Accounting is essential. It provides a record of how your business has performed financially and helps ensure your business remains solvent. More than that, accounting provides tools that help you look forward and manage your business more effectively.
There can be a temptation to completely delegate small business accounting tasks, relying on specialist employees and the services of an accountant. But even if your main skills are non-financial, every business owner and director should have some understanding of the key accounting concepts and how they can help your business.
Business accounting basics
When people think of small business accounting, they tend to think of bookkeeping - the records of all your business transactions (in goings and out goings). As a minimum, you have a legal obligation to make sure that you keep adequate records.
Your bookkeeping records are used to produce your statutory annual accounts and provide you with the information you need to complete your tax returns. While this is often seen as something you need to do in order to comply with the law, good advice can help you identify opportunities to minimise tax payments.
Accounting also has a vital role in cash flow management. In particular, businesses that sell on credit often find they continually need to chase up customers who fail to pay on time.
Accounting and business decision-making
Annual accounts are largely produced for the benefit of the tax authorities and any outside investors your business may have. By the time the accounts have been finalised, they are often months out of date.
Well-managed businesses also produce management accounts, typically on a monthly or quarterly basis. These give an up-to-date picture of recent performance, helping you see the trends in sales, profitability and cash flow. They help you identify problem areas and opportunities, giving you crucial information to guide your decisions on how to improve future performance.
You can also look further ahead, forecasting your profitability and cash flow as part of your budgeting process. Again, this helps you guide your decision-making. In particular, financial forecasts can be a key part of developing or updating a business plan and anticipating future financing needs.