Most small business owners will agree that managing your finances is no small task. One of the reasons small businesses fail is due to poor cash flow management. If you don’t have any prior accounting or bookkeeping experience, you should consider outsourcing those services. When running a business, there are a lot of financial (bookkeeping and accounting) things you need to know, and the money you will spend on these services could be well worth it in the end.
Many people use bookkeeper and accountant interchangeably; however, these professionals have several distinctions. Some services they offer may overlap, but others are different with the key difference relating to basic functions.
Bookkeeping and accounting are both important and distinct components required to maintain and optimize your organization’s financial health. Choosing the right professional is key to ensuring your business maintains its financial health, so here are the basic definitions of both.
What is bookkeeping?
Bookkeeping refers to the process of accumulating, organizing, storing, and accessing the financial information of your company, known as maintaining the general ledger. These professionals are responsible for keeping day-to-day bank reconciliations, journal entries, and other financial transactions organized and accurate. The work they do for your business provides short-term insights and data that can be used to form and make broader strategies and decisions.
What is accounting?
In many ways, accounting is a continuation of the groundwork that bookkeeping provides. Using records generated through bookkeeping, accounting involves high-level data research, interpretation, and presentation to help generate financial insights and develop strategies and models.
The purpose of accounting is to help organizations create a better comprehension and awareness of profitability, cash flow, tax filing, and financial position. Additionally, the accountant establishes controls to make sure the system is working well. These controls can help detect and deter theft, embezzlement, fraud, or other dishonest behaviors.
Differences in the tasks and functions of bookkeeping and accounting are as follows:
Bookkeeping is the process of recording daily transactions consistently and is a key component to gathering the financial information needed to run a successful business. Their typical responsibilities include:
- Managing payroll
- Recording financial transactions
- Preparing invoices
- Posting debits and credits
- Maintaining and balancing accounts and ledgers
- Ensuring financial data accuracy
- Communicating short-term finances with relevant colleagues or managers
- Gathering and preparing data and statements for other professionals
Accountants contribute to the long-term financial strategy of a business and their responsibilities could include:
- Using bookkeeping data to provide financial analyses and business insights
- Preparing and filing tax returns and other tax documents
- Advising business owners and managers regarding financial health, compliance, and taxes
- Performing financial audits to verify records and statements
- Adjusting entries and generating financial statements such as income statements, balance sheets, and cash flow records
- Assisting with business loan applications and offering advice regarding interest rates, terms and conditions
Often small businesses will use an employee with limited accounting knowledge to do their bookkeeping. This employee may also have other duties within the office which could lead to haphazard record-keeping. If you choose to use an employee, we recommend that they are trained in your bookkeeping system and that they have regular communication with an accounting professional.
So how do you know when it is time to call in a bookkeeping service? If your business is growing and you want to focus on that growth, a bookkeeper should be hired to help you keep up with the paperwork. If you have a high volume of daily transactions, employees, and basic recordkeeping needs hiring a bookkeeping company to help would be a good option for you.
An accountant may be needed when you need help understanding profitability, cash flow, financial planning, and business tax planning. A good rule of thumb is if you have more complex financial issues, you may need an accountant.
If you are considering hiring a bookkeeping service or if you are unsure what your small business needs, we suggest you call us at Warren Accounting Group and discuss your situation with us. We can manage the needs of most small businesses, however, if you also prefer to work with your accountant, we can provide them with the reports they will need to take a deeper dive into your business.