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Every business has multiple domains, each having a different operational role. For example, the marketing department builds a brand image and captivates customers. Similarly, human resources help with team building, employee grievances, and recruitment activities. But is that enough to run a business smoothly? Perhaps, not. An accounting and finance department lays the foundation for all operational activities. After all, your business can’t run for a day without effective money management.
Accounting enables business owners to allocate resources to every domain. It also provides critical information related to earnings, business costs, profitability, and assets, which are essential for decision-making. Even though accounting’s primary objective is to record financial transactions, it goes a long way in ensuring a company’s success. For example, it allows managers to plan a budget and track cash inflows and outflows to keep the organization from a liquidity crisis.
At the same time, accountants play a crucial role in building a company’s credit, opening doors to external financing. They also unfold new investment avenues to expand revenue streams and push the business towards expansion.
Let us show you the ropes if you don’t know much about finance. Here we have outlined six reasons why accounting is essential in businesses.
1. Budgeting
As most business functions rely on accounting and finance, the demand for accounting experts is skyrocketing. As a result, many entrepreneurs are considering starting a CPA firm as a side business to provide accounting services. After all, big organizational giants have been outsourcing their accounting and finance operations. That is because a massive part of accounting and finance includes budgetary planning. It helps businesses plan, develops strategies, and find ways to save money.
To prepare this budget, you need past and future accounting records. Previous records will unfold setbacks in business performance, whereas the forecast will demonstrate where the business stands in the next few years. Hence, all this would only be possible if accurate records were available since they form the basis for planning and budgeting. Therefore, ensure your accountants and finance experts have everything ready.
2. Credit Building
Most businesses need help with getting loan approvals. Lenders reject the application because of incomplete records or poor credit history. Surprisingly, accountants can help you with both things. They maintain effective record-keeping with correct accounting treatments, providing an accurate and fair picture of the business. Likewise, they can improve their credit score by making timely payments to creditors and reducing reliance on debt.
For instance, they will ensure the credit utilization ratio is under 30% for your business credit card. At the same time, the accounting department will pay all dues and bills quickly. These few practices can go a long way in building credit and improving credit scores. Once your credit score becomes acceptable, acquiring loans and opening credit lines will become much easier for your business,
3. Monitoring & Tracking Cash Flows
The company often makes profits, but the cash inflow is far less than expected. These instances reflect cash flow issues that need immediate resolution. And without experts, getting to the bottom of this is next to impossible. Only an accountant will assess working capital requirements and identify gaps where cash falls short. They will ensure the debtors make payments timely so that sufficient money is available for running routine operations.
Moreover, accountants will manage the inventory smartly to ensure stock isn’t piled up in the warehouse. Sometimes, a lot of cash tied up in inventory is the prime reason for cash flow problems. They will either recommend strategies to get rid of abundant stock or change the valuation method to minimize losses on inventory. Effective money management will help your business capitalize on new opportunities without injecting more cash into the business.
4. Analyzing Business Performance
Any idea where your company stands today? How many profits get distributed to shareholders? Getting answers to these questions isn’t possible without record-keeping. Financial reports maintained by accountants unfold business insights, enabling you to analyze performance over time. For example, it shows how much profit the company has earned in a year, allowing you to compare its performance with past years.
Similarly, the balance sheet reflects the organization’s net worth, putting together all assets and liabilities. It can allow entrepreneurs to calculate goodwill and determine their business’s worth. Based on these stats, you can make more apt decisions. For instance, if stats show increased demand, you can consider installing another plant. The decisions backed by real-time information and data are far more effective and reliable.
5. Finding Investment Avenues
Most stakeholders, especially investors, ask for financial information every quarter. They want to analyze where the company is heading and if it is profitable for them to keep investing in the company. Here, your accounting and finance department comes in handy. They prepare financials monthly, allowing you to give complete information to stakeholders.
Moreover, they can help entrepreneurs discover new investment avenues since they know the company’s risk appetite. If the company has a high-risk tolerance level, it will recommend investing in stocks. Besides returns and dividends, it will give you ownership of another company. However, they encourage business owners to stick to financial securities if the company has a low appetite for risk. These strategies go a long way in improving business health while expanding the income stream.
6. Ensuring Statutory Compliance
Is your business registered? If so, you can be in trouble for not having accurate accounting records. International Accounting and Financial Reporting Standards have rules that every company must follow. That involves the presentation of financial statements and other accounting treatments. If you follow the rules, your business can pay penalties after audit trials. Hence, make sure your accounting team is well-versed in these regulations.
You can install an accounting system that records all liabilities and ensures timely payments. From pension funds to tax, this software will manage everything. However, you must hire a tax accountant to identify deductibles and file tax returns. Having all processes in order will also help your business to ensure statutory compliance.
Final Thoughts
Undeniably, accounting has become inevitable for every business – whether big or small. Instead of neglecting this core business operation, hire experts and ensure effective money management. It will foster more informed decisions, giving your business an edge over competitors. Likewise, accounting will enable record keeping, helping your secure funding and capitalize on investment opportunities. It might cost your business a little more, but it can save you thousands of dollars in the long run.