Poor accounting practices can be very costly for businesses. Some of the adverse implications of not getting it right include:
• Financial Irregularities
• Distrust from Investors – Making it difficult or even impossible to attract new investors or even maintain old ones
• Reduced Credibility from Various Parties – Such as customers, partners, stakeholders, and suppliers
• Audit Troubles
• Financial Distress
What this proves is that every serious-minded business needs to take this aspect of running their business seriously. You can see Profitwise Accounting for more insight into this. You can also find additional, helpful information aside from what we will be discussing.
In this article we will discuss some accounting essentials for business success. Business owners (most especially) are advised to pay keen attention to the details shared.
Business Accounting Basics
Overall, accounting is about the proper handling of financial transactions through proper recording, summary, and analysis of executed transactions. In the long and even short term, doing this puts a business’s finances in a good state and shape. It achieves this by enabling strategic planning through the provision of insightful financial data.
Some people confuse bookkeeping with accounting. Although related, they don’t mean the same thing. Their relationship is in the fact that bookkeeping is a part of accounting as it only involves the recording of financial transactions in the form of generated income and expenses.
Accounting is more than just keeping a record of such transactions. It is equally about analyzing them and ensuring regulatory compliance, among other things. So, it is safe to say that bookkeeping is the building block for general accounting.
Essential Accounting Practices for Business Success
Proper accounting practices increase the chances of actualizing business success. This is because it ensures:
• Efficient Cash Flow Management
• Financial Visibility
• Informed Decision Making
• Tax Compliance
• Profitability Assessment
• Fraud Prevention
• Investor Confidence
• Informed Performance Evaluation
Considering how all of the above-listed are in a business’s best interest, we will go ahead to discuss some essentials that can help you achieve them
Accurate Maintenance of Financial Records
Bookkeeping, which is the recording of all sorts of business-related financial transactions, is the building block for accounting success, as mentioned earlier. Given how important it is, timely and accurate recording and maintenance of these records are important as a lot depends on them. It is therefore not a good practice to delay these entries as they need to be compiled on time.
Finance Separation
Financial confusion is bound to (or at least likely to) happen when business and personal accounts are merged. By the way, this is not even appropriate, even if there is a guarantee that this would not happen. For one, the formality of a business that has its official account as its owner’s account is likely to be undermined.
Furthermore, the finances of various arms/departments of the company should be separated. This is even if a sole account is used for all or several purposes. Aside from other benefits, doing this makes financial data analysis a lot easier.
Efficient Cash Flow Management
Cash inflow and outflow are the two sides to cash flow, and there is a need for a healthy balance between both. The outflow needs to be sufficiently less than the inflow, especially in the long run. The business’s sustainability is not guaranteed without this.
Chart of Accounts Setup
Financial information needs to be properly organized. This is crucial, especially for easier monitoring and reporting.
Financial Statements Business Owners Need to Know
While there are professionals whose services should be deployed in your business’s best interest, business owners still need to be aware of some accounting basics. In addition to what has already been shared above, there are financial statements that business owners need to know about. Partnering with an experienced audit firm can also give businesses deeper insights into these financial statements, ensuring accuracy, transparency, and compliance while helping owners make more informed decisions.
Some of them include the following:
Balance Sheet
The ability to interpret a balance sheet translates to an understanding of your business’s assets, liabilities, and even equity. In essence, it contains financial data that helps owners see their business’s financial state from a vantage point.
However, it is one document that should be updated regularly. This ensures the accuracy of whatever is interpreted.
Income Statement
It is equally known as a profit & loss statement as it makes revenue and expense tracking possible. In essence, interpreting this finance statement makes it possible to measure your business’s performance from the viewpoint of profitability.
Cash Flow Statement
This finance statement ensures that owners have a good idea of their business’s cash flow by monitoring how much goes in and out at every given time. An understanding of how to interpret this finance statement is especially important for liquidity management and investment planning.
Importance of Business Accounting
Poor accounting practices can be the difference between a bankrupt or failing company and one that is thriving. This underscores the importance of paying due attention to this aspect of running any business. Some of the reasons why this is necessary include the following:
Staying on Track
There is a difference between making a good business decision and making the right business decision. Unfortunately, ignorance about this difference is one of the reasons why some businesses are struggling to stay afloat.
Well, the right business decision is a good one, but it is also timely and in line with the present realities. Against this backdrop, you should know that business accounting puts your organization in a good position to stay on track by making the right decisions, and not just good ones. Most importantly, it ensures that your budget is informed by your revenue.
Budget Adjustment
If unforeseen circumstances unfold, it also makes it possible to make swift and informed budget modifications. In short, financial decisions that reflect the changes can be made.
Wrap Up
Business accounting is too important to be taken for granted. As a result, it should be paid due attention. You can click here for more on this.
To achieve this, there are two recommendations that we will leave you with. The first is to hire accounting professionals, while the second is leveraging technology for the same purpose. Thankfully, there are specialized accounting agencies that offer businesses both. Such agencies should be hired for the sake of proper handling of business finances.
