In the world of business, numbers speak volumes. Effective bookkeeping is the backbone of financial stability, from startups to multinational corporations.

Bookkeeping is how businesses, entrepreneurs, and decision-makers monitor a company’s financial health and activity. Without basic bookkeeping practices, it’s easy for financial transactions and spending activities to get out of control, leading to confusion, disorganization, and loss of profit.

But what exactly is bookkeeping, and how can it make or break your business? In this guide, we dive deep into the importance of bookkeeping for small businesses, the responsibilities of a bookkeeper, how to set up a bookkeeping system in a small business, and the different bookkeeping services for small businesses.

What is Bookkeeping?

Bookkeeping is the systematic process of recording and organizing financial transactions for a business. It involves tracking income, expenses, debts, and other financial activities.

The bookkeeping or accounting process forms the foundation upon which accounting is based, helping business owners and financial experts analyze the data for better decision-making. In particular, you should understand the difference between cash and accrual accounting.

You should also know the most common accounts used by most bookkeepers, including:

  • cash
  • accounts receivables
  • accounts payable
  • loans payable
  • inventory
  • inventory
  • purchases
  • payroll
  • owners’ equity, and
  • retained earnings.

Regular attention to these aspects of your finances is important to ensure your company moves in the right direction. Although you may use various reports, the three bookkeeping essentials are the balance sheet, the financial statements, and the statement of cash flows.

CFO managing the bookkeeping process in a small business; image of incoming and outgoing cash

Bookkeeping Vs. Accounting

Bookkeeping differs from accounting because it is the critical first step in tracking all business activities. While bookkeeping provides oversight into each transaction (to catch discrepancies and correct mistakes), accounting provides a thorough financial analysis of all these numbers.

Accountants rely on bookkeeping records to analyze and advise on a business’s financial activity, health, and growth potential. In other words, a bookkeeper is the first step in ensuring your company’s financials are complete and accurate.

In contrast, a certified public accountant is your second step in knowing what the most run financial statements and records indicate so you can plan and make the right business decisions.

The Importance of Bookkeeping Process for Small Businesses

Maintaining bookkeeping tasks is essential for the stability and success of small businesses. Small business owners must stay on top of many moving pieces (including assets, liabilities, income, and expenses). 

1. Enhancing financial transactions

Small businesses often operate with limited resources, making it crucial to monitor their finances closely. Bookkeeping provides the means to organize financial statements systematically.

This includes tracking income, expenses, invoices, receipts, and other financial reports or records. By maintaining accurate records, small business owners gain transparency into their financial operations, which aids in making informed decisions.

2. Informed Decision-Making

Effective decision-making is the backbone of any successful business venture. With precise financial data, small business owners can make well-informed decisions about resource allocation, expansion plans, marketing strategies, etc.

Whether deciding to hire new employees or invest in new equipment, a clear understanding of the financial implications is vital.

3. Compliance with Regulations

Navigating the complex tax regulations and legal requirements can be daunting for small businesses. Failure to comply with these regulations can lead to penalties and legal troubles.

Accurate bookkeeping ensures that all financial records are up-to-date and well-organized, making tax preparation and reporting smoother. This compliance not only prevents potential legal issues but also helps build a reputable and trustworthy image in the eyes of customers and partners.

4. Access to Funding and Loans

Small businesses often require external funding to grow and expand. Lenders and investors need to evaluate the financial health of a business before providing funds.

Well-maintained financial reporting is a testament to the business’s stability and performance. Whether applying for a bank loan or seeking investors, having organized financial statements of business expenses can significantly enhance the chances of securing funding.

Record Keeping software used by Navitance, like Microsoft Excel, to better an SMB financial performance

5. Monitoring Financial Health

Understanding a small business’s financial health is essential for making timely adjustments and strategic plans for business owners. Regularly reviewing the company’s financial transactions, statements and reports, such as balance sheets, income statements, and cash flow statements, allows the small business owner to identify trends, strengths, and weaknesses.

This insight guides businesses to effective strategies to enhance profitability and manage cash flow efficiently.

6. Expense Management and Cost Control

Small businesses often operate on tight budgets. Accurate bookkeeping helps track all business expenses, both major and minor.

This visibility enables businesses to identify areas where costs

can be minimized or eliminated, leading to improved profitability. Additionally, it helps evaluate the return on investment for various expenditures, aiding in more innovative financial management and decision-making.

7. Preparedness for Audits

While small businesses hope to avoid audits, they can happen. In such cases, organized and accurate financial records are a lifesaver.

Proper bookkeeping simplifies providing documentation and explanations to auditors, reducing stress and potential complications.

8. Growth and Expansion

Bookkeeping provides the data and insights necessary to drive growth. Whether identifying the most profitable products or services, understanding customer behavior, or analyzing market trends, bookkeeping lays the foundation for strategic planning and expansion.

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Responsibilities of a Bookkeeper

Small-business bookkeeping revolves around keeping accurate records of all financial activity. To do this, bookkeepers should be involved in daily business operations.

Some of their tasks include the following:

  • Record financial transactions every day
  • Managing the business’s chart of accounts
  • Reconciling bank statements
  • Preparing financial statements
  • Managing accounts receivable
  • Managing accounts payable
  • Managing payroll

Bookkeeping Services for Small Businesses

Bookkeepers manage the chart of accounts, track sales, enter expenses, and generate reports for your company. They also handle account reconciliations and generate basic reports such as accounts payable and receivable.

When you launch or expand your business, you should decide who will handle your bookkeeping needs. Will that person be an employee of your company, or will you hire a part-time bookkeeper or a professional bookkeeping service?

You must hire a professional bookkeeper to handle your immediate and future needs. As you interview different professionals or companies, choose someone who can provide all your needed services.

Consider hiring a company like Navitance that offers a full range of accounting services, from bookkeeping to controllership to interim CFO services. This allows you to continue to work with that company as your business grows and changes.

Finally, you need a suitable suite of services that complement your company’s needs. Outsourced bookkeeping services offer a range of benefits, including the following:

  • Save time, compared to handling the books internally
  • Allow you to focus on growing your business
  • Give you access to an objective third party who can provide perspective on financial decisions
  • Handle complex tasks such as payroll, employee expense reimbursement, etc.
  • Keep costs down by negotiating payment terms and working with vendors
  • Avoid late fees by staying on top of accounts payable
  • Decrease accounts receivables turnover, speed up payment time, and manage invoices more effectively
  • File sales and use tax reports
  • Provide you with information for your annual business tax return

Remember that the services provided by different bookkeepers to create financial reports can vary. Before hiring anyone to handle your books, ensure you understand the services and the costs involved.

Ask prospective bookkeepers or financial professionals how they plan to help your business in ways that drive growth and success.

From accounting software to income statement mgmt. to business finances, a professional bookkeeper helps in more ways than you think!

Outsourced Bookkeeping at your Fingertips!

Unfortunately, the U.S. Small Business Administration reports that about half of all small businesses fail within the first five years, and 70% shut their doors within 10 years. Many of these companies go out of business due to cash flow problems or because they don’t have the right team.

For the health of your business, you need to ensure that you have the right team of professionals assisting you, including bookkeepers. Outsourcing your bookkeeping needs saves time and alleviates the hassle, labor burden, and liability of maintaining a full-time, in-house bookkeeping department.

At the same time, you benefit from their financial experience and reap the rewards of having a neutral third party reviewing your books. You can customize the services to meet your needs, including recording financial transactions, maintaining your chart of accounts, managing accounts payable and receivables, remitting payments, doing your bank account reconciliations, and more.

So, doing your bookkeeping vs. outsourcing through bookkeepers? Which is best for you?

Worry no more! When you need bookkeeping services Nationwide, we can help.

Navitance offers financial services for small businesses, nonprofits, and other organizations. In addition to bookkeeping services, we offer interim chief financial officer (CFO) services and financial restructuring services.

Contact us today to learn how we can help your business.