Taking accounting seriously is often the difference between a business being successful and having to call it a day, filing for bankruptcy. In a report carried out by Ormsby Street four in ten small companies don’t make it past 5 years. The reason they often fail is down to them running out of cash. They run out of cash because they don’t often understand the financial drivers in their business and end up spending money they don’t have, neglecting factors such as gross and net margins, and most important their break even point.
If most of those small businesses who didn’t make it past 5 years invested in accounting at the start, then they would probably not have to end up filing for bankruptcy.
How accounting is important in business
In our opening paragraph we touched on how accounting helps in business, but let’s investigate why it is so important.
Analyse business operations:
There are many different reasons why accounting is important. Firstly, assessing accounting information gives business owners the chance to analyse the overall efficiency and effectiveness of their business operations. To determine just how a business is doing in this area, prepared financial statements can be compared with industry standards.
Accounting can also be used to create trends for analysing and forecasting future sales, by looking at historical financial statements.
Getting backing from banks:
To get backing from banks, lenders or investors, business owners often need to provide a financial forecast. If a business wants to receive outside financing, this information is essential. In addition to forecasts, some may even require a business plan including economic forecast, expected expenditures and pro forma financial statements. All this information gives banks, lenders and investors a good indication that the business owner has an accurate and reliable picture of financial expectations.
A very important factor of accounting is the creation if budgets. Budgets are essential as they outline what is needed for various areas of a business such as advertising, hiring staff, materials etc. that need to be purchased. Budgets stop business from overspending and will help avoid wasting money on non-essential expenses. Budgets are also great for historical data too. Budgets show how and why a business has spent money in relation to producing or offering goods or services.
Accounting can also indicate to a business just how profitable it is. There is no use in just being able to generate high amounts of sales revenue if profits are down, as this is just a recipe for disaster. Business owners should understand just how well they are utilising assets to generate services and cost of inventory, when compared with the company’s profit margin. Those who are investing in your business also require this information so that they know they will be repaid over an adequate time period.
Essential business information:
Lastly, accounting lets business owners know essential business information such as their break even point, gross margin and net margin. Knowing the breakeven point is crucial, as you know just how much your business needs to make on a monthly or annual basis to breakeven, highlighting how much more you need to generate to make a profit. Your gross and net margin is just as important; keeping an eye on margins is a key indicator of how your business is performing and will help in your setting goals and targets.
What are the different types of accounting
Most small businesses will start as a hobby or a project on the side and will often use cash basis accounting. This is a simple method where transactions are recorded and recognised when cash changes hands. In the infancy stages of a business this can provide a simple solution for business owners to maintain accounting information.
However, as a company develops and grows, cash basis accounting will have its limits meaning a more complex method will need to be adopted. This is where accrual accounting comes in to play and records and recognises transactions as they occur.
In addition to accrual accounting, to survive and succeed business owners should consider using a mixture of management and financial accounting when it comes to assessing their business operations.
When we talk about management accounting we mean:
- Allocation of business costs to goods or services
- Creating budgets for business function
- Preparing financial information for business decisions
When we talk about financial accounting we mean:
- Listing sales revenues
- Cash flow – probably the most important as you can keep on top of what is coming into your business and what is coming out. If more is going out, then coming in you know you have an issue!
Do you need an accountant for a small business?
As a small business you may see hiring an accountant as another expense that you can avoid, however, the saying goes that behind every good business is a great entrepreneur, but behind them you’ll often find an expert accountant.
Turning an idea into a business and handling the accounts is a completely different ball game. Not only do you need the expertise and knowledge for accounting but also time. If you asked any business owner what they would wish for, we bet that the answer would be more time. With running and growing a business, do you really have the time to do your accounts? This is where an accountant comes in.
Business accountant definition: Collins dictionary defines business accountant as: the keeping of detailed accounts relating to a business or businesses.
What does an accountant do for you?
Fundamentally an accountant will help free up your time and give you peace of mind that your finances are in safe, expert hands. However, there is a difference between your standard accountant and a good accountant.
A standard accountant will make sure that your finances are in order and your business is doing everything by the book, a good accountant will do so much more.
A good accountant will have an invested interest in the success of your business. A good accountant will always be there for you and will do everything they can to help. They will save money, reduce risk, comply with regulation, manage growth and plan ahead. An accountant sort of acts like a business advisor. Most decisions will have a financial impact, so it only makes sense that you speak with your accountant.
What are the responsibilities of an accountant?
Let’s have a look into some of the responsibilities that an accountant has:
- They will make sure you are paying the right amount of tax (business owners don’t want to end up paying more tax than required however you can get into trouble if you pay not enough. An accountant has the knowledge and experience to confidently make sure that you are paying the right amount).
- He or she knows a lot about tax and the law meaning they can help you to reduce your yearly tax bill. Accountants know all the legal ways in which taxes can be reduced e.g. government incentives, allowances, expenses or even how income is drawn from your business.
- They can help from the very start in setting up your business. Accountants can go over business plans to make sure you have solid foundations in place and that all figures and forecasts are reliable.
- Accountants can take help you to manage your workload. Hopefully your business really takes off meaning that you need to spend your time on other areas than your finances. Also, as businesses grow, finances become more complex. Both good reasons to get an accountant on board.
- Let an accountant take the burden of making sure your business is compliant with government regulation. Compliance takes time and mistakes can easily be made which can be potentially very damaging.
- When looking at ways to grow, most businesses will need to look for additional funding. Those investing in your business will want to know they’ll get a return on what they invest. Accountants are essential in presenting a strong financial case to these stakeholders.
- Whilst sudden growth is exciting, it can also be problematic causing issues for office space, cash flow, tax etc. Accountants can help you to react quickly in these situations and turn it into a positive advantage.
- Some larger businesses are required to be audited. Even though not required, an audit on a smaller business is a great way to make sure you’re on course for hitting our business growth goals and targets. For both situations, accountants are a must.
- Accountants should always be the first people you turn to when you are deciding to buy or sell a business. They will assess all the practicalities and make sure the target businesses accounts are all above board.
- Accountants are great to turn to when you need business advice. With working with different businesses in different industries, they are a great resource when you are facing problems and challenges. They can give unbiased advice on ideas and help you to assess risks and make the most out of opportunities.
If you would like to discuss anything in this blog, fill in the form below and we will be in touch. Alternatively call to speak to one of the team on 0333 200 0714.
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