What is the Importance of Accounting?
The main objective of accounting is to record financial transactions in the books of accounts to identify, measure, and communicate economic information. Moreover, tax reporting agencies require you to keep books at a minimum level that tracks income and expenditure.
Accounting is important for small business owners as it helps the owners, managers, investors, and other stakeholders in the business evaluate the financial performance of the business. Additionally, it provides vital information regarding cost and earnings, profit and loss, liabilities, and assets for decision-making, planning, and controlling processes within a business.
What Is the Purpose of Accounting?
Accounting is often referred to as the “Language of Business”. It is a means of communicating financial information to different users for decision-making.
The main objectives of accounting are:
BUDGETING AND PLANNING
Business owners need to plan how they allocate their limited resources, including labour, machinery, equipment, and cash, towards accomplishing the objectives of the business.
Hence, an important component of business management, budgeting and planning enable businesses to plan by anticipating their needs and resources. This helps in the coordination of different segments of an organisation.
RECORDING TRANSACTIONS
The primary role of accounting is to maintain a systematic, accurate, and complete record of all financial transactions for a business. Thus, these records are the backbone of the accounting system. Business owners should be able to retrieve and review the transactions whenever required.
DECISION MAKING
Accounting assists in a range of decision-making processes and helps owners develop policies to increase the efficiency of business processes. Hence, 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, financing, and business opportunities.
FINANCIAL POSITION
The financial statements generated at the end of the accounting cycle reflect the financial condition of a business at that time. Also, it shows how much capital has been invested, how much funds the business has used, the profit and loss, and the number of assets and liabilities of the business.
BUSINESS PERFORMANCE
Using the 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 their competitors.
LIQUIDITY
A common reason for small business failure is the mismanagement of cash. Thus, 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 the detection of bottlenecks.
LEGAL REQUIREMENTS
The law requires businesses to maintain an accurate financial record of their transactions and share the reports with shareholders, tax authorities, and regulators. For indirect and direct tax filing purposes, you also need the financial statements and information.
FINANCING
Business owners use accounting to prepare historic financial records as well as financial projections, which they can use while applying for a loan or securing investments for the business.
CONTROL
By placing various checks across the organisation, accounting helps in avoiding losses caused by theft, fraud, errors, damage, obsolescence, and mismanagement. And so, the internal controls safeguard the business assets and avoid long-term losses.
Why Is Accounting Useful for Small Business Owners?
Poor financial management is one of the primary reasons for small business failure, especially in the first year of the business. Since small businesses have a limited budget and other resources, accounting plays a crucial role in providing information that helps businesses in their growth and development.
For small business owners, accounting is crucial due to the reasons below:
• Accounting gives you a better grasp of the well-being of the business. Furthermore, you can do this by learning to read a balance sheet, income statement, and cash flow statement.
• It helps you detect and avoid fraud and theft by customers, employees, and suppliers.
• Keep track of the cash flow. Importantly, to prevent your business’s cash flow from running dry, you
should implement policies for efficient record-keeping and a sound financial strategy.
• To understand the concepts of fixed costs, variable costs, and how to accurately cost your
project, small business owners can rely on cost accounting. This way, you don’t end up losing
money on a project you thought would be a big earner.
• Bankers are more confident when dealing with business owners who have a handle on the
business finances and understand financial implications.
• When you understand the business finance and dealings, you are better equipped with facing
audits.
Whether you are a solopreneur or employ staff, the key to growing your small business is to review your financial statements regularly and establish a detailed budget that will allow you to discover operational inefficiencies. Saving a little bit on several expenses can add up to big results over the long run.
Why Is an Accountant Important?
As a small business owner, it might be tempting to manage the business finances yourself, but financial matters can be delicate and may require a trained professional to handle them correctly. Professional accountants assist business owners in making smart fiscal decisions while adhering to compliance requirements.
Accounting necessitates huge amounts of data collection and organisation of information in a way that can be easily interpreted by the management. For this reason, business owners need to keep tabs on operating costs, changing revenues, and dividends to make strategic decisions.
Here are some of the key reasons to invest in an accountant for your small business:
• The accountant acts as a financial advisor and helps you with budgeting and monitoring cash
flow on a steady basis. This will allow you to navigate any hurdles that occur in real time.
• It helps you during tax season as accountants can identify potential deductions and help
avoid audits. Based on your unique business needs, we will provide you with customised advice.
• Using a third-party accountant ensures that you’ll receive unbiased information that is
verifiable and objective.
• Analyse the financial data and determine areas for improvement. This is crucial for the long-
term health of the business.
• Prepare financial statements based on the Generally Accepted Accounting Principles (GAAP)
Along with hiring an accountant, business owners are increasingly using online accounting software. The software syncs the accounting system with the banks and helps you understand your real-time cash position. It can also be used for viewing various accounting reports, creating expense claims, and sending invoices on the go.