Whether your business is a tiny, one-person operation and you intend keeping it that way, or your plans for expansion are bigger, accounting features strongly in your success.
Some business owners recognise the importance of good accounts from the beginning, while others see it as a burdensome exercise to just get through to stay legal.
If you’re in the second camp, understanding a bit more about why accounting matters and the insights it can give you might help you enjoy accounting a bit more.
The Practical Benefits
One of the main reasons why businesses fail is through poor financial management. It might have been a run of bad luck that caused a cashflow problem, or maybe you overstretched a bit too soon in the early days.
Nobody goes into business intending to fail, so learning accounting from the beginning really can help you make better financial decisions. These may include:
- Better Cash Flow – money bottlenecks can have various causes with one of the biggest dangers for small businesses being slow payers. Your outstanding invoices stay outstanding for too long so you’re unable to finance future projects. Everything grinds to a halt and the business stops functioning.
- Costing Your Projects – Up to date, detailed accounts, will help you price goods or services accurately so you’re neither pricing yourself out of the market or charging too little for sustainability.
- Painless Tax Returns – Like it or not, every year you need to send HMRC an annual report about how your business is performing. It’s much easier to compile this document if you have accurate numbers at your fingertips.
- Better Banking Relationships – when you want to invest in the future of the business and expand, you might need some help with finances. Your bank manager will look kindlier on a loan application if you can demonstrate that you understand your accounts. But even if you don’t want a loan, just keeping your business in the black will prevent uncomfortable communications with the bank.
- Detect Fraud – from false invoicing to petty theft, fraud can quickly drain your bank account if you don’t spot it in time. It’s less likely to happen when you keep a watchful eye on what’s happening with your accounts.
Daily Decision Making
There’s no time in the life of a business when it doesn’t depend on good decision making, but the early days are particularly important.
Looking at your accounts can let you delve into the past as well as, to some extent, predict the future. You can judge when to expand, what to charge and when to raise prices (and by how much) as well as when to hire more staff.
You can also judge how your business is performing. A glance through your accounts will tell you if the business is growing or stagnating, and it will inform you about why and how. You’ll see which areas or activities are most profitable (do more of these) and which might be costing you money instead of earning it.
From these insights, you can make smarter budgeting decisions. If you know there’s a slow down during summer, you can make plans that anticipate this and step-up activities during busier times to tide you over. ‘Feast or Famine’ is a well-known concept in small businesses, especially in freelancing, and it’s your accounting history that warns when the leaner times are coming.
Keeping Your Books
Should you do it yourself? If you know nothing about business accounting, then taking an accounting course might be a good idea. On the other hand, if the very thought of keeping accounts yourself gives you shivers, knowing where to look for help is useful:
- Bookkeepers – they’ll take on the daily running of your accounts, keeping your books up to date and dealing with invoices if you wish. You can hire as much or as little help as you feel you need to give you peace of mind knowing your accounts are properly recorded.
- Accountants – they can help you with a deeper dive into analysing what’s happening with your finances and may be able to offer advice on how to be more profitable. They’ll compile your end of year tax return and make sure you’re claiming all your expenses.
Depending on your level of business and location, you may be thinking about enlarging your accounting staff. Taking on an accounting apprentice is a smart way to get extra help while investing in the future at the same time.
How you run your books is up to you as there are no rules beyond compiling and submitting your annual reports. There are, however, best practises and methods that make it easier.
Give accounting the attention it deserves, either by learning what’s involved or getting good professional help, and your new business will be on the right road to becoming an old, established, and successful one.
Note: this is a collaborative post.