Last Updated by Richbrite on May 20th, 2021 at 11:48 am
Accounting is a process involving systematic maintenance of your company’s financial records, summarizing them properly to make sure that you get an idea of the profits and losses of your firm at a glance.
Every startup should have a dedicated accounting team or an accountant working for them because it isn’t easy to keep track of all the records of purchases and sales for a business owner.
The accounting system records and streamlines all your business transactions, thus allowing you to make decisions about expanding your business according to the capital you have in hand. Apart from giving a general idea about your company’s profits and losses, there are various other reasons why accounting is beneficial for starting a business. Here are a few of those reasons explained below:
1. Forecast Financial Estimates
Business owners often need to provide a financial forecast to lenders, investors, and banks to get loans to help their business expand. The first thing that these organizations will want is your company’s accounting records, including the balance sheet. It gives them a picture of the assets and liabilities of your business based on which they can decide whether to provide you a loan or not.
Without an accounting system, you won’t be able to furnish all these details. Your books of accounts can forecast your company’s financial status. Lenders and investors would want to know about that forecast because it’s their money at stake once they give you the loan or invest in your company.
2. Budget Expenses
Every small business works on a shoestring budget. Entrepreneurs need to take care of even the smallest expenses so that they can save enough money to expand their business later. But without accounting, it’s difficult to budget your expenses. You won’t have a clear picture of the profits and losses you made for the current accounting year. A proper budget can outline the expenses that cover various aspects of your business.
Entrepreneurs need to budget their expenses based on advertising strategies, inventories purchased, and paying salaries to employees. When you have a systematic accounting process, it helps you compare your company’s income and expenses, depending on which you can decide whether to cut down on some of the expenses or not.
3. Determine Profitability
Accounting is the easiest way to determine your company’s profitability. How do you know the percentage of profit your business is making in a month? How will you compare this percentage with the profits of the previous month? If you can’t do that, you won’t be able to know whether the sales volumes are increasing or not. A small business may generate a significant amount of revenue in a year but if it can’t, the entrepreneur needs to find ways to prevent his company from getting bankrupt.
With accounting, there is a systematic way to calculate the profits and losses of your business. It tells you the exact amount of assets and liabilities that you have in an accounting year. The profitability percentage is an indicator of where your business is going.
4. Expert Insight
Suppose you want an expert’s opinion on how to tackle your company’s profits and losses. How will the financial expert offer help if he doesn’t have any records of your business’s accounting history? Professional accounts study the financial records thoroughly to determine a trend, according to which they provide suggestions on what you should do to improve your sales volumes.
In addition to expert insight, accounting also helps you prepare your tax files before the end of the accounting year. If you don’t pay your taxes on time, the IRS will eventually take your company down and charge you for tax fraud. Therefore, you should have an accounting department preparing your company’s accounting books to avoid such issues.
5. Business Management and Growth
The business owner should have full control over his decisions. But if you don’t know the financial condition of your company, how will you decide whether expanding your business is the right decision or not? It’s only through accounting records that you can assess your company’s financial condition. Even a profit and loss account or a balance sheet can tell you whether investing in a new venture would be suitable or not.
Moreover, without accounting records, you won’t know how much tax you need to pay. Even if you want to pay tax in time, you may not be able to, because of the absence of accounting documents.
6. Assessing Liquidity
Mismanagement of cash can lead to heavy losses. This is a common reason for the failure of many startups. Even if you spend a couple of dollars on your office stationery, it’s essential to write it down in your accounting book. The liquidity of your business or the cash in hand is crucial to assess how much money you have to pay off financial commitments in case of emergencies.
Accounting can take care of that, provided you write all the incomes and expenses down at the right time. Delaying in the entry of records can lead to mismanagement of cash that may also lead to bankruptcy in the long-run.
7. Creates Confidence
Profits can make you confident as an entrepreneur. It means your business strategies are working. And accounting plays a crucial role because it determines your profit percentage. You can compare the profit percentages every month to get an idea of whether your company’s sales volumes are increasing or not.
When you are confident, you make better business decisions, leading to your company’s growth. And it all starts by figuring out how much profit your business makes. For that, you will need a proper accounting system. Once you have a clear picture of where your business stands financially, you can decide where to invest, how much to invest, and what strategies can help your business grow.
Now that you know the best reasons why you need accounting to start a business, here you can find experienced and reliable accountants in Newcastle who can take care of all your accounting and taxation needs, record your business transactions and assess it to provide a detailed report of your company’s financial condition.