As a business proprietor, you are likely aware of the various elements needed to maintain a thriving enterprise. One of the essential elements of running a business is keeping accurate records through good accounting practices. But many business owners don’t fully understand the importance of accounting or what it can do for their businesses.
Accounting is the process of recording, classifying, and summarizing financial transactions to provide helpful information for business decisions. In this blog post, we’ll discuss why accounting is so vital for businesses and outline some of the benefits it can provide. We’ll also dispel some myths about accounting that often deter people from using it in their businesses. So, if you’re curious about how accounting can help your business, read on!
1. It Helps You Stay Organized
Businesses must keep track of a lot of different information, and without a proper system, many things may fall through the cracks. It is where accounting can be beneficial. Having a sound accounting system in place will help you keep track of all the different aspects of your business, from inventory to employee records. This information can be extremely useful if you need to refer back to it at a later date. Additionally, having this information organized and readily available can save you a lot of time when it comes to preparing tax returns, marketing plans, and business and sales reports. Managing the data is extremely important if you have a lot of employees or are involved in complex financial transactions. Keeping accurate records can help you avoid problems in the future, such as audits from the IRS. Thus, the demand for accounting professionals has grown in recent years. Many universities now offer master of accounting online or on-campus programs to deliver necessary education and training to students who want to pursue a career in accounting.
2. It Helps You Understand Your Business's Finances
One of the fundamental functions of accounting is providing financial information about your business. This data can be instrumental in helping you make informed decisions about how to allocate your resources. It’s easy to make decisions that might cost you more money than necessary if you don’t grasp your company’s financial position well.
With accurate accounting records, you can track your income and expenses to know exactly where your money is going. This information can help you decide what areas of your business are doing well and where you might need to make cuts. Understanding your business’s financial situation will help you create more accurate funding and forecast future income and expenses. This data is crucial for making sound monetary decisions about your business.
3. It Helps You Meet Your Tax Obligations
Another important function of accounting is that it can help you ensure that you are meeting your tax obligations. It is extremely important, as failure to pay taxes can result in severe penalties from the government. With accurate accounting records, you can track the taxes you owe and ensure you are paying them on time.
Good accounting practices can also help you take advantage of any tax breaks or deductions you may be eligible for. It can support you to save a substantial amount of money, which you can use to reinvest in your business. A certified accountant can help you take full financial advantage of deductions and tax breaks for which you are qualified. Companies hire well-qualified and experienced accountants to prepare their taxes. Most of these accountants have a master’s in business tax or accounting.
4. It Can Help You Get a Loan
If you ever need to apply for a business loan, having good accounting records can be extremely helpful. Lenders will often request financial information from borrowers to assess their creditworthiness. Having accurate and up-to-date records can help you secure a loan more quickly and at a lower interest rate. Additionally, sound accounting practices can help you monitor your debt to keep your payments up to date and avoid defaulting on your loan. With the help of accounting, you can provide all the necessary financial data to potential lenders.
5. It Can Help You with Liquidity
Another essential benefit of accounting is that it can help you with liquidity. Liquidity refers to how easily you can convert your assets into cash. It is crucial because it can affect your ability to pay bills or make investments. With accurate accounting records, you can track your cash flow to know how much money you have available. Many businesses struggle with liquidity, but it is essential to running a successful business. A proper grip on your business’s liquidity will help you run your business more smoothly and avoid financial difficulties.
6. It Can Help You Improve Business Performance
If you want to improve your business’s performance, sound accounting practices can be helpful. Good records can provide insights into where your business is doing well and where improvements need to be made. Good accounting practices can help you track expenses to reduce unnecessary spending and make more money. Many accounting software programs offer features that can help you automate tasks and improve your business’s efficiency. You can use advanced features to track inventory, create financial reports, and manage employee time sheets. Automating these tasks can enhance your business’s bottom line.
7. It Can Help You Stay Compliant
There are various laws and regulations that businesses must comply with. These laws can be complex and confusing, but good accounting practices can help you stay compliant. Accurate records can help you track your income and expenses to ensure that you pay the correct taxes. If your business is ever audited, valid financial information can help prove that you have followed all relevant laws and regulations. Heavy fines and penalties are imposed on companies that fail to comply with the law, so you must do everything possible to avoid penalties.
8. You Can Keep Up With Accounting Standards Changes
Accounting isn’t something that stays static. The fundamentals might stay the same but there are often changes to the accounting standards. Take lease accounting for example. The recent changes under ASC842 might have been missed if your accounting practice isn’t up to date. ASC842 is a new standard issued by the FASB. It governs how businesses (or entities, because it impacts non for profits too) record their lease agreements. In short, the new accounting updates under ASC842 (some say ASC 842) are designed to improve transparency regarding liabilities resulting from lease arrangements and to reduce off-balance-sheet activities. Before, a business might not have had the lease on the balance sheet. But now, there’s no choice. This is a prime example of an accounting change that you should try to keep up with. If your business enters into a lot of lease arrangements, then the ASC842 changes are going to be pertinent and highlights why accounting is important in business.
So, what is the importance of accounting in business? Quite simply, companies need to keep track of their financials and make sound decisions based on accurate data. Good accounting practices give business owners a clear view of their company’s financial health and help them stay profitable. If you’re looking for more details on accounting or need assistance setting up your books, contact us – we can help!