Why Is Accounting Important For Small Businesses?

The Importance of Accounting For Small Businesses

Many small business owners think that accounting is only for big businesses. Nothing could be further from the truth.

Governments around the world require businesses of all shapes and sizes to maintain an accurate financial record of their transactions and share it with all the stakeholders, tax authorities and regulators. A good accounting system provides business critical information that managers need for decision-making.

Here are some other reasons why accounting is important.

It Keeps Your Business Organized

An effective accounting system accurately records and preserves financial information for future reference. It keeps this information organized. If a company’s financial records are not maintained properly, stakeholders have no way of knowing how much money the business is earning. Lack of accurate, reliable information can cripple decision-making.

Without an accounting system, you will have difficulty keeping track of your cash flow. You can forget what you have paid and what you are owed. As a result, you may not have an accurate record of your business’s profit or loss.

It Paves the Way For Better Decision-Making

Financial statements such as cash flow statements, balance sheets and income statements are a goldmine of financial information. They provide business critical insights that top management can use to make important investment, diversification and expansion decisions. Top management can also use financial information to build a long-term business strategy.

Helps You Secure Investments and Loans 

Before investing in your business, an investor will want to take a look at your financial statements. Businesses that do not maintain their books of accounts have no way to back their claims regarding their revenue and profitability.

If you want to obtain a small business loan, you will need to provide your financial statements for the past three years and a projected cash flow statement. It’s almost impossible to prepare these statements without an accounting system in place.

It Ensures Statutory Compliance

Federal and state governments require businesses to maintain their books of accounts in the prescribed manner. Your books should be accessible, organized and accurate at all times.

A regulating body can review your financial records at any time. If you fail to maintain your financial statements properly, you can find yourself in a legal soup. A robust accounting system and accounting processes help ensure financial statements are prepared accurately and in accordance with the rules.