When first establishing a small business, one of the biggest responsibilities an owner has is ensuring that they understand the businesses financial health and tax liabilities. You may find an accountant plays an important role in supporting you and your business or you may do the accounting yourself. However, if you perform your own accounting, it is important to know the benefits of small business accounting so that you understand how you can utilize the financial tools at your fingertips.
1. Small businesses need to create and control budgets.
Accounting helps business owners create and monitor budgets. This means that you should know when money will be coming into the business and how money will be going out and in what time frame. You are better prepared to monitor business budgets when the information you have is accurate and up to date. Otherwise, the business is like a car without a dashboard; you know it is going, but you have none of the gauges to tell you how fast or whether you need oil or fuel to keep it running.
2. Small business accounting saves you money.
Accounting software today allows a lot of transactions to be categorized quickly and efficiently. When utilizing this software correctly, receipts and bills can be added in with PDF attachments allowing for you to quickly find any errors from the vendor or if they have incorrectly billed you. For construction companies or remodelers, this is especially important as it allows you to double check and ensure that if you bill the materials back to the client then add your company’s markup that you are accurately billing the company. Everyone makes mistakes (even me…shocking, I know). Having the right accounting processes in place ensures that money isn’t leaving your business unnecessarily. This is extremely important for small businesses where every dollar matters.
3. Can help forecast revenue.
With your accounting done consistently and correctly, you can forecast revenue. Forecasting revenue is an educated guess about how much money your business will bring in within the current year. There are a multitude of benefits to this. It can help to budget business expenses, justify hiring decisions, execute strategic planning, and most importantly help you get to know your customers better. This will help you be better prepared in terms of advertisements and if you need to increase prices on products to directly affect your bottom line.
4. Reduces a business’s tax liability.
Don’t lose time in January and February by scrambling to get your books brought up to date or getting all your receipts together. Being a scrambler will ensure that not all expenses that could be deducted will be. Stay organized to ensure that every dollar that you have spent in the business is accounted for. Small amounts of money over a 12-month period add up, and you could pay more taxes then you should because you weren’t organized throughout the year. This will also keep your tax preparers fees down.
5. Small business accounting keeps costs down.
Every business has small expenses that they really don’t look at all that frequently. For example, a paper statement from a bank may costs on average $3. Add in ATM withdrawal fees, penalties for paying bills late, credit card interest rates, overdraw fees or penalties from the IRS for not filing on time, and we have a situation on our hands! Cutting small costs on a frequent basis can save small businesses money which can help increase a company’s cashflow and help the business grow.
6. Helps you understand your businesses financial health.
Once your business financials are in good order, the benefits speak for themselves. For starters, there are four financial health ratios that can be utilized to help understand just how good the businesses financial health is.
The first is the Quick Ratio. It is easy to calculate and understand. This formula tests to see if the business has enough cash, assets, and low debt to operate without running into financial trouble.
Quick Ratio = (Current Assets-Inventories) ÷ Current Liabilities
Secondly is the Total Debt to Equity Ratio. This determines how the business has been financing growth. A high result indicates that the business has been growing due to debt (E.g. Loans/Lines of Credit). Remember that not all debt is bad. However, if the result is very high, considering paying off those loans is probably a smart move.
Total Debt to Equity Ratio = Total Liabilities ÷ (Owners) Equity
Third is the Current Ratio. This determines the company’s ability to pay off short term liabilities. When calculating this, if the result is less than 1, it shows that a business may not be able to pay off its current liabilities.
Current Ratio = Current Assets ÷ Current Liabilities
Lastly is your Days Sales Outstanding. This shows how quickly your business can convert receivables into cashflow. The lower the number, the quicker you can collect your receivables. If this number is high, consider putting in place strategies to encourage clients to pay promptly.
Days Sales Outstanding = (Receivables ÷ Revenue) x 365
7. Small business accounting helps you grow.
The ability to monitor business growth is one of the top benefits of small business accounting. When you know and understand your assets, liabilities, and revenue, you can easily track the growth of your business. You will be able to monitor the businesses key performance indicators, whether that be your own or employees. If you don’t provide accurate business books to your tax preparation team, you may have a full IRS audit performed on your business. Small business accounting not only helps your business, but it also protects you from audits.
Small business accounting is essential to the financial health of any business. Ultimately, having your accounting processes and procedures in place increases the businesses chance of success as it allows you to make informed decisions by utilizing data rather than split second decisions which may or may not be beneficial in the short or long term.