Why Bookkeeping is Critical to Small Business Survival
To say bookkeeping is an important part of any small business is to laughably understate the matter. Let’s put it this way. A business owner who does not take the idea of managing the company’s financial books seriously will likely soon be closing the doors for good. Proper bookkeeping is a huge component of operating a small business efficiently. As too many Indian businesses have learned the hard way, keeping records inefficiently leads to reduced profits at the least and bankruptcy at the worst. If you’ve never considered how bookkeeping contributes to streamlined, productive operations, we’re here to enlighten your day.
Whether you have a bookkeeper to enter daily bank transactions by hand or (hopefully) have installed one of the many fine accounting software options available that specialize in India-based small businesses, the goal is the same. You, as a business owner, need to know your bottom line at all times throughout the business day. If you don’t know the up-to-the-minute status of your business, how can you make reasonable decisions? The answer is you can’t.
Without a bookkeeping system in place that lets you know the business’s financial health at a glance, you might spend money that isn’t there, generating overdraft fees, high interest rates, or stern warnings from your banker – maybe all three if you’re having a bad day. Alternatively, you might be tempted to pass on a great opportunity if you’re unsure about what your cash flow looks like. A record keeping process that doesn’t keep close tabs on daily transactions as they happen is bomb ready to explode.
Invoices and Accounts Receivable
These days, it’s rare for a business to be able to operate on a cash-and-carry basis. Bill-me-later is a payment style that won’t be going away anytime soon. While a certain percentage of invoices will eventually be considered a lost cause that will never be paid, a system that incorporates processes to generate invoices and manage the accounts receivable ledger is a must have. Consider this. Every invoice that isn’t sent out due to this inefficiency is money lost. Lose enough and it will be tough to continue operations.
Chasing payments is part of a bookkeeper’s duties. An unpleasant part, perhaps, but necessary nonetheless. While most customers have every intention of paying what they owe, when finances get tight it’s easier to postpone paying the company that never reminds you about your debt. Don’t be that company. How well your invoicing and accounts receivable processes work to generate income are critical in keeping the doors to the business open.
On the flip side of accounts receivable are the accounts payable accounts, which are probably only of slightly lesser importance than the former. Accounts payable is another way of saying money you owe to product or service vendors and for overhead costs like insurance, office space rent, internet service, etc.
In some cases, there is a financial benefit to paying a bill soon, say within ten days. It’s not unheard of for a vendor to offer a moderate discount, often in the 10 percent range, for timely payments. Without a process in place to keep tabs on which bills need to be paid and when, you could miss out on significant cost savings. While 10 percent might not appear to be much at first glance, calculate it over the lifetime of your relationship with a particular vendor and you might be talking about thousands (or more) of dollars.
The All Important Cash Flow
We alluded to this issue earlier but would like to expand on the idea. Maybe the most important way bookkeeping for small businesses contributes to a company’s overall efficiency is knowing where that fluctuating bottom line stands at any moment in time, and being able to call up the boss and alert him or her to the financial reality, for example, that there is only enough money in the banking account to operate for another two days.
A low bank balance is something the boss needs to know, preferably with enough lead time that he or she can take action before daily operations are forced to shut down. Especially in the manufacturing industry, re-starting operations can be a lengthy, expensive, and time-consuming process best avoided if at all possible. Having enough warning to deal with a cash flow shortage in time to avoid a shutdown is one of the most important functions a bookkeeper can serve.
Preparing for the Accountant
In case you’re unaware, the job of bookkeeper and accountant are vastly different. As we’ve been discussing, the bookkeeper is in charge of keeping all the accounts up-to-date on a daily basis and ready for the accountant to see as needed. Accountants focus on making business recommendations, reporting regularly to the board (if required), and completing company tax returns. An accountant’s final work product, which reflects either well or poorly on the company as a whole, can only be as good as the financial records maintained by the bookkeeper.
A company does not want to run afoul of government regulations when it comes to tax issues or required record keeping. When looked at from this perspective, it becomes apparent that the quality of bookkeeping for small businesses is at least as important, if not more so, than any other part of the process.
The Bottom Line
It’s easy to put off creating a rock solid record keeping foundation for your company when you’re under the pressure of day-to-day decision making. In a perfect world, record keeping processes would be among the first concerns addressed before ever opening the doors for the first time. But it’s never too late to rectify the issue. Sooner is always better than later. Running low quality or incomplete books can not only run you afoul of government agencies, it can also be a drag on the very survival of your business. Keep your books current and of high quality. They can be the best business friend you’ll ever have.