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Why
Are Financial Statements Important for Small Business?
"Good accounting won't make your business, but poor
accounting can break it!"
Accurate and timely accounting reports are vital to the
success of a business. An accounting
system should allow the business owner to see which customers or products are
most profitable for their business. Which
customers are overdue, what bills need to be paid, and exactly what your cash
balance is at any time can be answered in minutes with a well-maintained accounting
system.
You may find accounting confusing, even a bit
"scary." If so, you’re not
alone. Some accounting terms are used in
different ways, and sometimes several words are used to describe the same
thing. Too many business owners are
convinced they'll never understand accounting and consequently decide that once
they hire someone to do it, they won't
have to think about accounting ever again. This is a serious mistake, because an
understanding of accounting basics is a necessity for every business owner. These basics are not that difficult to grasp
once you realize that accounting is merely a way to collect key information
about your business.
Why Are Financial Statements Important for
Small Business?
A) Lack
of adequate recordkeeping is a major cause of business failure. A recent study highlights the importance of
accounting records to the health of a small business. The study found that over half of the businesses
that lose their accounting records due to fire or computer failure ended up
filing for bankruptcy within a year. With
proper precautions, tragedies such as these can be avoided.
B) If
you don't understand it, you can't manage it. Many business owners view their accounting as
a "necessary evil." What
business owners don't understand is that good financial statements raise
questions that will help them increase profits!
In order to use financial
statements to increase profits, the business owner must be able to understand
the information they provide. Well-prepared
financial statements:
– Provide the opportunity to
identify trends early on
– Ensure that the company is on
track to reach its goals
– Identify and concentrate on the
company's most profitable products, customers, and employees
C) They
allow you to make informed business decisions. Running any business requires a multitude of
decisions. Financial statements provide the
essential information that is needed to do so. That's why you need to understand and
appreciate the importance of the information your financial statements contain.
It's smart to ask an accountant for
advice, but ultimately you must make the decisions. You should never place the future of your business
in someone else's hands.
D) Businesses
with good accounting records are less likely to overpay their taxes! Believe it or not, most sole proprietors lose
out on deductions because they forget to write them down. Avoid that by knowing ahead of time which
items are deductible in your business and saving every piece of paper that supports
any expenses. The amount of taxes saved
by having good accounting records usually offsets the cost of maintaining
accurate accounting records.
E) Don't
work with blinders on! Compare your
financial results against competitors and with prior years’ results. One set of financial statements alone can tell
you very little. Analyzing several years’
results allows you to easily recognize problem areas. Why are sales down? Why are sales up but gross profit down? Why are we spending twice as much on
insurance? Why hasn't this customer
purchased as much from us this year? Why
are sales down in this product?
The answers to these questions enable
you to react quickly to changes in the business environment. Without good accounting records, a business
owner may not spot a trend until it is too late.
Comparing your business against
other companies in the same industry is a good way to know how well you are
doing. If an average company is able to
make twice the profit you do, you should ask yourself what they are doing
differently. How can you duplicate or exceed
their results?
F) Offer
additional protection against fraud.
Good accounting records are critical for detecting and controlling
fraud. If you don't have financial
controls in place, it's not a question of whether people will steal from you, but
when. Good accounting records help you
control cash, inventory, equipment, and anything else of value to the company.
G) Computerized
accounting programs eliminate excuses for not having good accounting records.
A good accounting program should be
simple enough for the owner to learn, understand, and use. It should provide all of the following basic
management controls:
– Sales control
– Bank control
– Purchases control
– Stock
control
– Accounts
receivable control
– Payroll control
– Expense analysis and coding
In a later blog article we will discuss the different
types of financial statements and why you should be familiar with, but not
intimidated by them.