Tracking cash flows, billing and lines of credit all relate to bookkeeping. Bookkeepers must resolve discrepancies occurring in company accounts and facilitate finance-related communication between other staff members to ensure that information is being fully and accurately funneled into the company ledger. While there are some clear advantages to bookkeeping, the practice has drawbacks that can affect company efficiency and profitability.
One of the advantages to bookkeeping is that you’re meeting a legal obligation to maintain financial reports for your company. Businesses aren’t legally permitted to operate “under the table,” so to speak. You must track and document revenue and expenditures in order to pay appropriate taxes each year. Not maintaining company books can result in government penalties if you are audited and asked to produce evidence of your company’s business transactions.
Another advantage to bookkeeping is accountability and transparency. Bookkeeping creates accountability with customers, since you’re able to look up previous transactions to verify prices or payments made. It also creates accountability among business partners, since authorized partners may access the company books to review revenues and expenditures, or to scan for signals that money is being used or reported inappropriately. Bookkeeping creates greater transparency; companies can open their books to potential investors interested in documentation of the business’ financial health.
Bookkeeping creates hard data that business owners can use to make informed decisions about expanding, trimming costs or taking out additional lines of credit. Rather than make generalized, subjective opinions about whether the company is “doing well” or “slowing down,” relevant parties can point to upward or downward trends using bottom-line examples and profit tracking. Data from bookkeeping can be used to justify closing a store location, hiring an additional employee or expanding to include additional products.
One disadvantage related to bookkeeping is time. Collecting financial records, researching ledger discrepancies and tracking down errors can take hours, even with automated computer software. It takes time to maintain the books by adding new information, and it also takes time to effectively analyze bookkeeping records in order to make financial decisions.
Cost is another disadvantage related to bookkeeping. Hiring an external bookkeeping service can be costly for smaller companies, although it may be cheaper than hiring a designated full-time bookkeeper. Purchasing bookkeeping software for your company can also be costly, especially since these need to be updated and replaced as newer versions become available.
Another disadvantage to bookkeeping relates to inaccuracies. Accidental inaccuracies can still result in lost time and money because they must be identified and corrected. Intentional inaccuracies from untrustworthy employees or business partners can result in “cooked books” that may be viewed as business fraud or tax evasion by the government. Hiring an auditor to review your bookkeeping records can help identify these problems.