Why Accounting is Important to the Small Business Community
Most entrepreneurs and business owners are bored by financial affairs and accounting. People generally begin a business to generate a profit, but they lack the skill sets needed to understand how profitability works. This is important because a company can have positive revenues and generate a profit. Nevertheless, without an understanding of the accounting numbers, negative cash flow can ruin a business. Although not all business owners need to know how to create a profit and loss report or balance sheet, all need to understand how to read them when available or obtain the same information from different sets of data. Accounting is much more than just a means to pay taxes and stay compliant. Proper bookkeeping and reporting are about keeping a company in the correct strategic course.
What exactly is accounting?
Accounting is the process by which all businesses organize their financial information to understand their fiscal position. Such records include information on purchases, sales, costs, taxes, and projections, among others. Some businesses seek assistance and hire check printing and mailing services. Even so, these processes generate data and documentation. Bookkeepers and other accounting professionals organize and analyze such data to produce meaningful reports that can help companies determine their economic outlook. When accounting is complete and accurate, business owners will know if their operation is profitable and if there is enough cash to cover liabilities. During this process, company employees will record transactions such as sales, invoices, and other documentation to prepare the financial statements that summarize the activities of the organization.
Importance and needs
A business plan is a roadmap that organizations create to guide the company toward achieving the goals set out. Nevertheless, accounting creates a way to measure said goals and provides guidance toward how to continue the path to success. Furthermore, the numbers that the process generates are more accurate as they allow individuals to assess how a business is developing. Ratios such as the gross margin and net margin allow people to track exact profitability. If a company is not on the correct path, then the figures can give some insight on what areas need adjustments. For example, if the costs of goods sold have increased and such increases are making the operations unprofitable, business owners can use that information to search for better vendors and adjust accordingly. Without accurate reporting, such moves would not be visible to entrepreneurs or company owners.
Accounting is also important to businesses because it is a way to fuel growth while having clarity over the difference between the cash in the bank and actual profit. Although the notion seems straightforward, businesses can generate revenue while also obtaining a false sense of security, thus creating the impression of a financially stable organization. However, there are countless cases where sales do not cover the operation. For example, a business can seem to cover costs by selling product. However, the company may be consuming their inventory to pay expenses while not reinvesting the cost of goods sold back into replenishment. When the company finally attempts to reorder inventory, they discover that there are not enough cash assets to re-invest in product. Accurate accounting will prevent this problem.
Another reason that accounting is important to the business community is that all reputable lending institutions will require financial statements to secure a loan. Organizations like the Small Business Administration (SBA) will ask companies to provide financial statements, banking information, projections, and other pertinent accounting figures to demonstrate the fiscal position of a company. Private investors or potential buyers will also ask for such documentation before considering an investment.
These are just some of the reasons that accounting is important. Companies do face many hurdles in handling these critical affairs. However, for those that need assistance, outsourced accounting firms can help reduce the workload while ensuring that their fiscal documentation is in order.