Accounting and financial accounts are an essential part of the day-to-day operations of a small business. Accounting enables business owners and other stakeholders to keep track of the business’ financial performance. Its purpose is to keep a record of financial transactions and provide essential information regarding profit and loss, liabilities, expenditure, cost, and earnings. The success of a small business is dependent on its accounting. It is, therefore, essential that business accounting is kept clear and accurate. This article provides insight into the importance of accounting on small businesses.
Establishing Business Performance
Through accounting, business owners can establish the financial progress of their businesses. Financial records formulated using accounting principles are an essential source of measuring a company’s key performance indicators (KPIs). Such KPIs include profit, costs, expenses, sales, and revenue. Business owners can establish their performance by comparing their progress against their past performances. This way, not only are they able to correct their detected errors, but they can also allocate their budget appropriately.
Determining the Financial Position of the Business
The financial statements or records generated at the end of the accounting period are a reflection of the business’ financial status. They indicate the capital invested in the business, its assets and liabilities, expenses, and profits and loss. It is essential to know that lenders rely on the financial position of a business before financing it. When your small business accounting is impressive, it can be significantly easy to get access to the right kind of business financing.
Facilitation of Planning and Budgeting
Planning and budgeting involve establishing the needs of a business and allocating the necessary resources to meet those needs. When it comes to the facilitation of these processes, business accounting comes in handy as one of the most fundamental tools. With financial accounting, small business owners can meet their daily objectives by allocating their limited resources properly, including equipment, cash, machinery, and labour. Financial records also assist in forecasting the needs of a business by tracing how resources were allocated in past activities.
Enhancing Legal Compliance
Companies and small businesses are obliged to comply with particular statutory requirements, some of which depend on the business’ financial records. To address the tax liability, for example, the accounting function must be well managed. All small businesses are required by law to file certain types of tax, including VAT and income tax. This is why small businesses need to have accurate financial records to ensure that all taxes are filed appropriately.
Determining the Liquidity of the Business
Most small businesses are subjected to failure due to mismanagement of funds. While this happens, business owners are left to pay debts and other commitments from their personal accounts. This is because small businesses that are not registered as companies are not legally recognised to be separate entities from the owners. Accounting helps you to determine the cash and liquid resources that are available to pay debts and other financial commitments. Information on the liquidity state of your small business enables you to minimise the risk of bankruptcy by dealing with bottlenecks in your business.