Bookkeeping plays a critical role in accounting. Ensuring your financial records are accurate and organized helps your company make better financial decisions, assists with evaluating your business performance (and where to invest more resources), and helps with day to day cashflow management. Some components of bookkeeping are also required for regulation compliance, and are useful for generating reports required for transparency with stakeholders, regulators, investors, and lenders.
In short, bookkeeping is an important part of the accounting process.
At the bare minimum, you bookkeeping should:
Record All Transactions
You should absolutely record any money that has come in or gone out of your business, meaning sales, purchases, expenses, and, most importantly—RECEIPTS!
(If you are ever audited, you will need to provide receipts to prove your purchases. It’s also important for qualifying your deductions)
You need an accurate account of all of your business’ money flow throughout the year.
Accurately Classify and Categorize Transactions
Your transactions should be sorted into:
- Accounts Receivable
- Accounts Payable
- Inventory
- Cash on Hand
- Etc.
This is critical for structuring your financial ecosystem and encourages better practices and accuracy.
Reconcile All Financial Reports, Statements, and Records
Whether it’s a credit card statement, bank statement, balance record, or other account, you need to go through your reports and ensure they match your cashflow. This means verifying balances and transactions and looking out for any errors (i.e. double charges on purchases, inconsistency in payouts) and unusual activity.
What’s Next?
Once you’ve picked up the habits and flow of minimum bookkeeping, it’s important to expand into the next steps. This includes:
Set up and Maintain a General Ledger
Your general ledger will create a record of all of your financial transactions, but in chronological order. It’s considered the central repository for your financial records, and gives you a great overview of account balances, transaction history, and monthly in and out.
Creating and Maintaining a Chart of Accounts
A chart of accounts is a list of all of the accounts in your bookkeeping system. This will include account numbers, names, types (i.e. accounts payable, accounts receivable), and be used to monitor all financial activity, not necessarily in chronological order.
Create Financial Reports and Statements Monthly, Quarterly, and Yearly
Typically, we recommend setting up a Profit and Loss Statement, Balance Sheet, and Cash Flow Statement as your three core reports. These give you a great overview of your business’ financial performance, and it’s good to get in the habit of generating reports in regular intervals.
Bringing it All Together
While there may be more your business needs (depending on the size, scale, and how much financial information involved), with these minimal components of bookkeeping implemented, you can begin the critical work of putting your financial data to work.
Here’s how:
Review and Analysis
While you should always review and analyze for accuracy, once you have accurate financial data you can begin identifying data and financial trends, discover any seasonality to your business, see high performing vs. low performing products and services, and begin to make shifts in your business to create more financial opportunity.
Establishing KPIs (Key Performance Indicators)
A Key Performance Indicator is often the financial ratios you can derive from your bookkeeping records. These are typically:
- Gross Profit Margin
- Net Profit Margin
- Debt-to-Equity
- ROI (Return on Investment)
Identifying which ratios you want to increase can help you determine how to shift your resources, and what shifts to make. You can also identify which products and services seem more stable and consider where costs can be reduced.
Bookkeeping Help and Support
Once you’ve reached this point in your bookkeeping system, you’ll probably realize how time consuming maintaining your books can be. This is the most common time when we begin to see errors, missing data, or reconciliations skipped. Most businesses will reach a point where accounting help is needed, whether for getting the bookkeeping system cleaned up, generating reports, or offering analysis and business recommendations.
Just know that you have options. Outsourced bookkeeping is a common service CPAs will provide, and you’ll often end up with a team of bookkeepers and Certified Public Accountants in your corner (which also makes tax time so much easier).
Contact us today if you’re looking for bookkeeping help!
