Why Is Accounting Important for Small Businesses?

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Why Is Accounting Important for Small Businesses?

October 12, 2022

Why is accounting important for small businesses?

  1. A must for investments and loans
  2. Keeps your records organized
  3. Evaluates the performance of your business
  4. Ensures compliance
  5. Helps with budgeting and financial projections
  6. Measures your strategies and their results
  7. Guides decision making
  8. Holds your business accountable

Why is accounting important for businesses — even for smaller firms? Everyone who runs a business has been told that it’s a crucial part of protecting their business, gauging its health, and making smart financial decisions. 

But how does accounting help your business do that? Let’s count the ways. Read on to learn more about the importance of this process for running your business efficiently and smartly! 

A must for investments and loans

Even small businesses have investors and can apply for business loans to finance their operations. But, investors and lenders alike both need to know more about your business, before they give you their money. And that means looking into your business’s accounting records. 

This includes having detailed — and accurate — financial statements, cash flow reports, and more. With these accounting documents, they have the information they need to understand the risks and profitability of your business.

Without organized accounting books, your business’s profitability claims won’t be accurate, or have any backing it needs to convince these stakeholders!

Keeps your records organized

Keeps your records organized

Which of your customers haven’t paid yet, and which loan payments are coming up? Keeping track of how much money should be coming in and out of your company can be a challenge for small businesses. 

However, with accounting, you have a clear picture of how much your accounts receivable and payable are. In short, it keeps you organized so you can accurately manage your finances.

Evaluates the performance of your business

Evaluates the performance of your business

The records created through accounting processes will reflect the results of your business, as well as its financial position. These records help you understand what is going on with your finances, including your total expenses, gross margins, and possible debt. 

Ensures compliance

Ensures compliance

There are many laws that require businesses to keep proper accounting systems and processes. This helps make sure that businesses properly address things like sales tax, VAT, income tax, and other obligations you have. 

This is especially important when it comes to tax filing. Most small business owners struggle with this, especially when they have no idea where to start. But, the first step to filing the right amounts for your taxes is gathering financial records — which is where accounting comes in! 

With the numbers you collect from your accounting efforts, you’ll be able to enter the correct numbers onto your tax returns. 

Helps with budgeting and financial projections

Helps with budgeting and financial projections

An important part of managing your business well is making — and sticking — to a budget every month. Keeping a budget helps you reduce unnecessary costs, while also still meeting the needs of your business each month. The same goes for financial projections, as these help you financially plan for the long-term needs of your business. 

Budgeting and financial projections therefore can make or break your business. And accounting plays a crucial role in these two things! This is because they are based on historical financial data, and such data can only be accurately collected and reported if you keep up with your accounting tasks.

Measures your strategies and their results

To measure how effective a business strategy is, you need to gather the clear, concrete results of your efforts — which includes data like sales numbers, net profit and expenses, and so on. 

Accounting, of course, helps with this. It provides the numbers you need to measure your business’s profitability before and after using your new strategies. Afterward, you can compare these numbers to see if your strategy helped or hurt your business.

This helps you decide whether or not to continue with the strategy, or make adjustments to it and try again.

Guides decision making

Should you add more inventory, or buy new equipment for your business? Well, that depends on whether you can afford it — and if your business will benefit from this investment. 

What about your expenses? Is there anything you can reduce spending on, or cut out completely without harming your revenue? That depends on you know how much you’re spending, and on what.

To answer questions like these, you need to look at your accounting records. It shows you how much you can afford to spend, and what you need to cut back on so you can avoid overspending (and even underspending or plateauing).

Holds your business accountable

As mentioned earlier — even small businesses have stakeholders. If someone has invested in your small business, then you need to show them your results. And accounting does just that. 

Accounting keeps you accountable for the success of your business. Stakeholders can see your business’s growth and success just by looking at your accounting records.

On the other hand, accounting also keeps you and your team accountable, as it provides up-to-date information on things like bank statements, expenses, and more. That way, you can catch fraud or theft before it affects your business too much. 

Key Takeaway

So why is accounting important for businesses? Even in smaller firms, this process plays a vital role in how well your company is run. It helps you track income and expenses, provides important financial information for your stakeholders, and can be used to make smart business decisions. 

Because accounting is so important for several parts of your business, you should entrust your accounting to the best accounting system in the Philippines there is — SAP Business One. At DynamIQ, we provide the services, ERP modules, and support you need to implement this software seamlessly into your business. Message us here to learn more. 

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