Bookkeeping is the function of accurately organizing and recording all day-to-day business transactions including accounts receivable, accounts payable, inventory purchases, payroll, and other key financial transactions.
Proper bookkeeping is vital to the health of any business. Accurate financial reporting helps ensure your organization is aware of its current financial positions and can control costs.
The systematic tracking of all financial records can be a complex and time-intensive process that small businesses may not have the time or personnel to manage these responsibilities. Resolution Accounting offers bookkeeping services to Philadelphia businesses so you can focus on more strategic financial management and business growth.
In this article, we draw on our experience to explain why strong bookkeeping practices matter, the bookkeeping challenges small businesses may face, and how to overcome them.
Why Systematic Bookkeeping Is Important
According to the Bureau of Labor Statistics, 20% of small businesses fail within their first year of operation, and only half survive to their 5th birthday. The odds are stacked against small businesses and clean books with accurate finance measures, that gives the visibility needed to make smart operational decisions to keep your business up and running.
All companies need to keep track of their sales, expenses, income, payroll and other financial measures to ensure adequate cash flow to cover all expenses and that smart spending decisions are made. Accurate bookkeeping also helps to create benchmarks from which to measure your business against industry standards as well as your own past performance.
In addition to providing insight into your business’s financial health, accurate financial information is required for tax preparation, and may also be requested by banks or investment partners to best inform their lending decisions.
Without an organized and accurate bookkeeping system, your company risks filing taxes improperly, making poor budgeting decisions, and being unable to accurately track profits and growth.
How Good Bookkeeping Contributes to Managing Finances
There are a number of common areas to which good bookkeeping practices contribute that businesses need to stay on top of, especially small businesses with limited in-house resources.
Accounts Receivable and Collections
Invoicing and collection processes can be complicated but are key to healthy finances. To bring efficiency to accounts receivable and collections, your company should have standard invoices that can be modified and tracked for partial orders. There should be well-documented procedures for the bookkeeper for when to send out invoices and when to send out payment reminders. Your company should also have protocols in place to chase down overdue invoices. Without these tools in place, following up on unpaid invoices can be a huge time draw and will ultimately contribute to cash flow problems.
Cash flow should be evaluated and in order to do that accurate records need to be maintained. Cash flow problems can stem from having a number of overdue invoices, but also from other sources. One common source of potential negative cash flow (and confusion in general) is the use of one bank account for both personal and business expenses. (According to a survey conducted by Clutch, 27% of small businesses do not have separate accounts for business and personal expenses). This makes it very difficult to isolate just the business expenditures in order to report an accurate profit or loss.
Other sources of cash flow problems include the understanding in how to evaluate the following:
- Periods of growth that require capital investment
- Onboarding new clients with longer buying cycles
- Launching new products that require upfront investments
You’re going to need organized books and regular reporting to most accurately make assessments for decisions on spending.
Consistent Monthly Reporting
This brings us to financial reporting. Some small business owners make the mistake of assuming their operations are small enough that they can get a good idea of finances based solely on instinct or by looking at a bank balance — and only run reports once every quarter or so. This is a sure way to let things slip out of control without noticing. Financial reports -profit and loss, accounts outstanding, and other key financial metrics should be produced and evaluated monthly.
Having Well-Documented Monthly Close Processes
Not only should preparing financial statements be done monthly, but reporting and monthly close processes should be well-documented and repeatable. For timely and accurate financial reporting, standardized procedures for a monthly balance sheet reconciliation and review of the profit and loss statement should be in effect. This should include standard practices for:
- Conducting an inventory count
- Recording monthly journal entries
- Reconciling balance sheet accounts
- Reviewing revenue and expense accounts
At Resolution Accounting, our bookkeepers have expert knowledge and a depth of experience working with industry-leading bookkeeping solutions such as Xero, QuickBooks, AccountEdge and more.