Many clients ask me “Why do I need to spend money on accounting services all year long? Why can’t I just give you my bank statements at the end of the year?”
Accounting refers to the systematic and detailed recording of financial transactions of a business. There are many types, from accounting for small businesses, government, forensic, and management accounting, to accounting for corporations.
Accounting plays a vital role in running a business because it helps to track income and expenses, ensure statutory compliance, and provide investors, management, and government with quantitative financial information which can be used in making business decisions.
- The income statement provides you with information about the profit and loss
- The balance sheet gives you a clear picture on the financial position of your business on a particular date
- The cash flow statement is the bridge between the income statement and balance sheet and reports the cash generated and spent during a specified period
It is critical to keep your financial records clean and accurate if you want to keep your business afloat. Here are just a few of the reasons why it is important for your business big or small:
1) Accounting Helps You Understand What is Happening in Your Business
Your financial records reflect the results of operations as well as the financial position of your small business or corporation. In other words, they help you understand what is going on with your business financially. Not only will clean and up to date records help you keep track of expenses, gross margin, and possibly debt, but it will help you compare your current data with the previous accounting records and allocate your budget appropriately.
2) It Ensures Compliance with Tax Laws
Laws and regulations vary from state to state, but proper accounting systems and processes will assist you to ensure statutory compliance when it comes to your business.
The accounting function will ensure that liabilities such as sales tax, income tax and pension funds, to name a few, are appropriately addressed.
3) It Acts as A “Backup” For an Audit
Proper accounting records act as a backup for all income and business expenses incurred in time of audit. Without good records, tax auditors may be forced to make decisions based on their “best judgement” of what value the income and expenses may be, according to the size, location or type of a business. Additionally, without the proper records, industry standards might be used as a guide in the audit of a business.
Good records shorten the length of time that an audit takes to be completed. If a business is chosen for an audit, the business owner will be asked to produce the necessary backups to the information filed on the income tax return. Once the business operator has produced the proper records, then the tax auditor will be able to examine the records provided and make a timely decision on the accuracy of those records. The auditor, will therefore spend less time at the business or on the audit.
4) It Assists to Create a Budget and Future Projections
Budgeting and future projections can make or break a business and your financial records will play a crucial role when it comes to creating them.
Business trends and projections are based on historical financial data to keep your operations profitable. This financial data is most appropriate when provided by well-structured accounting processes. It has been proven that maintaining clean and accurate financial statements will allow the company to draw higher sales prices if they ever desire to sell.
Finally, pursuant to the Internal Revenue Code all entities are required to maintain a valid set of “books and records”. Maintaining and reporting proper financial statements will allow the company to maintain these required “books and records”
5) It is Critical in order to Make Proper Business Decisions
Business owners need to plan how they allocate their limited resources including labor, machinery, equipment and cash towards accomplishing the objectives of the business.
An important component of business management, budgeting and planning enable business to plan ahead by anticipating the needs and resources. This helps in the coordination of different segments of an organization.
Accounting assists in the range of decision-making process and assists owners in developing policies to increase the efficiency of business processes. Some examples of decisions based on accounting information include the price to be charged for products and services, the resources needed to make these products and services and financing and business opportunities.
Using accounting reports, business owners can determine how well a business is performing. The financial reports are a reliable source of measuring the key performance indicators, so business owners can compare themselves against their past performance as well as against the competitors.
A common reason for small business failures is the mismanagement of cash. Accounting helps in determining the liquidity of a business which refers to the cash and other liquid resources at your disposal to pay off financial commitments. The information reduces the risk of bankruptcy through detection of bottlenecks.
Accounting helps business owners prepare historic financial records as well as financial projections which can be used while applying for a loan or securing investment for the business.