WHY ACCOUNTING IS IMPORTANT FOR A SMALL BUSINESS ?

Building a business is just like building a house; if some important elements are forgotten or excluded later on the house might start cracking or peeling off. One of the most important building materials for your small business is accounting. It is very easy to neglect it and just go with the flow as long as you are getting profit but you should be concerned. After establishing the business it could come down crumbling to the floor and this will shutter you and your efforts. Here are reasons why accounting is very important and necessary for your small business:

Recording of transactions

The most important role of accounting is to record business transactions. It would be more than a fatal error to have transactions and fail to record them and then try to remember what happened when you need the information. Recording transactions helps you to keep track of the cash flow so that you won’t run dry. When a customer needs some information on a transaction that took place then you will be in a good position to impress your customer and save yourself some embarrassment.

Determination of performance

When a car is purchased it is crucial to monitor the performance. Over time it can start having weird sounds or engine problems and any other problem can be easily identified and fixed. This is the exact same thing with your business. It is important to compare your current business performance with the past performance. This will help you assess if your business has changed for better or for worse. This will also help you in fishing out some problems and you can fix them before they damage your business. Determining the trend in your business performance helps you to predict future performance under different circumstances and you will be able to make necessary adjustments in time.

Making of decisions

There is no business which does not go through important decision making and it can be heart wrenching when you are not sure if you are going to make the right decision or not.

Accounting saves you from these hot headaches by giving you an overview of how your business is operating. Accounting records determine whether your business is healthy or is struggling with malnutrition. This way you will be able to make decisions which will help your business to continue running efficiently and effectively. Examples of decisions can be decisions on price of product/service, resources needed or decisions on whether a loan is needed.

Control of the business

Accounting helps you maintain control of the business. Some hyenas can be found in your business waiting to grab a chunk of meat when you are not aware. Accounting helps you identify if there are some ambiguous transactions taking place. This protects you from losses you can get from fraud, theft or errors by customers or even employees.

Preparation of business records
Accounting helps you compile business records which can be very useful.

These business records highlight your business and help you when you are seeking investments. With financial records in place there is no need for your blood pressure to shoot when there is an audit for accounting keeps you prepared. Accounting is like a soothing scent which bankers find attractive; so good financial records make it easier for you to get a loan when you need one.

Determination of financial status

No matter how smooth your business is flowing there is always a need to know where you stand. Accounting helps you determine your financial status and this will help you understand whether you are in a good place or not. This financial status helps you keep track of your assets and liabilities. It helps you manage your profits and losses. It reveals to you whether you have over-expenditure or not. Overall; financial status helps you estimate how long your business is going to run for and you can make necessary adjustments.

Budgeting and planning

One of the most common business errors is wasting money. Money can be flooding into the business and if you keep draining little amounts at a time you will one day wake up with a dry huge hole where there used to be a sea. Accounting helps you manage how profits are being used. It also helps in making necessary budgets which restrain unnecessary expenditure without suffocating the business. This also helps you in allocating resources efficiently and planning ahead so that you do not rush into a destiny you are not prepared for.

Legal requirements

Lastly; the law requires financial information to be shared with stakeholders so accounting helps you do that. It also helps you share financial records with tax authorities for any tax deductions.