As the foundation for accurate financial records and data in any organization, bookkeeping becomes critical when financial reporting and analysis is required. Bookkeeping is the process of recording, organizing, and categorizing financial transactions, and when handled correctly creates a systematic account of a company’s financial activities and overall health.
So, let’s talk about the role of bookkeeping in financial reporting and analysis. Unsurprising, its role is crucial, no matter what the size of your business is.
Critical Role #1: Organizing ALL Financial Data
Because bookkeeping captures and organizes all financial data and provides a structural framework for it, your books are where you will go for any information on sales, purchases, expenses, revenue, etc. This is why it’s important to maintain comprehensive and accurate books—if everything is documented and organized as it should be, then you have reliable foundational information to draw from for analysis and in the reporting process.
Critical Role #2: Generating Financial Statements
Your bookkeeping software allows you to generate all manner of financial reports, from balance sheets, cashflow statements, and expense reports to an overall picture of your company’s financial health and historical data indicating seasonality and/or ebbs and flows in business. Why is bookkeeping critical here? Without the software and a seasoned bookkeeper, all of these reports are inaccurate, which has lasting consequences as you make decisions.
Critical Role #3: Compliance with Regulations and Laws
Of course, accurate financial reporting isn’t just important for your business’ functionality and growth. Many companies are subject to a variety of ethic, regulation and legal obligations. Your books must be kept in accordance with these standards, or you will likely face fees and penalties. If your bookkeeping isn’t compliant and your data is inaccurate, you risk underreporting employee withholding tax, underpaying or overpaying your taxes, or accidentally committing tax fraud as well as ethical violations.
Critical Role #4: The Cornerstone of Financial Analysis
Any analysis you wish to make, whether it’s labor costs, profit margins, or even evaluating a new employee benefit plan, with depend on accurate bookkeeping. If your data is accurate and organized, your bookkeeping team becomes real facilitators in your financial goals. Your bookkeeper can generate reports that are used to examine profitability, investments, liquidity, labor costs, product and service performance and margins, all of which are used to identify trends. You can even use this data to set key performance indicators (KPIs) that aid in decision making and can be used as benchmarkers for your team’s performance.
Critical Role #5: Forecasting for the Future
The more historical data and trend mapping you have, the more effectively you can forecast future performance. Your books will help you create realistic forecasts, build budgets, and model your offerings around recurring ups and downs in your business. As part of all forecasting, a tidy budget must be built, and utilizing the data in your books is absolutely critical for ensuring you have enough resources allocated to the areas you need.
Bonus: Audits, Risk Assessment, and Due Diligence
While it’s well-established that bookkeeping is a critical component of day-to-day operations, ongoing predictive analysis, and business growth, there are special circumstances in which accurately kept books will be make or break for your business.
These special circumstances are things like audits—where records are examined for accuracy and potential fines are faced, due diligence—which is often employed during acquisitions, mergers, potential partnerships, and more, and risk assessment—which can range from questions of financial planning to expanding services.
To put it plainly, bookkeeping is the cornerstone of your business, and accurate financial reporting and analysis is often the difference between companies that thrive and grow and those that struggle and fail. If you have concerns about your business’ books, consider hiring a CPA consultant to examine your books, clean up any errors, and train your team. Of course, you can also consider a CPA working as a third-party controller, overseeing your bookkeeping team and being available for any pressing questions.
