Not having a proper accounting setup can have adverse effects on a business. This can result in mismanagement of resources and can lead to financial losses for a business. For most business owners, time is essential, and they cannot afford to waste it by running their businesses without a proper setup.
Every business should have an accounting department, and this department must be appropriately staffed. Whether you hire a freelance accountant who uses freelance accounting software or when you put up an accounting team for your business, it’s essential to establish a proper setup, so your processes are appropriately managed.
Here are the reasons why it’s essential to have a proper accounting setup:
To Have Proper Documentation Of All Financial Statements
Small business owners should also have a basic understanding of the financial statements that they will be required to submit to different financial reporting bodies. Financial statements are reporting that is given to investors or other people interested in the finances of the small business.
Proper documentation of financial statements is also essential for management and business owners to check the status of their financial situation. The accounting provides information on the income that the business has generated.
Businesses must report their financial performance to meet government requirements and to protect their interests. Financial reporting in the United States is required to meet the requirements for a variety of different things:
- Companies must provide reports that are prepared and submitted within a specific period.
- Companies have to provide an audited accounting with supporting documentation.
- Companies have to use financial analysis in making credit decisions.
When there is proper documentation of financial records, business owners can establish a trend on their sales, spending, and other aspects of the accounting.
To Ensure Business Is Following Laws And Regulations
As said earlier, financial statements are required to be submitted to various government agencies and regulatory bodies to obtain the information that they need. The accounting department’s job is to help facilitate the exchange of information between multiple parties, and it is this exchange that allows for accurate financial information to be available to all.
What should be included in your financial statements?
- Balance Sheet
The information that is contained in the financial statements is what the public will view on the balance sheet. This balance sheet will show the business’s gross and net income and other financial information regarding the company.
The balance sheet will show:
- Assets – things that a business has that are valuable. These items can either be sold or used by the business to make products or provide services
- Liabilities – the amount of money businesses owes to others like bank loans, rent, or employees’ salaries
- Shareholders’ Equity – also called the capital or net worth. It’s the money that would remain after the business sells all of its assets
With these documents, you will be able to know what is happening with the company, especially with regards to the business it is involved in. These documents will also help you determine if there are any problems or issues that the company is having.
- Income Statements
An income statement, or income and profit statement, is a detailed financial statement of a business and clearly shows the business’s profits and losses over a period of time. It is usually prepared for tax reporting and has to be prepared in accordance with the country’s governing agency.
Net income is the most important statement in the financial report as this would show how much profit the company generated from the sales that it had. The net income would show the sales of the business minus the expenses that it incurred in acquiring the raw materials needed in order to produce the products that you sell to your customers.
This part is important for law agencies because this is where income tax is calculated. It’s important for the government to check if the company is paying the right value of taxes from the income they generated from their sales.
- Cash Flow Statements
A cash flow statement, or also called a statement of cash inflows, is a numerical description of an account that documents the flow of funds in and out of the business. The purpose of financial statements is to provide management with information about the operating, business, and cash collections for a company. The information provided is used by management to make decisions concerning strategic and operating issues.
To Prove to Investors That Business Is Financially Stable
Why do investors need to read financial statements? They are used as evidence for a variety of things when it comes to making an investment decision. Investors can use them to help them determine the value of a particular stock, the risk of buying a certain stock, and the viability of a business’s plan.
An investor would want to invest money in any company that shows growth potential. In such cases, an investor would like to see the trend analysis, development reports, profits and loss reports, and other such reports to determine whether the company is earning more than it is spending. To develop such systems, a proper cash flow cycle is essential that leads to profit generation.
To Help Management Team Make Important Decisions
The importance of accounting in business is illustrated well by the way; it improves the company’s performance. For example, the management team will see that the industry is spending too much on marketing, but the sales aren’t increasing as expected. They can make the necessary changes to the marketing strategies or make budget cuts to increase the revenue.
This is because the recorded financial data provides the necessary information to the management regarding the organization’s performance and the kind of efforts made to achieve the goals or the objectives. This helps to improve the organization’s management, and they can make quick decisions, which will have a significant impact on the business.
Whether you’re starting a company at home or going for a significant venture, having a proper accounting setup is crucial for your business. Accounting in business plays a pivotal role because it gives so much useful information about the organization that accurately assesses the businesses’ performance.
With proper accounting systems in place, managers can easily make informed decisions, and this helps the managers to achieve the organizational goals by adequately aligning their resources with the objectives. Without any accounting system, it becomes difficult for managers to evaluate and determine where the weaknesses lie to take remedial measures.