Is an Accounting System Really Necessary
Hello All,
I was helping someone set up their accounting on QuickBooks recently and was asked about the purpose of the profit and loss statement and how it was relevant to their business. The question was surprising to me, but I quickly realized that many business owners while understanding that accounting is important often have to figure the why by themselves.
A large number of business owners believe that the primary purpose of an accounting system is to ensure compliance with tax obligations. This is correct, however, a well set up system can be much more than that. It can give you insights into numerous aspects of your business that ultimately ensure its success. Some examples of how it can help:
Determine your bestselling product so that you can redirect your marketing efforts
Identify your best customers allowing you to offer them incentives
Calculate your costs of making your product and find ways to reduce them
Evaluate your expenses and find ways to renegotiate or determine if even necessary
Review your amounts owing from customers (accounts receivable) and follow up promptly to ensure payment
Ensure that you have enough cash flow to meet your short term needs
Review suppliers/vendors and see if you can get better terms/discounts
Compare your gross margins (revenues less direct costs) to others in your industry
Review your inventory, evaluate what is selling well vs what is selling poorly and make better purchasing decisions based on the results.
See your history which can provide data on the trajectory of your sales, expenses and cash generated and also helps to calculate your budget for upcoming years
This is just a small smattering that are not simply about summarizing your financial results for a third party. (See my blog post for an expanded discussion)
Of course, not every business requires an extensive system. If you are a service provider that simply bills a handful of clients once a month, then you might only need reports for tax purposes. Or if you have a side business, it might not be cost effective to invest in an accounting software. However, if there is some complexity in your business or if you think you can benefit from any kind of analysis, setting up a solid accounting system and understanding your financial data can be the difference between success and failure.
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