In our business world today, financial management is the mainstay that keeps it running with Bookkeeping and Cashflow analysis as its vital component no matter the size of the organization. Effective Bookkeeping ensures an accurate recording of financial transactions, whereas Cashflow Analysis helps the organization to monitor their liquidity for good decision-making to effectively carry out a successful business.
Here is an on-point definition of Bookkeeping and its importance:
Bookkeeping is the process of recording your company’s financial transactions into organized accounts on a daily basis. It can also refer to the different recording techniques businesses can use. Bookkeeping is an essential part of your accounting process for a few reasons. When you keep transaction records updated, you can generate accurate financial reports that help measure business performance. Detailed records will also be handy in the event of a tax audit.
Bookkeeping is essential as it gives a clear picture of the financial health of the organization, guides in generating financial statements of accounts, and facilitates tax compliance. Purchases, sales, payments, and expenses are accurately recorded daily.
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There are several processes involved in maintaining healthy Bookkeeping. Let’s examine them.
1. The General Ledger
It contains all financial transactions categorized into different accounts, like the assets, revenue, liabilities, equity, and expenses of the day. It can be a physical book or an electronic spreadsheet.
Auditors investigate the Ledgers, so they must always be balanced at the end of each year. If the total debits are more than the total credits it is called a debit balance. A credit balance occurs when the total credits is greater than the total debits.
2. Accounts:
There are 2 types of accounts used. The account that tracks the money owed by the business to its customers, suppliers, and creditors for goods or services rendered is called Accounts payable. While the Accounts receivable records the money customers are owing for the sales made on credit to them.
Cash Book:
Records all cash transactions either the Cash receipts or the cash payments. This book recognizes and records only cash that enters or exits your account. It implies that purchases or sales made on credit will not be recorded until cash is paid.
Bank Statement:
This ensures that the cash balance of the company matches the bank’s statement of account. The bank reconciles the transactions in your bank account and that of your Bookkeeping. This is very important because after everything else is checked and logged in, this is the last step to finding any errors or discrepancies in your book. Bank reconciliation ensures that nothing is missing when it comes to the money in your account.
There are 3 reasons why the bank must reconcile your account – a} The bank gives exactly the financial situation of your company. b} Banks accurately keep track of your cash flows and c} In case of errors, or fraud it is the bank that easily detects it.
It is of great importance to keep an accurate Bookkeeping record because your business's financial transactions and tax payments depend on what you have.
When there is good financial data it will help business owners and managers to decide on expansion, investments, and reduction of unnecessary expenses. Accurate record-keeping simplifies the tax filing processes, prevents certain business risks, and makes auditing easy.
Investors rely on accurate financial statements to assess the company’s strength financially and stability before investing their money into such ventures. Likewise, creditors first check out the accuracy of the company’s financial statement before extending a credit facility.
Another area that Bookkeeping is of great importance is in evaluating the financial performance over a period of time, as it identifies areas of strength in a business and points out where improvements are needed.
The Cashflow Analysis
Just like its name suggests, Cash flow is a process of evaluating a financial report that tracks down incoming and outgoing cash in an organization within a specified time period. It allows business owners and investors to gain valuable insights into how the company is able to handle its debts and expenses. With this, an organization will be able to meet its obligations to achieve a sustainable business.
The Cashflow Analysis comprises 3 major aspects:
1. Operations:
The cash generated from the day-to-day activities of the business including cash received from the customers and the ones paid to employees and suppliers.
2. Investment:
The cash that comes in from the acquired long-term assets or the profits that enter after the disposal of equipment, properties, and other investment opportunities over a period of time.
3. Financial Transactions:
This refers to the Cash flows gotten from the company and its creditors. Such cash often results from stocks, shares, and loans.
The Benefits of Cash Flow Analysis
A number of benefits derived from Cash Flow include:
Management and Budgeting:
Business owners can maintain good cash reserves to their short-term goals thereby avoiding cash shortage. Realistic budgets can be created to aid in strategic planning for future benefits.
Identifying Issues:
A well-analyzed Cash flow allows businesses to see potential problems that may arise and take appropriate measures for correction before they escalate.
Decision Making:
A company’s financial health can be assessed by investors and creditors through their Cash flow analysis. They can then decide to help in assisting the company to generate funds for future use.
Bookkeeping and Cashflow Analysis are related in their way of operations as each contributes to the effectiveness of the other. When financial transactions are properly recorded it forms a good foundation for the accurate cash flow analysis, thereby making it possible for all inflows and outflows of cash to be correctly accounted for.
Integrating Bookkeeping and Cash Flow can identify recorded errors in financial transactions and cash management irregularities once it happens.
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Cash Flow analysis can assist business predictions in times when there is a cash surplus or deficit. This will allow for proper planning of Bookkeeping activities in a way that brings good benefits to the business.
Conclusion
To end this discussion, Bookkeeping and Cashflow are a big components of effective financial management. For the financial health of a company, Cashflow analysis offers great insights while Bookkeeping provides accuracy for a reliable financial record. By integrating these processes, any business can be able to make an informed decision, maintain a healthy cash flow, and enhance its overall financial strength. Organizations are empowered by paying diligent attention to Bookkeeping and Cashflow analysis to face any economic challenges and seize the opportunity for future growth and smooth running of the business.