Essentials for Business Survival and Growth: Book-keeping and Accounting

Essentials for business survival and growth: Book-keeping and Accounting

In this blog we discuss the importance of book-keeping and accounting to small and medium sized businesses. Proper accounting is not just about crunching numbers, it’s a strategic lever that can significantly impact on the success (or failure) of a business.

Book-keeping, though administrative in nature could be argued to be as important as accounting for the simple reason that it lays the foundation upon which accounting is built upon.

Before we delve into the importance of both, let’s give very brief definitions of the terms.

Definitions:

“Book-keeping” is the (daily) recording of the financial transactions of a business in a systematic manner

“Accounting” on the other hand uses the information gather via book-keeping for analysis, interpretation, summarising and reporting of an entity financial performance and health internally and externally to regulatory bodies.

The diagrams below are meant to depict the difference between accounting and book-keeping, though in reality a book-keepers tend to use accounting software to record transactions!

(can you guess which image depicts book-keeping and which depicts accounting)

Importance of Book-keeping

I’ll keep this section brief.

the main benefit of book-keeping to businesses is that it directly impacts upon accounting. Incorrect or incomplete financial records will have a direct knock-on impact on accounting outputs. The IT saying “Garbage in Garbage out” holds very true here. The ability of an organisation to leverage the many benefits of accounting depends on how good their book-keeping is.

Book-keeping tasks also include raising invoices for goods and/or services to customers and paying supplier bills. Organisations need to undertake these activities.

Digressing from the importance for a second, I should mention book-keeping is largely an administrative task and therefore is easier done “in-house” (ie, compared to accounting which requires specialist technical knowledge) if time and people are available to undertake the tasks.

Importance of Accounting

As shown below accounting is crucial to the success of any business.

Business financial health assessment
- Accounting provides a clear picture of your company’s financial performance and health.
- It helps understand liquidity, profitability and overall stability
- The numbers tell a story! Accounting identifies business strengths, weaknesses as well as potential opportunities and threats.
- It supports informed decision-making which can be crucial to business survival and growth.

Cash flow management
- Cash is the lifeblood of any business; a business that does not have the cash it needs to operate on a day-to-day basis will fail. Accounting enables businesses to manage their cash inflows and outflows with the intention of ensuring it has the cash reserves required to operate on a day-to-day basis.

Regulatory and tax compliance
- Regulatory and tax bodies require the filing of certain financial and tax records. These records are generated via accounting processes. Thus, accounting enables businesses to abide by the Law!

Planning, budgeting and forecasting.
- Successful businesses plan. Accounting processes enable the setting of financial targets in line with the overall business plans and the allocation of business resources to achieve the targets.
- Accounting processes also allow for the continued monitoring of performance against plan (ie, planned financial targets), and where planned targets are not being achieved (which often occurs!) supports the identification and implementation of actions to remedy the situation.

Investor and lender confidence
- A lot of growth businesses require external funding at some point. Investors and lenders will want to review the financial statements of a business to assess the financial worthiness of a business. In effect, without accounting it will be near on impossible to get third parties to invest in, or lend money to, a business.

The ability of any organisation to realise the full benefits listed above is dependent on the quality of its-booking, think of book-keeping as the inputs into the accounting process. Accounting in effect transforms the financial records derived from book-keeping processes to produce analysis, reports, financial statements, decision points etc for the business.

Accounting will most likely be sup-optimal if based on incomplete or incorrect book-keeping records. This can lead to misleading analysis and/or harmful business decisions, so strong book-keeping processes are an essential for all businesses!

Technological/AI impacts on book-keeping and accounting

We pride ourselves as also being technologists at grosvenor.solutions, so any discussion will not be complete without looking at how technology can and is impacting book-keeping and accounting processes.

Technology, including AI, is elevating the roles of book-keepers and accountings, not replacing them.

Accessibility to leading edge technologies.
- IT technologies that were up to a few years ago was only available to very large organisations are now available to small and medium sized businesses through the use of cloud-based applications. Cloud-based applications empower businesses by providing affordable, scalable, and secure technology solutions.

Automation of tasks.
- AI automates repetitive tasks, and thus can automate a lot of book-keeping activities. This increases process efficiency and leads to cost savings. Also, business owners can focus on the strategic aspects of their business.

Increased analytical sophistication.
- AI tools support financial analysis and can process very large volumes of data quickly thus aiding the accountant by enabling more effective and efficient analytical insights.
- The timely and more sophisticated analysis enabled using AI facilitates better quality decisions impacting upon the business.

Common mistakes to avoid!

Let’s look at some common mistakes that business owners make in relation to book-keeping and accounting; which you should avoid at all costs!

Mixing personal and business finances.
- Avoid using personal funds for business purposes and vice versa.
- Maintain separate bank accounts and credit cards for business vs personal finances.

Guessing your way through
- Do not guess your way through book-keeping. As earlier mentioned, book-keeping is the bedrock upon which accounting stands upon. All the benefits of the analytical insights provided by accounting will not be realised without complete and accurate book-keeping records.
- Seek professional guidance rather that guessing your way through.

Inconsistency in undertaking book-keeping tasks
- Do not wait till receipts or expenses overflow till you record them! You are unlikely to recall all the transactions and even if you do the records and accounting analysis performed will be out-of-date. Avoid delays in recording financial transactions.

Inefficiency in book-keeping processes
- Ensure your processes are effective and efficient. Inefficient processes will lead to excessive time being spent on tasks, thus taking away from time to focus on other aspects of the business.
- If processes are inefficient, they are likely to be ineffective also, ie, there are likely to be errors too. Inefficient processes are typically caused by lack of understanding of book-keeping and accounting processes or lack of familiarity with associated systems. Either way, not only will this lead to time being wasted there is also a great chance of errors.
- Seek professional help if you deem your book-keeping processes inefficient.

Not budgeting for taxes
- Do not forget to estimate taxes (VAT, corporation tax etc) and set monies aside to pay for them.
- Typically, if you had a budgeting process, you will be able to estimate taxes due accurately.

Not using secure cloud-based software
- Your competitors will have a technological advantage over you if you do not use the best technologies available. For smaller businesses, this is cloud-based software due to its pricing, scalability, flexibility and pay-as-you-go model.
- Ensure your data is backed up on a regular basis.
- Use secure cloud storage.

Seek professional help.
- Consider hiring a book-keeper and/or an accountant. Even if you don’t need them full-time, they can provide expert advice that can greatly aid your business.
- Don’t forget, you can always contact grosvenor.solutions for this!

Conclusion

The importance of book-keeping and accounting extend far beyond the legal requirements to provide financial and tax information. They provide a compass that identifies weaknesses and strengths, and guides businesses towards success.

The effects of technology, including AI is profound. Businesses can streamline processes and thereby reduce costs, enhance accuracy, and make data-driven decisions. This applies to you and/or your current book-keeping and accounting service provider.