Why is accounting important for small businesses?

It’s true—accounting may be the least fun part of running a small business. Despite its reputation, accounting remains to be one of the most vital ways to keep a business financially healthy.

But why is accounting important, really? Accounting is the process of recording financial information indicative of business performance. It’s kind of difficult to know if your business is surviving or thriving without it.

From creating a budget to preparing for tax season, we’ll show you all eight ways accounting best practices can benefit your business.

1. Accounting helps you create and manage your budget

Creating a budget that is easy to manage is essential to keeping your small business financially sound. Here are a few accounting practices for successful budgeting:

• Expense tracking: Tracking how much your business regularly spends 
• Monitoring operating costs: Monitoring what it costs to run your business
• Calculating asset depreciation: Calculating how much value your assets lose
• Preparing for tax season: Preparing tax forms and scouting for deductions
• Bookkeeping: Recording and maintaining important financial records

Budgeting may not seem glamorous, but it can help you achieve long-term financial goals and maintain a cash-flowing business.

2. It can facilitate decisions for your business

Why does a business need accounting information? Accurate accounting records can facilitate data-based decision-making for your business.

Payroll accounting, for example, can show you how much you can compensate your employees and how much to withhold for taxes.

When you use accounting formulas, you take the guesswork out of running a small business and allow the numbers to do the talking.

3. Accounting helps organize financial statements and records

Financial statements report on the performance of your business and are necessary for tax purposes. They take the form of three accounting documents:

• Balance sheet: Provides a simple recap of your financial situation
• Income statement: Shows your profits, losses, and net income
• Cash flow statement: Tracks the money that flows in and out of your business

Keeping your financial statements organized is important for when unexpected situations arise. From interest investors to surprise audits, having your financial documents nearby can make tackling any challenge or opportunity easier.

4. It provides evidence of your success

Customers and stakeholders love to see your success. Show them the facts and figures that prove you are worth investing in.

When you have an actionable accounting plan, you can add your recent financial wins to your next marketing strategy. Here are some examples of how to accomplish this:

• Incorporate the number of worldwide sales into marketing collateral.
• Share gross income earnings since your founding with stakeholders.
• Forecast your projected earnings for the year based on last year’s profits.

5. It shows where you could improve

Employing basic accounting skills can quickly show you areas where you need to improve business performance. Here are some takeaways that a regular accounting practice could show you about your business:

• Spending habits: Learn where you may need to reduce spending.
• Asset depreciation: Identify assets that will require replacement soon.
• Inventory costs: Stay alert to increasing inventory costs.

For this technique to work, it’s important to record your financial transactions regularly. As a result, you'll have the most accurate data at your fingertips.

6. Accounting helps satisfy legal requirements

Not only is accounting a great way to manage your small business finances, but it is also a legal requirement. Take a look at how accounting helps satisfy the following legal requirements:

• Legal disputes: It’s common to show financial documents in a legal dispute.
• Registrar filings: Businesses must file with their registrar.
• Tax audits: Receipts may be necessary during a tax audit.

Skip the headache of satisfying legal requirements by having your financial documents neatly organized and ready for inspection anytime.

7. It prepares your business for tax season

Tax season is perhaps the most important time to flex your accounting skills. Having a firm grasp on the inflow and outflow of cash within your business can clarify which:

• Tax forms are relevant to your business.
• Deductions your small business qualifies for.
• Tax filing deadlines that apply to your business type.

Since the overall purpose of accounting is to simplify and organize your finances, consider using a tax preparation checklist during your next filing period.

8. An accountant can provide an unbiased perspective

With the help of their financial expertise, accountants utilize technology to provide a nuanced and unbiased perspective on your business performance. 

If you struggle with important business decisions based on your accounting data, an accountant could serve as an objective advisor. 

It’s easier than ever to get an accountant’s professional opinion when you need it most. Live accounting services can connect you with a financial professional in minutes.

Streamline your accounting and save time

Accounting is the basis of a healthy financial plan and can help you make big decisions about the future of your small business. With accounting software, you can keep track of your business performance with just a few clicks. 

Now that you’re comfortable with accounting basics, consider utilizing our small business accounting checklist to prepare for next year’s tax season and beyond.