admin posted on December 03, 2009 13:59
Accounting and Your Business
Why you need it
Accounting is a crucial part of running a business. You might find everything about accounting boring, but it is unavoidable. People often believe that if you are just starting a business or your business is small, accounting is not really important or necessary. However, that is not true. If you want your business to reach its full potential, you have to follow basic accounting practices.
Importance of Accounting
When you start a business, you need an accounting system in place. This will help you create a record of all the revenue and expenses of you business on a daily basis. Maintaining this data is crucial because you will need it when you file for tax returns or for legal purposes. If you apply for a loan to expand your business, this information will be required as part of the paperwork.
Another important purpose of maintaining an efficient accounting system is it provides you with a tool to assess your business’s performance. An accounting system provides you with information that will help you to learn the weak and the strong points of your business.
Accounting Systems
Most small businesses maintain their records on accounting software such as QuickBooks or Peachtree. Accounting software organizes your information for you once it is entered in, and keeps a record of sales, revenue, expenses, banks, and loans. Make sure you enter all your receipts, expenses, and sales. You can do this on a daily, weekly, or monthly basis.
Anyone can buy accounting software, but you may not understand how to use it. Most programs have backup support you can call for help, or you can consult with an accountant who is an advisor for the program. For example, some accountants are QuickBooks Pro Advisors—they may also offer training as well.
Three Financial Measures
Accounting consists of many things, but three of the most important to understand are how to read the Balance Sheet, Profit & Loss Statement, and Cash Flow Statement.
The Balance Sheet portrays how much your business is worth or how “healthy” it is. This statement lists all your assets (cash in bank, inventory, accounts receivables, etc.) and liabilities (loans, accounts payable, and debts). If done correctly, the Balance Sheet can show you exactly where your business stands.
The Profit and Loss Statement shows how your business is performing. It provides information that shows the ability of a company to generate profit by increasing revenue and reducing costs. It is also known as an Income Statement.
The Cash Flow Statement allows investors to understand how a company’s operations are running, where the money is coming from, and how it is being spent—it reflects a company’s financial health. Consult an accountant when reading a Cash Flow Statement because it can be difficult to understand at first.
If you do not know much about accounting, you can consult an accountant to help you set up your own accounting system. Consulting an accountant is cheaper than hiring a bookkeeper when your business is small.