What is accounting and why is it so important?

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You hear people talking about it all the time, but what is accounting? You know this is an important part of the financial side of your business, but it could go as far as your knowledge grows. Some of you might know what it is and how to do it, but you still don’t know why it needs to be done or why it is supposedly so important.

Therefore, today’s article will walk you through everything you need to know about accounting. By the end of it, you will understand exactly what it is, what the process is all about, and why it is a critical aspect of any successful business.

What is bookkeeping?

In all fairness, bookkeeping is one of the less glamorous tasks a business will ever have to do. It is the systematic recording of all financial transactions of a company. These transactions will be recorded and organized every day, including exits and entries.

Who takes care of the bookkeeping and how is it done?

The management of the accounts can be entrusted to anyone in the company. However, it is usually contracted out to accountants, or a chartered accountant is hired to handle it. The way it is performed will vary slightly depending on who is handling the books. Traditionally, this was done with real books where transactions were noted – hence the term accounting originated. Nowadays, this is usually done through some type of accounting software that allows businesses to track all of their transactions on a daily basis.

Why is accounting important?

The main purpose of bookkeeping is to help you see the financial condition of your business. It gives you an overview of your accounts, showing what you spend and what you earn. However, this is much more important than just a way to view your total account totals. With bookkeeping, you get the following benefits:

Preparation and accuracy of tax returns

Every business has to pay taxes and keeping the books is one way to make the whole process a lot easier. Tracking your whereabouts allows you to see how much money your business has made in the last fiscal year. In turn, this can help you understand how much tax you may have to pay. Keeping a record of your expenses will also let you know what qualifies as a tax-deductible business expense, thus lowering your tax bill.

As a result, you can prepare your taxes much earlier than usual, allowing your business to plan the invoice. This means that tax bills are never a surprise and that you are always in a strong financial position to pay them on time without any penalties.

Budget creation

Likewise, accounting allows you to create a budget that will work for your business. After all, what do you need to know to create a budget? That’s right, your exits and entrances. Accounting shows you all of this, so you can start bypassing transactions to conjure a budget that you can stick to.

This should mean that your business will stop spending too much money and increase its profit margins. By limiting your spending, you can earn more money each month which will always benefit your business financially.

Monitoring of customer payments

Having a history of customer payments is very important to your business. From a certain point of view, it allows you to see if someone has paid for something. So if they ask for a refund, you can quickly check if the money has already entered your account. You’ll be surprised how many customers and clients will try to scam businesses with money by asking for refunds when they didn’t pay in the first place. Accounting prevents this because you have clear proof of all payments made to your business.

In addition, accounting also allows you to see if customers have not yet paid. Okay, this looks like a repetition of the previous point, but there is a nuance to it. In this scenario, your customer does not try to get a refund at all. You’ve completed a service or delivered a product, but they still haven’t paid for it. Naturally, late payments interrupt your cash flow, so you want to kick people out. A good accounting system allows you to find all the leaks in your cash flow, allowing you to let customers know that they still have to make a payment. From there, you can patch the leaks as the money finally arrives.

Obtain financing more easily

For whatever reason, your business may need additional financing. As a result, you will need to talk to the lenders and apply for the loan. Or, you can search for investors who are willing to put money into your business. Either way, having clear financial records helps demonstrate the health of your business. This can show lenders or investors that you are clearly booming, increasing the likelihood of funding being granted.

This is not possible without accounting! If you don’t keep track of all your comings and goings, you will never be able to produce financial statements or demonstrate the financial health of your business. Unfortunately, this will make it much more difficult to obtain financing.

Faster response time

There are times when things happen and your business needs to respond. Without accounting, you will have a hard time reacting quickly to these situations because you do not have an accurate report of your finances. With accounting, you will know if your business is financially capable of responding in a certain way. For example, during the first blockages, companies that used accounting fared much better because they knew the financial situation of their business. They were able to see where the money might run dry and what they can afford to do to stay afloat.

In conclusion, accounting is an essential part of your organization. It’s not the most glamorous or the most enjoyable task, but it can yield a whole host of benefits. Therefore, every small business owner must find a way to keep track of all financial transactions every day.


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