Tracking Financial Performance: The Bookkeeper’s Guide to Better Business Management

Tracking Financial Performance: The Bookkeeper’s Guide to Better Business Management

Tracking financial performance is one of the most important responsibilities of any business owner. However, for many, managing finances can be overwhelming. This is where a professional bookkeeper becomes essential. Bookkeepers help business owners understand their financial health by accurately tracking assets, sales transactions, inventory, and depreciation—and showing how each impacts overall profitability.

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Why Tracking Financial Performance Matters

Every successful business owner understands the importance of monitoring financial performance. Knowing what the business owns, sells, and earns gives clarity on its value, profitability, and future needs.

Key Reasons to Track Financial Performance

• Determine business worth

• Monitor revenue generation

• Maintain optimal inventory levels

• Support strategic decision-making

• Identify growth opportunities

A skilled bookkeeper ensures these financial insights are accurate and easy to understand.

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Understanding the Accounting Foundations

1. The Accounting Equation

The accounting equation is the cornerstone of accounting:

Assets = Liabilities + Equity

This equation must stay balanced at all times during the accounting cycle.

Real-Life Example

You purchase a business vehicle for $20,000:

• You pay a $5,000 down payment

• You take a $15,000 loan

$20,000 Asset = $15,000 Liability + $5,000 Equity

This simple example demonstrates how purchases impact the equation.

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2. The Accounting Cycle (6 Key Steps)

Every bookkeeping process follows a standard cycle. Although the steps may vary slightly between businesses, the core structure includes six stages:

1. Identify Transactions

2. Record Journal Entries

3. Post to the Ledger

4. Prepare a Trial Balance

5. Adjust Entries

6. Prepare Financial Statements

Throughout each step, the accounting equation must remain balanced.

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Asset-Related Transactions and How They Work

Debits and Credits in Asset Accounts

Assets have a normal debit balance.

Rules for Assets

• Increase an asset → Debit

• Decrease an asset → Credit

Understanding these rules helps maintain accurate books.

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Important Bookkeeping Terminology

To succeed as a bookkeeper, you must understand key financial terms related to assets and revenue generation.

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Sales Transactions

Sales transactions represent a business’s primary source of operating revenue. Income is generated through:

• Selling goods or merchandise

• Providing professional services

• Cash or cash-equivalent sales

• Rental income (for property owners)

Sales revenue is essential for business growth and long-term sustainability.

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Inventory Management

Inventory (or stock) includes raw materials, work in progress, and finished goods ready for sale.

Why Inventory Matters

• Directly impacts sales and cash flow

• Helps meet customer demand

• Affects profitability and operational efficiency

Inventory Balance Challenges

• Too much inventory → Tied-up capital & increased storage costs

• Too little inventory → Stockouts & missed sales

Finding the right balance is crucial for long-term profitability.

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Property, Plant, and Equipment (PP&E)

PP&E represents long-term assets used to operate the business. These assets:

• Provide value over many years

• Require capital investment

• Include buildings, machinery, vehicles, and equipment

PP&E is essential for business operations and revenue generation.

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Depreciation: Spreading the Cost of an Asset

Depreciation allows a business to expense a long-term asset over its useful life instead of recording the total cost upfront.

Why Depreciation Matters

• Reflects the gradual use of an asset

• Impacts reported profit

• Helps businesses match expenses with revenue

• Supports accurate financial reporting

Depreciation Example

If you purchase a vehicle for $50,000 with a lifespan of 5 years, you won’t record a single $50,000 expense. Instead, you depreciate it:

$10,000 per year × 5 years = $50,000 total depreciation

This method gives a more realistic view of business expenses and profitability.

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Final Thoughts

Bookkeeping plays a vital role in helping business owners understand and improve their financial performance. By tracking assets, sales, inventory, PP&E, and depreciation, a bookkeeper provides clear insights that help businesses grow and make informed financial decisions.

Test Your Knowledge: Accounting Basics Quiz

1. Which items that were mentioned qualify as an asset? Select all that apply.?

Vendors that provide the inventory
Shoe-and foot-related inventory for sale
Repair services Bank accounts (checking and savings) Van with mobile repair shop

2. For Sergio's shoe repair shop, what is important about tracking sales and inventory?

Knowing that the customer is always right
Being able to pay the bills on time
Having enough inventory to provide service to his customers and to project how much he'll need for his ongoing business needs Keeping up to date on their customers' lives and needs

3. What does depreciation do?

Spreads the cost of an asset over its useful life
Increases the cost of an asset
Records revenue