Accounting may be one of the most important aspects of running a business as it helps business owners keep track of all their financial transactions. This task is usually handled by bookkeepers, an accountant at a small firm, or a large finance company with dozens of employees.
But other than that, accounting also plays a big role in helping owners, managers, investors and other stakeholders in the business evaluate the financial performance of the business. The reports generated by accounting provide vital information regarding cost and earnings, profit and loss, liabilities and assets that are invaluable in helping management make informed business decisions.
You know what they say: "The numbers tell a story."
In this article we will be covering:
How accounting works?
Why is accounting important for small businesses?
Importance of understanding the business financials
NOTE: Undoubt Studio team members are not accounting professionals and cannot provide advice in these areas. If you need business accounting advice, we recommend reaching out to an accounting expert.
1. How Accounting Works?
As you may already understand, accounting is the process of recording the financial transactions of a business. The accounting process includes summarizing, analyzing, and reporting these business transactions to oversight agencies, regulators, and tax collection entities.
These financial statements typically summarize business operations, financial position, and cash flows over a particular period to provide concise and consolidated reports based on thousands of individual financial transactions.
As a result, these reports are also able to assist business owners in a range of decision-making processes and develop policies to increase the efficiency of business processes. Some examples of decisions based on financial accounting information include the pricing strategy for products and services, cost adjustments, and various marketing campaign objectives.
2. Why Is Accounting Important For Small Businesses?
According to studies, about 20% of small businesses fail within the first year. One of the primary reasons for this is due to poor financial management. Without the relevant accounting information, small businesses might find it hard to plan for growth and development as they usually have budget and resource constraints.
That's where financial accounting is important. Business accounting reports either good or bad – help businesses strategize. It helps the people in the organization know what they need to do to win and provides a clear course of action based on what the current financial situation of the business is at.
Without understanding where the business is currently at, it's hard to predict how the business can reach where we want it to be. Everything about the business plan may change depending on what the financial figures show – businesses may either be pushing defense or offense, the overall strategy might be different, and some businesses may even switch up the players in their team.
3. Importance Of Understanding The Business Financials
As business owners, we may think that we know our numbers inside and out. But the reality for most business owners is that we’re not as clear on our numbers as we think we are. Having a general idea isn’t good enough when building and leading an organization.
It’s impossible to plan effectively without being totally clear on the business's financial numbers. If the numbers aren’t complete, the story isn't complete. When we don’t know the full story, our business suffers as a result.
That's why it's so important for business owners to find clarity in their financial figures. We gain so much more clarity about how to lead our business, our team, and the next steps we need to take.
So Long Story Short
Financial accounting is a way for businesses to keep track of their operations but also helps business owners paint a clear picture of their business's financial performance. Through a variety of accounting reports including the balance sheet, income statement, and cash flow statement – business owners can be more precise and coordinated in their decision-making.