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Why Accounting is important to small businesses?

Updated: Aug 22, 2021

It is the key to success in any business size.

Accounting is essential to every business no matter its size. It is the key to your business success if you know how to use it and implemented it into your business. Accounting provides you with valuable and relevant information about your business. It will let you know how the business is doing.

It will indicate possibilities with causes and effects, and it will definitely show you if anything needs to be changed. It is one of your best mentors because it will always tell you the truth in time for you to make decisions that matter to the path of your business success. Accounting has the feature to prevent failure, by flagging to you in red or parenthesis topics you need to deeply analyze and changed. If you take your business seriously, you need to take time to implement an accounting logistic that is reliable and consistently generating data. Don’t rush your business, take the time of taking each step plan, calculated and strategized.

Bookkeeping - Financial - Managerial - Income Tax

There are four fundamental parts in Accounting you must learn how to master and implement into your business. These are all important and dependent on each other. You need to create a foundation based on best practices and standard ethics to form, managed, and direct each of these fundamentals into your business. This is where your source of information will come, and you want the truth as soon as you can get it. It is very easy to be excited about your business and listening to great reviews and knowing you have a good product or service. Yet, the numbers could be telling you that you are not quite where you believe or wish to be. This is why accounting is so imperative, it lays the path so you can see where you are in the present moment with the information from the past to where you are leading into the future. It will answer all your questions throughout your journey without you having to improvised and hope for the best.

Bookkeeping -

This is where it all begins. You have to collect, gather and organize information to record all the information systems to have the actual blueprint of your business to make better decisions.

You need to have it recorded in order to make sophisticated decisions. You need to log all your actual related transactions toward the business; from the initial corporate registration fee, the logo creation, the website cost, leases, furniture, office supplies, all of it. You need to know how much is all costing you versus how much stays as an asset to be depreciated with time, and how much are you either putting in Equity or accumulating debts (liabilities). All are important to record from the beginning on.

In the beginning, you might act as a bookkeeper yourself at least until it becomes too time-consuming.

Make sure to get good accounting software. There are many accounting software, SAGE and Quickbooks are most popular because they are simply designed to understand all the fundamental aspects needed to be able to compass the four essential fundamentals hereto explain.

If you can’t at the beginning do the bookkeeping in-house, make sure you outsourced this service. A good reputable bookkeeping service agency knows how to organize, set up your software, and record your income and expenses transactions to substantially provide you with important information as the liquidity of your business.

Financial Accounting-

Financial Accounting keeps track of a company’s transactions. It will present you with a Balance Sheet and a Profit and Loss Statement. These are summaries of all the transactions recorded. It is a snapshot of your business at a certain period. This is where we start seeing the results of the bookkeeping of records, that is why is so important that from the beginning all is recorded accordingly. Financial accounting shows the economic results to other people on how you are doing. It shows what economic resources you have. It is a summary to verify your economic income and obligations. The key external users are lenders and investors, those who provide capital to a business.

This will show do you have assets, do you have resources, do you have an investment account, do you have cash in the bank, do you have any loans, do you have debt. Your partners, coming investors, lenders are going to be comfortable, will trust to loan money toward your business, if they can verify your income and the health of your business. This information is to establish the future of where the business is going taking into account where it is in the presence.

Financial accounting helps with analyzing a certain period of performance. It highlights each type of income, cost, and expense is being proportionated throughout the operational finances of the business. Where the money is coming from and where is going towards.

Managerial -

The more you know the better you could be. This is the most exciting data information you need to be at the top of when running a business. It is the detailed secret data in the organization to help you to make a business decision about running your business.

This accounting data are used internally to make daily decisions that are crucial for the evolution and growth of your business. This information is not shared outside. If done well, can be a competitive tool to beat your competition. Because you know what is vs what is not working. For example, managerial accounting will provide you with an analytical view to answer questions like: how many employees should I schedule? at what times and days should I scheduled my employees? is the price of my product or service need to go high, stay or decrease? what is my customer's feedback? what are my customer's preferences? Where is the revenue going to? How can I project which product or service I need to focus on? Should I expand? Should I cut it down? You see managerial accounting can answer all types of topics within the scope of your business. You can ask any question to make a decision and through managerial accounting, you will have the answer.

This information lets you know your precise cost, your profits, you can decide what is selling more, when you can have discounts, you can tell when you need more staff. You keep track of your clients. You have smart control smart of the business.

You can create a budget with different types of decision-making information. Many businesses failed because they ignore this important part by not having a budget and a cash flow analysis. It is important to have a system to evaluate different parts of your business.

Income Taxes -

Bookkeeping gathers the raw data to convert it into Financial Reporting to show the business performance, helping investors and lenders more likely to invest in your business. Now we move to the end-of-year reporting, the Income Tax reporting. Income Taxes makes sure you are in compliance with the law to satisfy our legal obligations. We use the bookkeeping data to provide the information required by law. Its objective is to recognize the amount of taxes payable or refundable for a period and deferred tax liabilities and assets for the future tax consequences of events that are present in business financial statements. This is simply if you report a cash basis or accrued basis. Perhaps your financial statements show an income that you yet haven’t received so you choose to pay taxes you owed when you actually received the money not before. Your initial bookkeeping is essential at this stage because it should have allocated the recorded transactions in a manner that it's clear the transactions that are allowable to deduct when is time for Income tax reporting.

Remember you don’t want to have a business improvising every decision, implement a structure to maintain an accounting flow as the foundation of your business so you can always find the answer.

Even if you outsource, take time to learn these basic principles and all related to managing a business so you are prepared to direct and make smart decisions.

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