Why Is Bookkeeping Important?

By Oliver Milambo

For organisations to operate efficiently and grow, it is important for management to have a clear understanding of the finances of the business. The transactions of the business provide data about the financial activity of the business but in order for this data to be analysed appropriately it is required to be converted to information through a process called bookkeeping.

By definition, Bookkeeping is the "process of regularly recording and classifying transactions of a company". Bookkeepers perform their duties through the use of daybooks and ledgers. Bookkeeping can be done physically, however in recent years the emergence of accounting software has allowed for the use of digital bookkeeping. Digital bookkeeping is more accurate, faster, and easier to correct than physical bookkeeping. The choice of which bookkeeping method to be used by organisations depends largely on the size and complexity of the transactions occurring in the organisation.

The business entity rule is a rule that stipulates that the finances of the business and the founders should be kept separately, this is especially important with regards to bookkeeping as it allows for solely the financial position of the business to be captured. The best way to ensure this happens is to use separate accounts for personal and business use.

Why is Bookkeeping Beneficial?

Although bookkeeping mainly serves the purpose of helping companies understand their financial position, its usefulness is much more widespread. Tax is an aspect that all companies will have to encounter and therefore it is important for all entities to be able to reduce their tax bill as well as ensure compliance. Bookkeeping categorises many expenditures in a business, and this will allow companies to have the ability to file their taxes correctly and legally claim ALL their tax deductions which will lead to a lower tax bill.

Another underlying benefit of bookkeeping is that it makes the business more attractive to investors and lenders because bookkeeping will allow them to have access to more information about the company and this will help the business secure funding and achieve growth.

Lastly, Bookkeeping allows businesses to reconcile accounts held at the bank and with debtors and creditors on a monthly basis. It allows for easier reconciliations because all the transactions have been correctly classified so tracing the flow of money is not difficult. Reconciliation is very important because it allows for the business to detect accounting errors made by themselves and other parties, this protects the business from losing money. Reconciliations should be undertaken monthly rather than annually because this allows errors to be detected early on this allows for greater ease with dispute resolution.

Factors to Consider during implementation

There are many factors that need to be taken into consideration when undertaking bookkeeping. The first factor to be considered is weather the accruals or cash method will be used, the difference between the two is that when the cash method is used transactions are only recorded when money is received whereas with accruals method transactions are recorded when the performance obligations have been satisfied.

The second factor to take into consideration during the implementation of bookkeeping is whether the double-entry or single-entry bookkeeping method will be used. Double entry bookkeeping is the superior method as it can be used on entities of all sizes and unlike single entry book-keeping, Double entry bookkeeping allows for more accurate records as businesses can track where money is coming from and going to.

The last factor to consider would be how to categorise your transactions and how to store source documents to prove the validity of transactions. It is important for transactions to be categorised correctly as this allow for easier preparation of financial statements. It is mandatory for companies to keep records of transactions for an extended period of time in case of audits and storing source documents safely allows for an easier audit process.

Why outsource your Bookkeeping

Bookkeeping is a tedious task and requires plenty of attention to detail. If you are processing your own bookkeeping it is probable that you will spend large amounts of time on this activity, this time could be better used on other operations in the business to create growth.

If you have an accounting department outsourcing may also be a more appropriate solution due to the possible cost savings. Inhouse bookkeepers are paid monthly or hourly and require training as well as other employment costs. Outsourcing is generally a cheaper option and reduces the amount of employee hassle that employers will deal with. Outsourcing will also allow the organisation to scale up easily and not have to restructure their bookkeeping function.

The last reason to outsource your bookkeeping is because of the large access to resources it provides. Outsourcing leaves your bookkeeping in the hands of specialised reliable individuals, and this allows for more confidence in the reliability of the work produced. Outsourcing also allows for many of your accounting needs to be met as outsourced bookkeepers allow you to be flexible with your business as they are able meet a wide range of needs that you have and will be able to provide you with detailed financial reports without you needing the services of an accountant.

Why Stop Saving?

Firstly, saving money usually slows down the flow of money, leaving money vulnerable to the effects of inflation. Inflation can be defined as the increase in the overall price of goods and services in a country (IMF, 2020). The reason inflation affects saving badly is due to the increase in the price of goods. This results in your money not having as much value (or purchasing power) as it previously did and this in turn will lead to a decrease in the value of your savings.

Furthermore, saving reduces the economic activity in the country due to the reduced flow of money in the economy. Saving also excessively reduces the opportunity for growth. This is because it causes individuals and companies to miss out on opportunities to multiply their wealth exponentially. Saving may appear like a safer option but the only thing constant in life is change, therefore it would be wise to use money for activities that would create growth in value over time.

If you are a business, saving also reduces the ability for you to take hold of tax deductions. There are multiple tax avoidance techniques that can be exercised through investing. For example, if you purchase machinery in certain regions, you might be able to write off the initial cost of the machinery from your tax bill. By doing this your taxable income is reduced and you also gain an asset that will generate income. Purchasing machinery also allows you to write off the depreciation of the machinery over its lifespan which well reduces the taxable income. These are some of the incentives that governments put in place to stimulate growth by increasing spending on assets that improve productivity.

Some individuals and companies that prefer to opt for safer investing options do this by putting money in savings accounts where they earn compound interest on that investment. Compound interest is quite beneficial as it allows for the money to increase by larger increments each year if the interest rate is fixed. Individuals should, however, pay attention to the interest rate on their savings because the interest rate is required to be higher than the rate of inflation in the country for the money to not lose value over time.

The rate of inflation in South Africa was 4,6% in 2021. This is higher than the 2021 global inflation rate of 3,4%. It is projected that the inflation rate in South Africa and globally in 2026 will be 4,5% and the 3,05% respectively (World Bank, 2021). These figures indicate that any investment that will yield returns equivalent to 4,5% per annum or less in South Africa should not be undertaken.

Forms of Investment

Investing is "The act of distributing resources into something to generate income or gain profits." Risk and return are the 2 main factors that influence an investment, and it is a generally accepted principle that the higher the risk the higher the expected returns. Investments range widely in the level of risk they carry, allowing for a wide variety of risk appetites to be satisfied.

There are many forms of investments, these include shares, bonds and real estate. The investments that carry the highest risk are financial instruments. This is because the value of these investments is derived from many factors that act simultaneously adding to price volatility.

Stock market investments are a very popular form of investment especially for those seeking long term growth in their investment. This is because the value of the stock market has been consistently increasing over the past decades, due to this, investing in any funds (indices) that mimic the movements in the stock markets will lead to positive returns.

Government bonds are seen to have the lowest risk due to government backing and they also usually get settled. Real estate is considerably a good asset class for investments because real estate has been consistently appreciating in value over the last few decades. Real estate also allows the owner to have cashflow monthly that can be used to make repayments if the real estate is purchased using debt.

As we can see investments all have different risks associated with them. However, there is a form of investment that is far superior to the others and is less talked about. This is Investing money in yourself and your financial literacy. Upskilling yourself allows you to have the ability to earn more money as well as mange it better and this will add to a better quality of life than saving.