In commerce, accounting is the most important area that every individual should have some basic knowledge of. From the secretary who writes cheques and purchase orders to the director who makes executive decisions, financial information is the pivotal underlying element that influences their actions. For new small business owners who often start out wearing many hats during the early stages of their business, the importance of understanding the financial implications of their actions become more crucial.
Accounting is not only about debits and credits. It provides vital statistical ratios and metrics to help the business owner keep an eye on their business health – similar to a car dashboard or a doctor’s ECG machine. Ratios such as the debt ratio and current ratio can help to keep an eye on your liabilities, ensuring that debts do not become excessive. Asset turnover ratios indicate how efficiently you are using your assets to generate revenue. A business can generate large revenues but can still run at a loss. Analyzing the metrics and ratios will help the owner identify inefficiencies and areas for improvement.
Preparing budgets and cash flow forecasts help business owners to plan for their business expenditures and identify periods when extra cash resources are needed. Sticking to a budget will help to avoid wasting capital on non-essential items. It is important to compare actual numbers to the budget on at least a monthly basis. By doing this, significant deviations and variances from your budget will be detected in a timely manner.
As your business expands, you may need more financing. You may also receive offers from potential investors. Entrepreneurs will have to provide financial reports to lenders and investors in order to secure the funds. Investors and lenders rely heavily on financial reports when assessing the situation of your business.
An accountant could be hired to handle your financial reporting. However, do you know exactly what they are doing or saying ? Having a basic understanding of accounting will help in reviewing the work of your accountant. As a business owner, you will be in a position to ask more informed questions about your finances as well as reduce the risk of any unethical or fraudulent mishaps from occurring. According to Section 155 of the Business Corporations Act of Alberta, which deals with financial disclosure, the directors of a company are responsible for preparing the company’s annual financial statements. If you do not understand accounting, you cannot run a business or ever expect to expand and grow it.
Many small businesses collapse due to a lack of proper record keeping. No business, regardless of size can survive without an accounting department. During the vulnerable early start-up phase, you do not have to hire people to do it for you if that is an option. If you are a small business owner or sole proprietor, you can teach yourself what you need to know to propel your business beyond success.
Visit my LinkedIn profile at : www.linkedin.com/in/nikesh-harrinarain-1249ba29/ or contact Nikesh Harrinarain to learn how accounting knowledge can propel your business beyond success. Comments and questions are also welcome.
