How accounting controls your business

Posted by Carmelo Romano

Accounting is a major part of your small business or even startup. While you might not realize this completely, it has a powerful impact on how profitable and successful your company is in the long run.

Why is accounting important?

Actually an accountant is more important than you might think. He/she is not just someone filling in papers and corresponding with you at tax time once a year. Their position in your business is not only for receiving your receipts and reports, and for keeping you pressed for time a few tedious weeks every spring.

An accountant keeps you focused on your business, both because you see how you’ve done in the previous year via your yearly tax return, and because you receive expert advice to set future goals and make a solid plan for your business.

I’m sure that by now you know that in every business you need to keep score and to maintain cash in your bank control. This is what basic accounting and cash flow control deal with. For a successful business, there needs to be a dedicated commitment and responsibility in using financial tools.

An accountant deals with the classic financial measures, such as the balance sheet (which tells you how much your business is worth), the profit and loss statement, and the cash flow statement (which help you understand the inflows and outflows of cash).  All these indicate the financial health of your business.

In order to evaluate the success of your competitors and your position in the business eco-system, you need this kind of information. You can read the annual reports of your competitors, to see whether they have financial success. You can also check the information provided for your company to determine whether you have the possibility to expand, to hire more staff, or whether it’s time to slow things down a bit.

How accounting impacts on your business

Accounting influences decisions to be taken in 4 major areas: finance, investments, operations and dividends.

Financing decisions

In any business, there is a need for finance. I’m going to talk about two financing sources: debt and equity. The former, by definition, needs to be repaid and has interest charge. The latter usually involves that the owner invests their money, or others invest money in the business in exchange for shares. This doesn’t have to be repaid, but investors will get a part of the future profits of the business. Although debt (a loan) will have to be paid + interest, it is usually the right option at the very beginning of the business. Equity is offered when the business has already started showing a promise. As a result, trading equity for cash at the latter stage is more favourable for the business and shareholders.

Investing decisions

After finance, comes investment. Accounting will also determine the budget you have for this. You should invest in items and assets that are in the benefit of the company, also you should invest sensibly and put money into non-current assets, which will offer benefits in the long run.

Operating decisions

These impact directly on your business and how it is run. You need to think of the price charged for your goods, of the distribution model and the marketing strategies and their costs. You should aim for profit, so that your operating decisions should result in income exceeding the expenses for the year.

Dividend decisions

It’s essential to observe cash inflows and outflows, and not only profit. Also, the final decisions should concern how much cash there is to return to shareholders by way of a dividend. The funds not to be returned as dividend are kept within the business entity, thus becoming a source for future investments.

Would you like to optimize the accounting of your business?

These are only a few details about how this process controls and influences your business. There are many more aspects and maybe you’d like to share a few with the community on our blog.

So, why do you think accounting is so important for a small business? If you still haven’t figured out this aspect of your business, download our eBook, and it will help you get in control of your business.

About The Author

Carmelo Romano- .

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