Accounting is the process of recording the financial transactions of a business. The process includes summarizing, analysing, and reporting these transactions to oversight agencies, regulators, and tax collection entities. It is one of the key functions of almost any business. The reports generated by various streams, such as cost and managerial accounting, are invaluable in helping management make informed business decisions.
Regardless of the size of a business, a well-managed book of accounts is a necessity especially for decision making, cost planning, and measurement of economic performance measurement.
Two important types for businesses are managerial and cost accounting. Managerial helps management teams make business decisions, while cost accounting helps business owners decide how much a product should cost.
When it comes to keeping good records we all seem to acknowledge that things could be done better.
But why is keeping good records important?
Here are 9 reasons why it’s so important.
Allows you to manage and grow your business effectively
No one knows your business better than you do, but reliable information can only be extracted from the records you keep. Good records help you to make better decisions.
Gives you a proper cash flow position
Producing invoices, quotations, and estimates promptly is vital. An early estimate can be the difference between winning and losing a job. Similarly do not rely on supplier’s statements. You need to know before they tell you how much you owe.
Makes it easy to prepare management accounts
Have you ever wondered whether you are making or losing money? You want to know how your business is performing over the years, are you improving, and your plan for the future. With management accounting, you can evaluate your past year’s performance with the present year.
Organized data lets you access information easily.
By being organized you can quickly and easily find information regarding the original order and the goods and work supplied.
Makes it easier to get a bank loan or overdraft
Yes, banks like it when you seek an overdraft for the right reason and at the right time. They obviously would be willing to give it to you if they think you know how to organize your finance. Don’t wait until you need one to ask for it.
Helps you plan in advance for tax payments and other liabilities
Tax planning is for everybody. Set money aside when you have the cash. Or make an arrangement with HMRC in good time.
Avoids interest and penalties by making it easier to pay the right tax at the right time
Well-organized accounts give you a proper idea regarding your payment due dates and help you to avoid the penalty.
Will support your claims to some tax reliefs or capital allowances
What are capital allowances? There are provisions which help you to save a lot of tax and you wouldn’t want to miss that because of not having a proper account.
Record keeping complies with the law
Good record keeping is a legal requirement under the rules of assessment. So, by being organized not only do you have all of the above benefits, but you stay within the law. Complying with HMRC requirements is in fact a very important reason why you should keep good records.
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. For any growing or developing business cash is king. The proper management of cash and cash flow determines how you would prosper in the long run. 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:
- Keep a track of the cash flow. To prevent your business cash flow from running dry, you should implement policies for efficient record-keeping and a sound financial strategy. You must be able to operate according to the requirements of the business.
- · Accounting gives you a better grasp of the well-being of the business. You can do this by learning to read a balance sheet, income statement, and cash flow statement. Let’s evaluate the position, the growth, and the trend shown by the business.
- Helps you detect and avoid frauds and theft by customers, employees, and suppliers
- When you understand the business finance and dealings, you are better equipped with facing audits
- Bankers are more confident when dealing with business owners who have a handle on the business finances and actually understand financial implications
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. “Never take your eyes off the cash flow because it’s the lifeblood of business.”