Understanding a company’s financial health is one of the most critical aspects of running a successful business. If you don’t know the financial position of any business, it can be impossible for you to make an informed decision on the future of the company as well as make any credible strategic decisions about the daily running of the business. One of the best ways to understand the financial health of any business is to look at its books. This makes bookkeeping a fundamental tool for the effective running of a business. The following are just some of the reasons bookkeeping is so important;

Accurate Financial Reporting

Financial reports like income statements, balance sheets and statements of cash flow are essential for ownership and executive leadership. The balance sheet for example shows assets, liabilities and capital structure and the income statement shows revenue and expenses. All of this information would be impossible to keep track of without the bookkeeping process. Bookkeeping updates the general ledger system which makes is possible to create some of these important financial reports.
In turn, these reports can help business owners make crucial strategic business decisions that can mean the difference between profitability or not. When these reports are not accurate, a business owner can fail to see a crucial problem with the business until it is too late.

Managing Receivables

Every business must remain on top of all money owed to it and the best way to do that is once again bookkeeping. With proper records a company will know when the receivables are due which can do wonders for the business’s cash flow. On the other hand, without bookkeeping tracking the deposits of checks and closing receivables in the general ledger, it would be very difficult to track these receivables.

Managing Payables

It is equally just as important to ensure that you keep track of all your payments and bookkeeping is the most effective way to do that. Accurate reports that you get from the bookkeeping process can help track the amount of money a business owes third parties. Keeping up these payments means your suppliers and vendors continue to serve you. But bookkeeping can also help you know when you don’t have enough to pay suppliers and should consider other sources of capital or debt financing.

Paying Taxes

All the financial statements you can create with the bookkeeping process can help you easily pay tax. The yearly and mandatory process of filing tax returns is made much easier with these financial reports. Without proper bookkeeping it would be impossible for the government to get the proper amount of tax due and you may end up facing tax troubles or even pay more tax than you should.

Payroll Management

Bookkeeping can also be instrumental in helping you facilitate paying your employees on time through accurate record keeping, bank reconciliations and communication with the payroll system you use. If there isn’t enough to pay employees, then good bookkeeping practices can help you determine how much you need and when the payment needs to be made. This gives you appropriate time to deal with these problems and avoid some of the labor problems that can occur when you fail to pay your employees.
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