Running a small business is definitely not an easy task, especially when you have a large number of things to take care of and keep track of on a daily basis.This also makes it difficult to manage accounting and bookkeeping, because when you have a lot on your plate already, making the effort of keeping track of everything just becomes all that much harder.
But accounting is an extremely important business function that cannot be overlooked. Let’s consider why it’s so important for small businesses to have a solid accounting foundation.
Why Do You Need Accounting For a Small Business?
The main purpose of accounting is to keep track of and record any financial transactions that occur within the business. Because finances are a core part of any business, this naturally makes it extremely important.
Having good accounting practices from the very start is necessary for a number of reasons.
Record Keeping
The basic role of accounting is record-keeping. Accountants will keep a complete and comprehensive record of all financial activities taking place within a business, which will give you a clear idea of the business’s health. These records are the backbone of the business, since they will help you with any further decision-making and are required for 7 years by the CRA.
Budgeting and Planning
Depending on what your accounting records say, you’ll be able to budget and plan, and allocate your resources to a suitable function. This helps make sure that different segments within the company are all in sync and working together efficiently.
To lead your business towards growth and prosperity, you need to be able to budget to account for any potential losses or problems, and make sure you still have enough money available to keep yourself on your feet. Understanding what drives your business and how those drivers lead to revenue are ultimately what determines your business’s success.
Without proper accounting, you wouldn’t know how much to attribute to marketing, because you don’t know how much marketing needs to begin with. If you allocate too much or too little to any function, other functions are likely to suffer and you’d see the negative effects of it very quickly.
Decision Making
Decision making is an important and inevitable part of running any business. Accounting contributes to the decision-making process in a much more significant way than you’d think. For example, based on your accounting records, you’d be able to identify which functions are lagging behind and which ones need improvements.
You would also be able to adjust prices for products and services, and make decisions around whether or not investments have to be made.
Understanding Liquidity
These records also give you a good idea of where you stand in terms of liquidity – something that can easily make or break your business. A common reason for the failure of many businesses is the lack of adequate cash flows. If your business does not have enough cash, you’re doomed. But if you had good accounting records prepared, you’d be able to identify this problem before it really starts to affect you, and thus save your business.
Financing & Grants
Many businesses also require some form of financing, be it through loans or otherwise. In order to apply for any type of financing, you need to have good accounting records that show the financial health of your business. This is because lenders will want to see these records before they approve any loan.
Similarly, if you’re looking for grants or other forms of investment, again, good accounting records are a must. For example, during the COVID pandemic, current books were needed to obtain CEWS/CERS/TWS funding.
Legal Requirements
There are also plenty of legal requirements around businesses which necessitate that an accurate and comprehensive record be kept, which will be used during tax season.
Keeping Control
Knowing where your money is going is an excellent way to keep a check on what goes on within an organization. This helps with problems like fraud or theft, since any ups and downs in your funds will let you know that something is wrong immediately. You’d also get an idea of whether any damages or mismanagement is costing you a lot, and be able to take action against it in time, before it becomes a long-term loss.
Understanding Business Performance
The main purpose of any business is to make profit, and the best way to understand whether you’re making a profit or not is to look at your records. Financial reports are one of the best ways you can measure your performance, since they have a very clear record of how much money you put into the business and how much you received from operations.
You don’t just get to compare yourself against past performances, but also against competitors. This will give a good idea of how to improve and where improvements are needed.
The records will also let you know your financial position and condition. It lets you know what you put in at the start of your business, how much you’ve earned or lost as a result of operations and how many assets and liabilities you have so far. Knowing these will help you decide how to move forward with your business in the future.
Do You Need an Accountant?
Having a professional accountant to do all your accounting work is very important because there is so much room to slip up. Accountants have in-depth knowledge about finances that you may not, and they’d be able to record, read and understand your business performance much better than you may. As such, they’d be able to help you make a lot better decisions regarding your business.
In-house accountants are often expensive, especially for small businesses which have few funds to allocate to every function as it is. In such cases, hiring a CPA can be an excellent choice, since you’d get the benefits of a professional accountant, while still being able to save money as well.
If you’re looking for an excellent CPA in Canada, Lift CPA has expert professionals who can support you and help you achieve your financial and tax goals. Any concerns you have around your business’ financial growth and sustainability can be set aside because we can handle these for you and guarantee results.
