The “keeping tabs” of the commercial world is bookkeeping. Bookkeeping is a routine task that involves the collection of financial data. It is a method to obtain accurate financial statements and, ultimately, recommendations and suggestions regarding business. Furthermore, this provides businesses with a dependable measure of performance.
The process of bookkeeping is as simple as journalizing and posting each financial transaction that took place during the fiscal period, preparing the trial balance and worksheet, and making the necessary adjusting entries. Following that, the financial statements, closing entries, the post-trial balance, and finally, reversing the journal entries will be prepared.
Although it may seem like a lot of work, it is essential to operating the business, especially for startups and small enterprises. That’s because one of the first things every entrepreneur should learn or understand before entering the business sector is bookkeeping. In this approach, novice and small business owners can effectively manage the financial aspect of their business operations.
That being said, keeping records has a hugely beneficial impact on both start-up and small businesses. In order for management to run a business effectively and efficiently, bookkeeping is indeed a prerequisite. This is not just limited to keeping source documents and maintaining records of it; it may also be important for developing business strategies and plans.
Some of the reasons for why bookkeeping is vital for startups and small enterprises include the following:
- Provides an organized record-keeping system
Recordkeeping is the primary component of bookkeeping. Simply said, keeping records entails preserving a substantial volume of data—in this case, financial transactions—in an orderly way, such as in a chronological or sequential order. A properly organized record-keeping system ensures that the entity’s assets are properly safeguarded.
- Provides an effective and efficient financial management system
An organized bookkeeping system embodies an efficient financial management system. Cash inflows and outflows can be easily monitored. Income and expenses can be easily tracked down. And, outstanding receivables and payables can be conveniently reviewed. The results of such constructive financial management can be utilized as a tool to carry out effective and efficient business planning.
- Guarantees a reliable report
After the books are created, reporting happens. This might be in the form of compilations of financial statements. When bookkeeping is properly done, the financial statements’ reliability also improves. The more reliable and confident an entity is in its ability to develop business tactics and strategies, the more appealing it will be to investors and other external users.
- A key to tactical and strategic business planning
Effectiveness and reliability of bookkeeping are mainly the focal point of the previous takeaways. The ultimatum of such an effective system is a reliable report, and when there is a reliable report, that simply means an indubitable basis to formulate tactics and strategies from.
Coming up with an economic and financial strategies may be based from a sound financial blueprint–which in this case–bookkeeping.
Consider financial management in general. An entity can use the output from bookkeeping to base its capital budget or profit planning to determine whether or not it is feasible to invest in the business.
- Ensures a quality internal control over accounting and finance
Bookkeeping defines the control system over safekeeping financial transactions–even non financial transactions. Furthermore, this provides an audit trail. Meaning to say, any inconsistencies can be easily traced down whenever there is a well-documented trail of transactions because of the bookkeeping system.
With all that being said, no matter how small or big an entity, if it doesn’t value the importance of bookkeeping then it simply means that it calls for it as a manifesto of its demise.
As a wise man once said, “Beware of little expenses; a small leak will sink a great ship” – Benjamin Franklin.