Bookkeeping the key element to effective business performance Every business has a vision that comes with a wish of success. The successful achievement of one’s vision requires absolute control over one’s strategy of execution. A lack of control results in disorder which can be controlled through effective organization. In order to run a business successfully, it is important to be organized and to remain that way in the long term. This is where an effective bookkeeping system comes into play. Neglecting your bookkeeping function can have a tremendous impact on your business performance. What is Bookkeeping? Bookkeeping is the process of tracking the daily transactions of a business. It is a part of business accounting and includes transactions such as purchases, sales, receipts, and payments by an individual or an organization. It mainly refers to the record-keeping aspect of financial accounting. Each financial transaction is documented, whether it has been made by cash or credit, in their respective ledgers that include a supplier ledger, customer ledger, petty cash book, as well as a general ledger among others. The two most common and standard methods of bookkeeping amongst several others out there are single-entry and double-entry bookkeeping systems. In a single-entry bookkeeping system, all entries are allocated amidst various categories of income and expense accounts. A separate record is maintained for accounts that are payable and receivable, petty cash, and other relevant transactions. In a double-entry bookkeeping system, every entry to an account needs a corresponding, opposite entry in a different account. The ledger has two equal and consistent sides known as debit and credit. Read more about debtors and creditors here. How is it different from Accounting? While some believe that bookkeeping and accounting are the same, there are significant differences between the two. Bookkeeping is a constituent of financial accounting and maintains a record of financial transactions. On the other hand, accounting is the process of summarising, interpreting, and communicating such financial transactions. Financial statements are not prepared in bookkeeping and hence the data provided cannot be used to make major decisions. Whereas in accounting, financial statements are made and, depending on the data provided by accountants, critical business decisions can be taken. Bookkeeping only requires a very basic skill set. The objective is to properly maintain records of all financial transactions in a systematic manner. On the other hand, accounting needs a very special skill set due to its complex nature. Accounting uses bookkeeping information to analyze and interpret data. There is a need to analyze transactions to gauge the financial situation and communicate the same to the concerned authority. Try to find an accounting firm nearby or an online accountant who can provide you with complete solutions, we are accountants in London who can provide you complete solutions covering bookkeeping, accounting, tax, advisory, and growth services. Why does my business need effective Bookkeeping? Bookkeeping is a vital function of a legitimate business. The purpose of bookkeeping is to ensure that all the financial transactions of the business or corporation are lawfully accounted for. In the past, bookkeeping was recorded and maintained in a handwritten book. But now it has been digitized and is maintained electronically on computers or on online cloud accounting software. Key Point When searching for an accounting firm or an accountant make sure that they are proficient in the use of suitable cloud accounting software such as Quickbooks or Xero. One way to identify if they are suitably qualified online accountants is by asking them if they are certified with the said cloud software. Bookkeeping plays a vital role in the process of accounting. It aids in the preparation of financial statements by an accountant who prepares reports based on the recorded financial transactions compiled by a bookkeeper. Key Point When setting up your bookkeeping system, make sure you agree on a long term chart of accounts with your bookkeeper or accountant. Also, make sure you the structure of your Chart of Accounts is in line with future financial reporting. Bookkeeping is a vital process as it allows the business or an individual such as a sole trader to check whether their venture is profitable or not. It assesses whether the business is viable or not and helps in calculating the profit or loss that the business is making. Apart from the financial standing of the business, bookkeeping also estimates the tax the business or the individual owes to the government (HMRC), providing a detailed record of the income and expenditures. If you are thinking of going at it on your own to set up a Bookkeeping function without the help of an expert you might want to understand the key bookkeeping terminologies. Why is it important for my business? In simple, bookkeeping is important to maintain accurate financial transactions. Businesses have been dragged down due to their failure to maintain good financial records. Whether it is an individual/sole trader, a small business or a corporation, bookkeeping is vital for the following reasons. To be better-equipped and informed of all financial transactions. To keep a clear picture of the company or business’ financial health and plan future budget allocations. To save time while filing for tax returns; helps with tax preparation and calculates potential tax deduction and tax payable. To keep the stress of investigation at a minimum. To analyze and manage cash flows. To allow investors to have up-to-date and accessible information. To track business profitability. To avoid fraudulent transactions and cash skimming To avoid stealing To visualize the impact of certain business decisions Bookkeeping is not a requirement under law, however, keeping certain records is required by law. The business transaction and personal financial transactions must be recorded separately, failing which the business can be terminated or taken to court. Related: A visual representation of why Bookkeeping is important for your business. How can it make or break a business? Bookkeeping can make or break a business. It is the bridge that connects a business to success. Failure to maintain proper bookkeeping can lead to bankruptcy as without it might be impossible to ascertain the success or failure of the business. A single mistake can set a chain reaction that may affect accuracy, making it difficult to determine which aspect of a business needs more time and attention and which ones have been worthy of the time and investment. It is easy to keep track of information and documents that are mandatory obligations for tax and audit. Failure to produce the necessary documents can lead to the termination of the business. Bookkeeping keeps investors informed and helps in planning the future of the business. Without bookkeeping, getting investment can be a difficult task as it would void any due diligence activity required. The process also systemizes invoicing and payments to suppliers and improves the overall business structure. Without a tab on financial transactions, it is difficult to follow-up with payments in a timely manner. Bookkeeping is also indispensable when it comes to evaluating the performance of the business and making better decisions. How can it help my business make better decisions? Bookkeeping allows a business to keep track of all its financial transactions. These are used by accountants who analyze the data and interpret the information. Data interpretation shows how well the business is performing in the market. It helps determine whether the business needs investment or whether there’s a need for marketing, and so on. Based on the analysis, the business can judge whether there is growth and can make better decisions on budget allocation. Key Point Review tools and add-ons which can enable your online accountant to prepare and present information in a better way, such as visual reporting tools such as futrli, dryrun etc. If you already have a bookkeeping function in place but do not see it adding much value you might want to read Our tips on improving the bookkeeping function. 5 tips for effective Bookkeeping. Bookkeeping is a crucial aspect of any business. Maintaining it properly can benefit the business in several ways. It is no rocket science and does not require any advanced skill set. But with the following tips, it can be managed effectively and efficiently. Record all transactions with proper categorization: A good bookkeeping system classifies the day to day business in different categories. This keeps a detailed tab on expenses. Update your books daily or weekly: It helps understand where the business stands in the cash flow perspective. Effective creation of reports and budgets: Detailed expense reports can assist with financial decision-making and planning a budget. Year-end transactions can avoid tax issues: Bookkeeping helps determine the tax liability during the financial year-end. A business can make key moves at this time to avoid tax-related issues. Have your books reviewed by a professional Accountant in London: This helps determine whether your bookkeeping is accurate or whether any damage has been done with a wrong entry. Bookkeeping is vital in the progress of a business. As simple as it seems, it plays a major role in the financial health and the growth and development of a business.