Do you know how many businesses failed due to bad cash flow management? Around 82% of businesses failed because of this! Yes, I know this statistic is surprising. 

So how can you prevent it? The answer is bookkeeping and proper financial management.

Every businessman wants a clear picture of his or her financial health. They want to know exactly how much money they are making, how much they are spending, and where they stand financially. Recording and organizing your financial transactions is a crucial step for any business, no matter how large or small it is.

With the power of bookkeeping, you can make better financial decisions, manage tax season efficiently, and manage cash flow properly. So let’s dive deeper and discuss it further.

What is bookkeeping?

Bookkeeping is the system of keeping records of a company’s financial transactions on a regular basis. This is a systematic way of recording, analyzing, and organizing a company’s cash flow.

Each and every transaction, no matter how tiny it is, has to be recorded. This includes sales, purchases, expenses, payments, etc. This will paint an accurate picture of the business activities. All these transactions will be categorized in order to organize them. Once transactions are recorded, they must be broken down into separate accounts.

Common account types include: revenue, expenses, owned assets, and liabilities. By categorizing it, the entire transaction will showcase where your money is coming from and going. Afterward, you can analyze your data in order to decide what brings more profits and where you are losing money.

Types of Bookkeeping

There are many systems of bookkeeping, but there are two common ones. 

Single-entry bookkeeping: this method involves recording the transaction one time for each financial activity. It’s a cash-based accounting system that keeps track of cash flows in a journal. However, it does not capture the full picture of the financial health of a company. Since there is no balancing between debit and credit, transaction entry can be inaccurate. 

Double Entry Bookkeeping: in this system, financial transactions have to be recorded twice. Unlike single-entry, this entry system is not cash-based. You enter transactions when you owe money or make money. This system prevents fraud and ensures 100% accuracy. It offers comprehensive data on assets, debts, ownership, income, and costs, facilitating improved financial evaluation and choice-making.

Importance of Bookkeeping

Bookkeeping is needed for any business, no matter what industry or what size it is. It can help you budget correctly for your business. It makes sure that taxes and financial regulations are followed. If you fail to keep track of your financial transactions, then your business might not succeed.

Let’s talk about the 5 importance of bookkeeping:

Financial Accuracy and Transparency

One of the biggest benefits of bookkeeping is the accuracy it brings to financial reporting. You can easily learn the financial position of your business and its performance. To avoid making mistakes in the financial statement, bookkeeping is a must. This type of record-keeping makes sure that all income and expenses are well documented and will give you a full picture of your business’s financial activities. Keeping detailed records helps you track cash flow, track expenses, and manage budgets efficiently. Moreover, it will give transparency to your investors, stakeholders, creditors, and regulators. They will know that you are organizing the business ethically and legally.

Organized Record-Keeping

Sales, purchases, receipts, and payments are all written down in bookkeeping, which makes it easier to keep track of every financial transaction in a systematic manner.

It will allow you to easily access your past financial information, which will help you budget, forecast, and make crucial financial decisions in the future. By keeping it organized, it’s easier to analyze. Companies can track trends, identify opportunities, and make informed decisions to improve performance.

You can predict the cash flow trend and future cash flow requirements. Additionally, it gives you the information you need for strategic planning. You can set realistic objectives, create effective plans, and observe your progress over time.

Tax Preparation

Another key benefit is that bookkeeping will prepare you for taxes. Since all your transactions are well organized and categorized, you can easily compile the necessary information required for tax filing.

If you accurately keep records, then it will ensure you have all the information you need to report the numbers on your tax return. When the tax audit is conducted, a well-structured and detailed set of financial records can support your business’ tax returns and show that you are obeying the tax laws. Having accurate financial information reduces the chances of mistakes being made on your tax return, which can lead to audits and legal problems.

Cash Flow Management 

Cash flow management involves planning, monitoring, and controlling the flow of cash in and out of your business. It also manages excess cash in the most efficient way possible.

As it was mentioned before, 82% of businesses failed due to poor cash flow management, so this is where bookkeeping comes in. Bookkeeping provides you with accurate and up-to-date financial information that helps you track, analyze, and improve your cash flow. This record-keeping allows you to spot trends, patterns, and changes in cash flow so that you can plan ahead and prepare for your financial future.

As a result of budgeting, businesses are able to issue funds more efficiently. It will ensure that cash on hand is sufficient to cover operating costs, investments, and debts. It will also help you identify cash flow gaps. Gaps can also be identified at an early stage, allowing companies to take proactive steps such as securing funding or adjusting costs to prevent cash flow shortfalls.

Peace of Mind

Another important benefit is that you don’t have to worry about whether you’ll have enough cash on hand to pay your employees or if there are any unexpected costs.

Proper bookkeeping can bring peace to your mind knowing your business transactions are being recorded. It will also bring transparency to your business. This will reduce your uncertainty and help you make better financial decisions. On the other hand, it will lessen your stress as all your financial data is accessible. During auditing season, your well-organized transactions will make the process a lot smoother. 

There are hundreds of other benefits to bookkeeping. Good bookkeeping gives you the power to make financial decisions confidently. Whether you’re taking out a loan, growing your business, or hiring new employees, you’ll have the data to support your decisions. This lowers the risk of making bad decisions based on instinct or poorly stored monetary information. You can set your business target as you can see the growth or decline in your financial records.

You can spend more time managing your business with peace of mind and making strategic choices for the future. Furthermore, it will save you so much time, as the bookkeeping will arrange your monetary activities systematically. Now that you know its importance, it’s time for you to start bookkeeping.