer service, among others.

Do You Have the Knowledge?

Bookkeeping requires accounting knowledge. It is not easy to manage finances if one has no accounting training; bookkeeping errors could be disastrous. Thus, it is crucial to have accurate records for bookkeeping. It is crucial to comprehend the principles and regulations of accounting to perform bookkeeping.

What Are My Bookkeeping Options?

DIY Bookkeeping

Self-creating – whether with physical books or Excel online – may seem more economical, but it has many disadvantages. Lack of expertise may lead to overlooking mistakes and regulatory requirements in Sri Lanka, while time-consuming bookkeeping will not offer proper financial management solutions.

Traditional Bookkeeping Service

The traditional way is to employ an accountant or an accounting firm, which may be expensive for small organisations. While these services offer professional help, their prices may be significantly higher than the benefits they offer.

Automated Bookkeeping Service

This is a new service that uses cloud-based software with professional accountants. Documents can be uploaded from any location and then sorted by professional bookkeepers.

Usually, these services require a monthly subscription fee that depends on the number of transactions and may be suitable for small and mid-sized companies - they are not ideal for large companies, however! Automated services are convenient and effective, which makes bookkeeping easier.

In-House vs. Outsourced Bookkeeping

In-House Bookkeeping

Managing bookkeeping in-house has its advantages and disadvantages. An in-house accountant may offer a lot of accounting knowledge; however, qualified accountants are costly, and it takes time to train new employees.

In addition, salaries, office space, and accounting software must be spent on proper bookkeeping – while it is costly to have in-house bookkeepers, it is more advantageous than outsourcing.

Outsourcing Bookkeeping

Outsourcing bookkeeping enables your employees to concentrate on other business operations while incurring minimal costs for a full-time employee.

Outsourcing bookkeeping enables your employees to concentrate on other business operations while incurring minimal costs for a full-time employee.

When engaging an external team of professionals, they can offer continuity without the need to recruit a new employee in case they leave, and they provide specialised knowledge at a lower price than forming a team in-house.

Take advantage of PDMC’s free consultation to find out how outsourcing could benefit your company in Sri Lanka. We offer professional consultancy and recommendations that suit the needs of our clients in bookkeeping to enable them to make the right decisions.

Conclusion

As a growing business owner, time is your most important asset, and outsourcing your bookkeeping to experts is efficient, cost-effective, and stress-free. Let them manage the records so that you can concentrate on growing your business as you also have fun doing it.

Maintaining proper records of your financial transactions will help you in decision-making, fundraising, meeting legal obligations, and succeeding in a competitive business world.

Accounting is the foundation of financial success, and it offers knowledge and data that help a business succeed regardless of the circumstances.