What Is Bookkeeping?
Put simply, bookkeeping refers to the task of meticulously organizing and recording a business’s financial transactions. A professional specializing in undertaking these tasks is known as a bookkeeper. If you were to think of a business as a ship, the bookkeeper would function as the dashboard instrument panel — providing valuable, objective insight into various vital functions, such as motor RPM or fuel level — providing the Captain with the data needed to inform the path and performance of the ship. In the business world, bookkeeping provides business owners with the necessary framework to identify financial strengths and challenges to better inform the direction of their business.
What does a Bookkeeper do?
For most businesses, the work required to handle bookkeeping responsibilities will necessitate a specialized bookkeeper to handle the books. In their typical day-to-day, a bookkeeper must:
- Develop and adhere to their employer’s bookkeeping policies, procedures, and systems.
- Manage cash flow.
- Balance and maintain subsidiary accounts such as accounts payable, accounts receivable, and payroll.
- Prepare invoices.
- Keep track of overdue accounts.
- Categorize business transactions.
- Prepare bank deposits.
- Deliver payments to lenders.
- Verify receipts.
- Maintain bookkeeping documentation.
- Maintain compliance with federal, state, and local requirements.
In addition, one of the most critical responsibilities of a bookkeeper is to create financial statements. Bookkeepers must craft financial statements for each reporting period — informational documents that guide business decisions and indicate financial performance for lenders and investors. Chief among these statements are the balance sheet, the profit and loss statement, and the cash flow statement.
- The Balance Sheet: Put simply, the balance sheet is a financial statement that balances what a company owes and what is owed during a specific period. It allows you to compare your assets alongside your liabilities and, if applicable, your shareholders’ equity. When prepared correctly, a balance sheet should be balanced, as the name implies; the total of assets should be equal to the sum of liabilities and shareholders’ equity.
- The Profit and Loss Statement: Typically, the PnL statement includes vital cash flow information such as revenue, costs of goods sold, and operating expenses during a particular period. It should also show the resulting net income or loss for that specific period. There are typically five main components to an income statement: (1) revenue; (2) cost of goods sold (COGS); (3) gross profit; (4) expenses; and (5) net profit.
- Cash Flow Statement: The statement of cash flows, or the cash flow statement (CFS), is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company. The CFS measures how well a company manages its cash position, meaning how efficiently it generates money to pay its debt obligations and fund its operating expenses.
Due to the nature of their primary responsibilities, bookkeepers are uniquely aware of certain aspects of a business’s inventory. As such, many bookkeepers take on the additional responsibility of inventory management.
No two business situations are alike. With FinancePal’s dedicated bookkeeping service, you’ll receive a dedicated financial team — you will only work with someone intimately familiar with you, your business, and your financials.
Bookkeeping vs. Accounting
Among the general public, the role of the bookkeeper can be difficult to parse from the role of the accountant. However, there are a few fundamental differences; in a nutshell, bookkeepers handle the financials from an administrative perspective, while accounting is much more subjective. For example, while bookkeepers record and file concrete financial transactions, accountants utilize recorded financial information to inform strategic decisions, manage business finances, or identify potential avenues for growth.
Should My Business Hire a Bookkeeper?
Most small business owners started their companies because they were experts in providing a good or a service — not balancing a book. In addition, small business and startup bookkeeping can be difficult and multi-faceted. Nevertheless, sound bookkeeping is imperative to manage any company’s financial health, guide decisions for growth initiatives, and ultimately ensure your business is in good standing with its tax obligations throughout the year. However, it can also be tedious, complicated, and time-consuming — especially for those who own smaller businesses or sole proprietorships. Additionally, the IRS can be unforgiving when it comes to mistakes — for instance, filing your payroll taxes just one day past the deadline incurs a 2% penalty. To make matters worse, these penalties can add up to a hefty 15% of the initial amount owed.
There is good news, however; outsourcing accounting and bookkeeping to an outside firm is a rewarding and straightforward process that allows business owners to spend less time worrying over books and more time, well, running their businesses. Every day, more and more business owners trust FinancePal’s small business bookkeeping services.
