The Importance of Accurate Bookkeeping for Business Success [Blog 02]

#1 – Bookkeeping Facilitates Informed Decision-Making

Spoiler alert! Yes bookkeeping is legally required by the IRS; but, it can be a very useful tool!

Whether you do your bookkeeping on a paid accounting software like QuickBooks (my personal fave), or a free software like Wave, or even on Excel/Google Sheets, your bookkeeping can give you useful information into your business.

For one example, are you profitable?! As you can image, profit is very important to business success. If you do not earn a profit, your business will fail and we do not want that for you!

At bare minimum you need to calculate your Net Income.
Example: you earned $10,000 in sales, but you paid let’s say $4,000 in expenses. Use the below formula to calculate your Net Income.

Net Income = Revenue (Sales) – Expenses
Net Income = $10,000 – $4,000
Net Income = $6,000

Congrats! You earned a profit! Now what are you going to do with the profit? Save it for future business purchases? Buy that new asset like art supplies? Well, without first determining if you have a profit, making financial decisions become a lot more difficult. And your bank balance does not always show the full financial picture.

So, if you do not have a bookkeeping workflow in place now, it is time to start! ASAP.

#3 – Financial Health and Performance

As lightly described in Reason #1, bank statements does not equal financial statements.

Financial Statements are what show the true health of any company which is why they are required by the IRS and that every U.S. based business follow GAAP (Generally Accepted Accounting Principles). There are four financial statements minimum to meet this requirement and they need to be processed within a specific order:

1. Income Statement
2. Balance Sheet
3. Statement of Retained Earnings
4. Statement of Cash Flows

Each financial statement answers specific questions about the business.

For example, the balance sheet is the home for all assets, liabilities, and equity. If you are unfamiliar, the accounting formula is Assets = Liabilities + Equity and it is used specifically on the Balance Sheet.

The Income Statement evaluates your revenue and expenses. As statement above, you need both of these figures in order to get your Net Income/Loss.

The Statement of Retained Earnings then takes your Net Income/Loss and adds your Net Income/Loss and then takes into account if you had any dividends paid out to your stockholders, getting your ending Retained Earnings balance.

The Statement of Cash Flows is exactly how it sounds, it is a report of all accounts under the Chart of Accounts that had movement.

#4 – Building Investor and Creditor Confidence

If your business is open to investors or creditors, the first thing they will ask your business for are the financial statements. Typically, they will ask for the major 4 financial statements: Balance Sheet, Income Statement (Profit & Loss – QuickBooks), Statement of Retained Earnings, and the Statement of Cash Flow.

Now, you may be thinking: “Tillena, I am a small business, why do I care about building investor and creditor confidence?”

Well, what if your business needs a loan?
The first thing the bank will want to know is: What is your businesses financial health like? What are your upcoming payments? What is the likelihood they are going to get their money back?

All of these questions are answered by the financial statements. So, if you do not have these readily available it can cost time, and potentially money, that your business may not have.

This is one of the biggest benefits and value to outsourcing your bookkeeping needs to a professional bookkeeper. These reports will be prepared monthly, so you will never have to scramble last minute in order to provide the necessary documents to fund your business.

#5 – Budgeting and Planning

Budgeting and planning are critical components of a successful business strategy. They provide the roadmap for allocating resources, setting goals, and guiding your business toward growth and profitability.

However, without accurate bookkeeping, these efforts can quickly become misguided and lead to financial instability. Let’s delve into why accurate bookkeeping is essential for effective budgeting and planning.

Accurate bookkeeping allows you to base your financial projections on concrete data. With reliable historical financial records, you can analyze trends, identify seasonality, and make more accurate predictions about your business’s future performance. This enables you to create budgets that reflect your business’s actual financial situation and avoid overestimating or underestimating your revenue and expenses.

Budgeting involves determining how to allocate your resources effectively to achieve your business goals. Accurate bookkeeping provides a clear picture of your cash flow, profit margins, and expenses.

Armed with this information, you can allocate resources strategically, whether it’s investing in new projects, hiring employees, or expanding operations. Without accurate financial data, your resource allocation decisions may be misinformed and jeopardize your business’s growth prospects.

Setting achievable financial goals is a key aspect of successful planning. Accurate bookkeeping helps you set realistic goals based on your historical performance and industry benchmarks.

As you execute your plans, you can measure your progress against these goals and make informed adjustments along the way. This iterative process of planning, execution, and measurement is greatly enhanced by having accurate financial records at your disposal.

#6 – Auditing and Accountability

Auditing and accountability are integral for maintaining transparency, complying with regulations, and building trust with stakeholders. Accurate bookkeeping plays a pivotal role in ensuring that your business meets these requirements and stands up to scrutiny.

Internal audits help businesses identify operational inefficiencies, assess compliance with internal policies, and mitigate risks. Accurate bookkeeping provides the necessary financial data for these audits. When your records are precise and up-to-date, internal auditors can easily trace transactions, verify financial statements, and ensure that financial controls are being followed.

External audits, conducted by independent auditors, are often required by regulators or stakeholders. Accurate bookkeeping streamlines the external audit process. Auditors can rely on your well-maintained financial records to assess your business’s financial health, verify the accuracy of your financial statements, and provide an unbiased opinion about your business’s financial position.

Accurate bookkeeping enhances your business’s credibility and demonstrates your commitment to transparency. When stakeholders, including investors, creditors, and customers, see that your financial records are accurate and well-organized, they’re more likely to trust your business.

Trust is a vital component of strong stakeholder relationships and can open doors to investment opportunities and partnerships.

#7 – Avoiding Costly Errors and Fraud

Errors and fraud can have devastating consequences for businesses, leading to financial losses, legal issues, and reputational damage. Accurate bookkeeping acts as a shield against these risks by promoting transparency, accountability, and early detection. Let’s explore how accurate bookkeeping helps you avoid costly errors and fraud.

Accurate bookkeeping enables you to track transactions and identify discrepancies promptly. Regularly reconciling your financial records with bank statements and other supporting documents can help you spot errors before they escalate. This vigilance prevents inaccuracies from snowballing into major financial issues.

Fraudulent activities can occur internally or externally, threatening your business’s financial stability. Accurate bookkeeping establishes clear audit trails, making it easier to trace transactions and identify unusual patterns. By maintaining tight financial controls and regularly reviewing your records, you can deter fraud and catch it early if it does occur.

Inaccurate financial records can lead to legal disputes and regulatory fines. Accurate bookkeeping ensures that you are in compliance with tax laws, reporting requirements, and other regulations. This reduces the risk of penalties and legal actions that can arise from inaccurate financial reporting.

Summary

Accurate bookkeeping is a cornerstone of business success, supporting informed decision-making by providing real-time financial insights. It ensures legal compliance, fosters trust among investors and creditors, and enables diligent tracking of financial health and performance. Through accurate records, effective budgeting and planning are achievable, while internal and external audits are streamlined, promoting transparency and accountability. Equally vital, accurate bookkeeping prevents costly errors and fraud by maintaining clear financial trails and minimizing legal and financial risks.

If you have made it this far, comment: FACTS.
Seriously, if you have read the entirety of this post, we hope it has helped you.