Why is accounting so important?
Accounting keeps you organized
Accounting lets you keep a track of how much money your business has earned and how much money it has paid out. This helps you remember how much your current profit or loss is, compared to the previous quarters.
In short, accounting allows you to know exactly what your business has been up to when it comes to business finances. It helps keep you organized so you can legally and accurately fill out your tax returns.
Accounting holds you accountable
If you have shareholders in your small business, it becomes really important to show rather than tell. Accounting helps one do just that.
Shareholders will hold you accountable for the success of your business. Just by looking at the accounting records, they can observe your business’s growth and success.
Accounting also helps you hold your employees accountable, and helps you stay up-to-date on things like performing trial balances and reconciling bank statements. That way, any fraudulent activity can be caught before it takes too much of a toll on your business.
Helps back up your tax return claims
Business owners usually dread small business tax filings, especially because they have no idea where to begin. This is where the importance of accounting in business comes in.
Step one of filing your tax return requires the gathering of financial records. Without such records (e.g., financial statements), it'll be difficult to be able to enter the correct numbers onto your returns.
If you get audited by IRS, what happens? You need to show them that you’ve done your share of due diligence and have all the necessary accounting information to back up your returns.
Helps guide decision-making
All your purchase and expenditure decisions can be made after going through your accounting records to identify whether it is feasible to make that purchase/ expense or not.
Accounting can help guide the decisions you make so you avoid common business mistakes, like:
Measure new strategies with hard data
Conduct a risk analysis especially for small businesses before you make a change in your business. This way, you can determine whether taking that risk could benefit or damage your business.
With accounting, you have the numbers showing your business’s expenses and revenue before the change. After you make the change, it can be used to compare the numbers. This way, you know whether your strategy helped or hurt your business.
Necessary for getting investments or loans
Any investor or lender requires information about your business's financials before they make a decision to invest in your business or lend you money. This means that they would want to have a look at your business’s accounting books.
Ideally, you must show investors and lenders your business’s financial statements. This helps them obtain information about your profitability.
Without organized accounting books, your profitability claims, financial statements, and financial forecasts won’t be accurate or have any backing.