Accounting is a crucial part of running a business. Many people mistakenly believe that if you are starting a small business, you really do not need accounting. However, this is not true. If you want your business to reach its full potential, you have to follow basic accounting practices. You might find accounting boring, but you cannot avoid it.
Importance Of Accounting
When you start up a small business, you need an accounting system in place. This could help you create a record of all the revenue and the expenditure of your business on a daily basis. Maintaining this data is crucial because you will need it when you file for tax returns. You might also need it for legal purposes. If, in the future, you apply for a loan to expand your business, this data can help you get one.
Another important purpose of maintaining an accounting system is that it provides you with a tool to assess your business’s performance. An accounting system provides you with information about your business that will help you analyze the weak and the strong points of your business. You will realize what is helping your business and what is not.
Once you realize how important accounting is, you will be more than eager to put in that extra effort. Moreover, accounting is not that hard for small businesses. All you need to do is ensure that your financial records accurately reflect your business’s income and expenditure.
Most small businesses maintain their records in a ledger, which is a record of sales receipts and expenditures. You need to transfer all your receipts and expenditures to this ledger. You can do this on a daily, weekly, or a monthly basis. Basically, this will depend on your business.
Three Financial Measures
Accounting for small businesses usually consists of three financial measures: Balance Sheet, Profit and Loss Statement, and Cash Flow Statement.
The Balance Sheet portrays how much your business is worth. This statement will list all your assets (cash, inventories, account receivables, etc) and liabilities (loans, accounts payable, and debts). If done in a proper manner, the Balance Sheet can show you exactly where your business stands. Your ledger will not show accounts payables and receivables; however, your balance sheet will.
The Profit and Loss Statement shows how your business is performing. This statement covers a time period, which could be monthly or quarterly.
The Cash Flow Statement provides an assessment of future cash needs of your business.
So now you understand how important accounting is for your business. If you have been educated in the field of commerce, you might be able to do the accounting yourself. However, if you do not know much about accounting, you can consult an accountant to help you set up your accounting system. Consulting an accountant is cheaper than hiring a bookkeeper.
Another thing you can do is purchase accounting software. It will not only help you keep track of all the receipts and expenditures, but will also help you create quality financial reports.
The bottom line is that as long as you make the commitment to setting some time for your accounting needs and start maintaining your accounting system, you will realize how easy it is.