Many business owners have questioned the value of accounting in business, and as a Chartered Professional Accountant with over twenty years of professional experience, I can assure you that accounting is an extremely valuable part of the business.
Accounting goes beyond bookkeeping and taxes. Accounting is important because every business needs an accounting system that will keep you organized, issue timely and accurate reporting, and provide you feedback on how your business is performing. There is a difference between accounting and bookkeeping.
When your books are organized and you can issue timely reports, it offers the opportunity to take cost-saving measures based on those reports. These reports offer you insight and information on the performance of your business.
When you know your business numbers this allows you to know your business on a deeper and more intimate level.
Every decision that you make in business will affect your profit line, whether that decision affects it directly or indirectly. When you are the decision-maker of your business, your business finance and accounting knowledge will help you make smart decisions that are good for your business.
What is accounting?
First, let’s start with understanding what is accounting. Accounting is how your business records, organizes and understands its financial information. All business transactions need to be captured in your accounting records, and your accounting software can capture all the transactions for your business and keep them organized.
The importance of accounting software choice can make a difference in how well your records are organized. I like to use Freshbooks accounting software (please be aware that if you click on the link and purchase an accounting package I may get a small compensation for you joining, at no cost to you).
When you are using a robust accounting software program that can grow with your business, it minimizes headaches should you have to switch down the road. Carefully choose your accounting software to ensure it is able to accept budget numbers, cash flow reports and generate various types of financial reports.
What is the difference between bookkeeping and accounting?
Many business owners mistake bookkeeping for accounting. Yes, while bookkeeping is considered to be part of accounting, the real useful accounting skills come into play after the bookkeeping is completed.
Accounting expertise goes beyond bookkeeping and jumps into the analysis of your business numbers.
Bookkeeping is the first layer of finances in your business. Every transaction that your company has made needs to be captured in your accounting records.
Bookkeepers who are keeping accounting records for businesses need to be skilled and know the accounting rules, however, accountants have a deeper knowledge and understanding of accounting and are skilled at data analysis.
What that means is the accountant will take the financial data that the bookkeeper has entered and turn that information into meaningful reports and perform data analysis on those reports.
The data analysis and interpretation of transactions are typically performed on a monthly basis in companies. It is vital to be abreast of any changes in the company’s financial scenario.
Why is accounting called the language of business?
Warren Buffet coined the saying that accounting is the language of business. There is plenty of truth to that. I like the saying that if you really want to know what’s going on in the business, ask the accountant.
The accountant is trained to know what is going on in the business and monitors results on a regular basis. The accountant in the business will know exactly where the business is making money, and where it is losing money.
The accounting terms used are common business knowledge as well. The balance sheet, the income statement, the budget, the statement of cash flow, the forecast, are all terms that are commonly used in business and happen to be accounting terms. Everyone in business knows the accounting terms. These terms are the universal language of business.
When at the boardroom table or in the lunchroom people in business know the terminology and use it. If you are unfamiliar with these terms, I suggest you get familiar with them.
The Biz Finance Basics course has been designed to help business owners understand the basics of business. From learning the language, understanding financial statements, knowing how to structure your business and paying taxes, there is a ton of valuable information to learn and understand to help make you a savvy business owner. Sign up for the Biz Finance Basics course now!
Importance of accounting in business
Accounting goes beyond recordkeeping and analyzes the financial reports for the business. The truth about what is going on in your business will come up in the financial reports, and numbers don’t lie.
This is why we have Generally Accepted Accounting Principles (GAAP) that must be followed. If these rules are not followed and corporations file misleading documents, this is known as fraud and it has serious consequences.
Professional accountants (CPAs) are trained in all business areas. Types of jobs accountants do for the business that you may not be aware of include:
1. Advise you on how to structure your business
Whether you want to set up your business as self-employed or incorporate, a good accountant will be able to advise you what the best approach is for your business. They will ask you about your business goals and recommend the best course of action based on personal and business information.
2. Suggest tax-saving strategies
A good professional accountant will have a basic understanding of tax savings strategies but for more complicated business and personal structures you need to consult a professional tax accountant that will be well versed in your local tax laws. A good tax accountant will never give you shady or illegal tax advice.
3. Grant applications
It is part of the accountant’s job to be aware of the industry they are working in and research any government grant programs that would be available for a business. For example, companies that do a lot of research and development may be eligible for grants offered by their government.
4. Loan and debt management
Your accountant will monitor your debt ratios in the business and monitor any changes or regulations when it comes to meeting your contractual obligations with loans. Cash management is a vital part of keeping a business going and this job is extremely important.
5. Manage your inventory
Managing inventory levels is crucial for assembly lines. Good accounting software enables the monitoring and point of sale software can order parts when inventory levels reach a certain point. This will keep assembly lines from work stoppages, which costs a lot of money for a business.
6. Make your business more efficient
Inefficiencies in a business cost money and an accountant is trained to spot inefficiencies that are taking a toll on the company. With regular reporting and monitoring, an accountant identifies irregularities quickly and cost-draining activities can be corrected quickly.
7. Monitor your internal controls
Knowing how to keep assets safe from theft and white-collar crime is an essential benefit to having a good accountant on your team. An accountant will ensure that proper internal controls are in place to protect the business and its assets.
8. Network
A CPA or other accountant will have a network of other professionals that you should be able to tap into. Networks are extremely valuable for a business.
9. Introduce artificial intelligence (AI)
AI is popping up all around the accounting world and it is a useful tool for accountants to take advantage of. AI can find accounting irregularities in a fraction of the time it would take a human and it can be set to crawl your records and alert you to irregularities.
10. Improve your bottom line
Good accounting will improve your bottom line with cost-saving strategies and being on top of irregularities that arise in your accounting. Knowing where your money is being spent and identifying money leaks before they become huge money sucks is a regular part of an accountant’s role.
11. Ensures you are within industry regulations
If your industry is heavily regulated the accountant will file reporting and ensure the company is following compliance rules. This is an essential cost-saving measure to ensure hefty fines are avoided by not being in compliance with rules and regulations.
12. Makes record searching simple
When accounting records are organized in a methodical way it helps with looking information up in the system. This will help save time when employees are looking for information on sales orders or credit history.
13. Take advantage of tax deductions
Accountants are knowledgeable about tax deductions offered in business and can communicate with the tax accountant of the company to ensure they are optimizing the use of tax credits.
14. Manages growth of a company
Fast growth in a business is extremely risky if not done well, and an accountant is an essential member of that team to ensure the growing pains of the company do not exceed the cash levels.
15. Manages risks and threats against the company
Many risks threaten the business and accountants make the effort to mitigate the magnitude of those risks. They are responsible for risk assessments and insurance purchases. Ensuring the best rates and complete coverage are attained for the business will result in cash protection.
This list is not an exhaustive list as there are numerous ways that professional accountants help the business perform better. Working closely with your accountant and investing the time to build your financial skills will result in you becoming a better CEO of your business.
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