Unless you want IRS penalties and audits, you know you have to do it. Without it, you wouldn’t know your business’s financial health. Your business decisions would be shots in the dark. We’re talking about accounting, of course.
So, how does accounting protect your business, gauge its health, and help you make decisions? In short … why is accounting important in business? Let’s count the ways.
Why is accounting important in business?
Accounting and business go together like peanut butter and jelly. You can’t have one without the other. But why?
Take a look at the seven reasons why you need accounting below.
1. Accounting keeps you organized
Why is accounting important, you ask? Without accounting, you wouldn’t know how much money your business has earned. You could easily forget how much money you paid out. And, you wouldn’t remember how your current profit or loss compared to the previous quarters’.
Which customers haven’t paid you? Wait, what debts haven’t you paid yet? If you use accrual accounting, you (should) know exactly how much your accounts receivable and payable are.
In short, accounting shows you exactly what your business has been up to when it comes to finances. It keeps you organized so you can accurately and legally fill out your tax return, which we’ll talk about next…
2. It backs up your tax return claims
Many business owners dread small business tax filing, especially if they have no idea where to start. Here’s where the importance of accounting in business comes in.
Step one of filing your tax return is gathering financial records. Without these records (e.g., financial statements), you won’t be able to enter the correct numbers onto your return.
But because we touched on this above, we’re going to dive into the second part of accounting and filling out tax returns: the dreaded audit. If you get audited by IRS, what happens? You need to show them that you’ve done your due diligence and have the necessary accounting info to back up your return.
3. Accounting holds you accountable
If you have shareholders in your small business, you know how important it is to show rather than tell. Accounting does just that.
Your shareholders hold you accountable for the success of your business. They can observe your business’s growth and success by looking at your accounting records.
On another note, accounting can also help you hold your employees accountable. Keep up-to-date on things like reconciling bank statements and performing trial balances. That way, you can catch fraudulent activity before it takes too much of a toll on your business.
4. It guides decision-making
Should you buy that brand new, top-of-the-line printer for the office? Well, that depends on whether you can afford it.
OK, how about your expenses? Is there anything you need to cut to help your business’s bottom line? That depends on how much you’re spending and on what.
To answer questions like these, you need to look at data—your accounting records, to be exact. Accounting can help guide the decisions you make so you avoid common business mistakes, like:
5. You can measure new strategies with hard numbers
Before you make a change in your business, you likely conduct a risk analysis for small business. That way, you can determine whether taking that risk could benefit or damage your business.
But what about after the risk? Don’t you want to analyze the effects of taking a risk (i.e., making a change) after you do it?
Accounting can help. You have the numbers showing your business’s expenses and revenue before the change. And after you make the change, you can compare the numbers. That way, you know whether your strategy helped or hurt your business.
6. It’s necessary for getting investments or loans
Investors and lenders need to learn a little bit about you before they invest or lend you money. And that means poking and prodding into your business’s accounting books.
Generally, you must show investors and lenders your business’s financial statements. That way, they can obtain information about your profitability.
Without organized accounting books, your financial statements, financial forecasts, and profitability claims won’t be accurate or have any backing.
7. Without it, you’re in trouble
Handling accounting for your business isn’t a choice. Although you can choose how you want to do it (e.g., outsource, use software, etc.), your business must have an accounting system in place.
The IRS requires that you choose a business structure and accounting method. Without it, your small business tax return will be inaccurate. And you know what that means … IRS audit red flags and penalties.
In addition to keeping detailed records, you may need to follow a set rulebook for accounting, known as generally accepted accounting principles (GAAP).
If you see the importance of accounting, here’s what to do…
Do you recognize the importance of accurate accounting? If so, you can take these steps to keep your business in shape:
- Choose an accounting method (cash-basis, hybrid, or accrual accounting)
- Keep accurate books (use software to easily record transactions)
- Create a budget based on your records
- Have protective systems in place (e.g., trial balance, bank statement reconciliation, etc.)
As any small business owner would tell you, business success doesn’t come from laziness. So, avoid getting lazy when it comes to your accounting books. Happy accounting, entrepreneurs!
You can’t skip accounting … but you CAN make it easier. With Patriot’s online accounting software, you can import bank transactions into your ledger, send estimates, reconcile your bank statements, and so much more. Start your free trial today!
This is not intended as legal advice; for more information, please click here.