THE IMPORTANCE OF BOOKKEEPING
Bookkeeping is essential for small businesses, companies, organisations, and other institutions that keep electronic and physical records. Bookkeeping ensures a company's financial and other related transactions are organised for future reference and efficient analysis. It is considered an essential part of accounting and financial analysis within a company. In the modern world, different approaches have been adopted in bookkeeping. While some businesses still use the conventional approaches like pen and paper, others use modern technology including online storage platforms such as cloud and Google Drive, among others. This approach is crucial as it improves the accessibility, portability, and security of a company's financial and accounting records. Also, the use of third parties to conduct bookkeeping processes for clients are increasing as it reduces company workload, reduces storage cost, and promotes security, in cases of a loss of company files due to uncertainties like a fire.
Firstly, this case compares the bookkeeping of both a self-employed business and a limited company. Secondly, it also addresses the benefits of using modern technology to promote cloud computing, particularly adopting cloud-based accounting. Thirdly, it outlines the importance of using a third party to conduct the accounting process, and finally, addresses the importance of controlling customers' cash flow as a bookkeeper.
A limited company is a business entity that can be owned by many individuals or entities in the form of shares. It offers many advantages to its investors, making it one of the best legal business structures. In terms of accounting, all limited companies must disclose their books of accounts, other financial information, and transactions to the public. The availability of such information subjects a limited company to scrutiny. Additionally, investors and other stakeholders use this crucial information to make more informed decisions. A limited company has both advantages and disadvantages. A limited company can be owned by many individuals or businesses meaning it minimises personal liability, thus protecting personal assets from losses and other risks incurred by the company (Rapid Formations, 2022). Another key advantage is that a limited company is tax efficient compared to personal entities. In the United Kingdom, for example, a limited company pays taxes worth 19% on profits, while sole proprietors pay between 20% and 45% on their profits, (Rapid Formations, 2022). Also, in being a separate legal entity from the owner, both creditors and other issuers of liabilities will only claim assets from the company without touching the investors' assets. This further makes it a desirable and more secure option for investors.
Some disadvantages of a limited company include bankruptcy declaration, payment of incorporation fees, and disclosure of personal and corporate information to the public (Rapid Formations, 2022). Also, the accounting process in public companies is more complex and time-consuming considering that it is subject to accounting principles and standards, unlike a self-employed business.
A self-employed business is a type of business made up and operated by a person or group of people where the founder(s) of the business are the boss(es). One of the key advantages of a private company is autonomy in the decision-making process. In this case, the founder of the business can make investing, operating, and financing decisions without consulting other external parties or stakeholders (Reddy, 2016). Also, during decision making, self-employed businesses are not required to follow set standards and principles when reporting their financial information to the government and other authorised agencies, nor are they liable to make available to the public their financial and non-financial information (Reddy, 2016). Due to quick decision-making, new business opportunities can easily be identified and the execution of new business projects is easier and faster compared to a limited company.
One key drawback of a self-employed business is that the owner pays more in taxes than a limited company. This implies that such businesses are comparatively less profitable. Also, unlike the case of a limited company, a sole trader is not separate from the business. This means the owner is responsible for any liability the company incurs. This means that the business is exposed to many risks, which potentially, can lead to bankruptcy.
Having compared these business models, it is important to take discuss the role of cloud computing and other online accounting platforms in bookkeeping. Cloud-based accounting is supported by cloud accounting software. The software resembles the traditional, self-installed, or on-premises accounting software (Financial Force, 2022). The difference, however, is that this form of software is hosted on remote servers. One of the key reasons for adopting cloud-based accounting is that it is flexible. As such, one can access the accounts from anywhere and any device connected to the internet, unlike the traditional approach where access is restricted to a few computers within a premises.
Another significant advantage of cloud-based accounting is that it is automated (Financial Force, 2022). In this case, the account automatically updates when some accounting information or data is added, making records more accurate, and information more reliable in real-time. Also, cloud-based accounts tend to accommodate multi-company and multicurrency transactions more effectively and efficiently. Another advantage of cloud-based accounts is that they are cost-effective. Since businesses are required to set up technology and accounting infrastructure on their premises to promote the accounting process, such infrastructure is associated with significant setup and license costs, which can negatively affect the company's cash flow statements (Financial Force, 2022). With cloud-based accounting, the company only requires a sufficient and reliable internet connection and minimal infrastructure to support cloud accounting.
In business, consulting a third-party firm is essential. The third-party firm provides additional knowledge and backup information to enable a company or business to make informed accounting decisions. For instance, one reason for using a third-party in accounting, is to allow the business to maximise its returns through tax deductions. A third-party accounting firm, for instance, has sufficient experience and knowledge of different activities and processes that would enable the company to maximise its returns from the books of accounts.
Employing a third party in such processes is crucial as it can aid in strategic planning for these deductions, while informing the company or business on how such deductions have been tracked over the year. Another reason is that third parties make better decisions that can improve business performance in the long run. Finally, using a third-party is crucial as it saves time and money for a business owner. In this case, a company has time to focus instead on other issues within its strategic plan.
CASH FLOW MANAGEMENT
The last aspect of this case is to evaluate the importance of an entity or premises in controlling client cash flows in a business. Experian (2021) notes that cash flow management is the most critical process in business as it enables a company to understand the cash flow that enters and exits a business. In this case, a healthy cash flow is the one that enables a business to settle its' expenses, depreciation, amortisation, tax, and any other deductions, but remain profitable. Managing a client's cash flow is vital as it provides them with a picture of the financial state of a company in terms of costs and revenues. It also enables a company to ensure sufficient funds to finance its current expenditure, including paying bills, while still making some profit.
Another purpose for proper management of client cash flow is that it gives a clear projection of the account’s payables and receivables and monitors the level of credit that would threaten the business' existence (Experian 2021). Also, cash flow management enables a client to understand the intrinsic value of their business. For example, a company can project its future cash flow and then discount it to the present time to understand its expected value. Such valuations are crucial when performing essential business operations and deals such as internal decision making, investment recommendations, mergers and acquisitions, and business selling.
Financial Force. 2022. Cloud Computing Software.
Experian. April 2021. Why is cash flow management important?
Rapid Formations. 2022. Limited company advantages and disadvantages.
Reddy, C. 2016. Self-Employment Advantages and Disadvantages.