Accounting: A Necessity for Small Businesses Owners

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Let's face it - most of us don't find accounting particularly exciting and would rather have someone else do it for us, right?

This is a fine stance for those who are completely disassociated with the business world, but as a small business owner, you and your business will benefit greatly from gaining knowledge on the subject of accounting.

Why not just leave it to the experts?

Well, for one thing, when first starting your business, you may be struggling financially and may not be able to afford too many "experts". Even if you can afford an accounting department, it is wise to understand accounting principles.

It is never wise to be ignorant of how any department in your company works.

With no knowledge of accounting, you have no way to monitor the effectiveness of your accounting department. You won't know if payments are prompt, taxes are being handled properly or records are accurate without at least a limited knowledge of accounting principles.

Don't wait for the tax return to find out how your company is doing.

Knowledge of accounting helps you understand financial records, such as the balance sheet and profit/loss statement, which reveal the worth of your company and whether it is profitable. This allows you to make decisions to correct or adjust any areas of financial concern in your business before you receive your annual tax return. If you wait until you receive your tax return, it may be too late to detect vital errors that could save your business.

Accounting helps you make wise decisions concerning the future of your company.

Accounting based decisions may include anything from expansion to correctly pricing the goods you manufacture. It is easy to focus on the cost of goods versus the sales of the product to estimate a profit; however, this can lead to financial disaster when the many liabilities of your company are taken into account. Accounting keeps track of loans, money owed, equipment depreciation, salaries and other items that must be included in expenses. It also analyzes trends to help you make adjustments in policy to increase profit and cash flow.

Accounting is important as a source of information for others.

Bankers use financial records to determine the risk involved in giving you a loan. From this information they will approve or deny your loan applications. They also use these statements to figure the amount of credit they will give your business. With knowledge of accounting principles, you can spot potential errors in your company's financial position ahead of time and discuss them with your banker in advance.

Accounting is vital to employee management.

You must use accounting skills when determining salaries, vacation policies, sick leave, paid time off, benefits and other aspects of employment.

Accounting can help you keep up on competitors' success.

Annual reports are not easy for the untrained eye to understand. It takes knowledge of accounting terms and principles to interpret your competitors' annual reports.

You can help detect fraud, waste and carelessness.

When you compare your bank statement with your company's checkbook, you can quickly locate any discrepancies. With your accounting skills, you can locate these differences and detect any avoidable errors in the future.

Cash flow - one of the most valuable of accounting benefits.

Cash flow is the rate at which money enters and exits your company. By referring to your financial statements frequently, you will know if your cash flow is positive or negative and you can make adjustments as needed. Negative cash flow, whether or not the business is profitable, is a major reason for small business failure.

So, how can you gain this knowledge?

One of the quickest ways to learn accounting skills is by enrolling in a few classes. Another way is to purchase accounting software. Software can be a useful tool to organize, compute and produce reports for your company. It can also ease the tedious process of assigning credits and debits by prompting you to enter the amount and the payee and then automatically recording the entry in the two appropriate accounts. Some software even includes a "primer" that teaches you basic accounting principles. It can ease the tedious work of number crunching and make accounting a little more enjoyable.

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References

Lohr, David. MyOwnBusiness.org: Cash Flow and Accounting. (2004).

Malburg, Christopher R. The Language of Accounting. Adams. (2003).

OnlineWBC.gov: Bookkeeping and Accounting. SBA Online Women's Business Center. (2002).

Ward, Susan. About.com: Before You Buy Accounting Software for Your Small Business. (2004).

 
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