Proper accounting is so very important for any business, but it is especially true for smaller businesses with limited resources. Many new entrepreneurs do not fully comprehend the value of establishing sound accounting practices right from the very beginning. Nevertheless, maintaining orderly finances and financial records is absolutely vital to the health and longevity of a small business. There are several big reasons small business owners need to make accounting a top priority.
One of the most pressing reasons small businesses need orderly accounting practices is so that they can remain compliant with financial regulations. Businesses of all sizes have legal obligations for their accounting and financial reporting. Regulatory requirements, though, are usually less stringent for small businesses.
For example, small firms are often exempt from specific audit and reporting mandates applied to public companies. Small businesses still must adhere to fundamental rules covering areas like tax documentation, expense reporting, payroll processing, and cash management. Staying compliant reduces audit and penalty risks that can quickly spiral out of control.
Enabling Informed Decision Making
Sound accounting practices are the backbone of better decision making, which helps entrepreneurs steer their businesses optimally. Financial reports and analyses generated through efficient accounting provide key insights business leaders need to plan strategically. Things like cash flow statements, P&L statements, and balance sheets highlight strengths, weaknesses, opportunities, and threats.
Verifying Business Profitability
All entrepreneurs start small businesses with the goal of making them profitable, but wishful thinking alone cannot confirm this financial viability. The accounting process verifies whether a business is truly profitable through accurate tracking of cash inflows and outflows. Until revenues consistently exceed expenses over time, profitability remains theoretical at best.
Through proper accounting, business owners can pinpoint factors negatively affecting profitability, like receivables collection gaps or inventory management issues. Accounting highlights exactly where problems exist and consequently where improvements may be needed to reach the goal of profitability. Without it, profitability assessments are simply conjecture at best.
Gaining access to small business financing is difficult without demonstrating the financial discipline and transparency that sound accounting provides. When seeking loans, lines of credit, or funding from investors, lenders and shareholders will scrutinize a company’s financial records intently before risking capital.
Sloppy accounting and lack of reliable financial data is a huge red flag for potential funding sources. In contrast, orderly finances and reporting demonstrate operational maturity and trustworthiness. If small businesses ever hope to secure outside financing, investing in rigorous accounting processes is an absolute necessity.
Enabling Tax Planning
Meeting ongoing tax obligations is challenging without structured accounting practices that track income, expenses, deductions, credits, and other variables needed for accurate tax filings. Disorganized finances lead to missed deductions and mistakes that elevate tax liabilities unnecessarily. This negates potential tax savings only achievable through diligent record keeping and planning.
Sometimes the best solution for a small business is outsourcing accounting to a specialized firm. According to those at VertiSource HR, outsourcing eliminates the need to have an in-house accountant on payroll. A seasoned firm can establish accounting processes and handle bookkeeping, reporting, payroll, tax filing, and other financial needs.
The right outsourced accounting partner understands small business environments and requirements thoroughly. They implement optimal practices and technologies to put the business on solid financial footing. Outsourcing provides affordable access to elevated accounting expertise and enables entrepreneurs to focus on core business priorities.
Orderly accounting is imperative for small business survival and success. It enables regulatory compliance, informed strategy, validated profitability, sourcing of capital, tax savings, and overall stability. Business leaders who neglect accounting do so at their peril. Finding ways to implement sound accounting from day one, whether internally or via outsourcing, must be a top priority.