The Importance of Accounting for Small Businesses
Bookkeeping is necessary in any business. As a small business owner, it’s important to recognize that the best practices used by Fortune 500 companies also apply to you. Following basic accounting principles is essential for success in any size business; savvy record-keeping and financial analysis is key to not only monitoring your expenses, but to discovering new avenues of growth. In addition, it ensures you stay responsible for tax obligations to the government and to your employees.
Accounting entails more than just managing credits and debits, and it comes into play more often in everyday business decisions than you may realize. A few examples include:
- Closely monitoring your accounts receivable to illustrate trends or behaviors in your customer base. It can also cut down on the costs you incur by pursuing late payers.
- Establishing a detailed budget to help discover inefficiencies within your operations.
- Sudden changes in vendor costs or sales revenues can alert you to important industry changes.
- Understanding your financial position in order to spot problem areas that could interfere with loans earmarked for expansion.
As you consider your accounting strategy, review your company’s financial goals. Whether you are a solo entrepreneur or you employ a staff, your survival hinges on clearly stated financial objectives. You may be in business to reap as much profit as you can, or you may be interested in sharing a product or service that you believe in. Either way, experts agree that one of the most common reasons small business fail is because cash flow runs dry. To prevent this disaster, your business should implement policies for efficient record-keeping and a sound financial strategy.
Taxes are unavoidable. Depending where you operate and the nature of your business, the IRS has very specific requirements about the documentation you’re required to file. Submitting improper or inaccurate documentation can get you into trouble, and it can be extremely costly in terms of fees and penalties. Preparing the required tax documentation has its benefits though, and it can give you vital information about the health of your business. Monthly or quarterly financial statements, cash flow statements, and asset and income statements can provide a clearer picture of your business than your bank balance. Understanding IRS requirements and how you can make them work for you can give you a deeper understanding of your company’s financial health.
What information should I be tracking?
If you haven’t had formal training in accounting or are more interested in other aspects of your business, keeping meticulous records of financial data can be a chore. Furthermore, understanding precisely what information you should be tracking can be overwhelming and confusing. Most small businesses should track the following categories of data:
How should I track these metrics?
Though it’s quite common for small business owners to have a spouse or family friend “do the books,” effectively managing your small business’s finances goes beyond bookkeeping. Properly strategizing for your company’s future, as well as meeting your legal requirements, is best achieved with professional accounting methods. This is particularly true if you’re too busy or too uninterested in the nitty-gritty details to analyze the numbers. At this stage, successful small businesses consider either outsourcing their accounting needs or investing in accounting software. Each option has its pros and cons.
For many startup companies, funds are tight and it may be tempting to pursue the cheapest method. Because your legal requirements are only due once per year, you may choose to ignore it all until tax time every spring. Remember, if you choose this option, you’re essentially opting out of receiving crucial data that can encourage success. The short-term solution may not be the best one, and it pays to do your due diligence when making this critical decision.
Tech-savvy business owners or those familiar with accounting principles may be drawn to accounting software. From a time management standpoint, digital bookkeeping is a vast improvement over manual calculations. These applications automatically crunch numbers, perform data entry, track performance metrics and produce business reports. Once your data is entered into an application correctly, the accuracy of the software’s calculations is virtually guaranteed; this can be a comfort in the event of IRS scrutiny.
More advanced versions integrate with other office management programs, display data trends, pay accounts receivables, remit invoices or ensure that you’re meeting tax requirements. Extensive data storage within an application like this also increases your company’s efficiency, allowing access to details like payment history with a few keystrokes.