The Importance of Finance & Accounting Process for Defining the Success of a Business
As Warren Buffett says, ‘accounting is the language of business.’
He and other savvy business owners use accounting to make investment decisions to grow the businesses they choose to invest in. But interestingly enough, many small businesses often neglect the role of accounting and finance in an organisation until tax time or don’t do it at all.
9 out of 10 small businesses fail due to financial mismanagement of their company.
Their financial mismanagement may result in their failure to make decisions, to grow their business, meet financial obligations like paying their employees or rent, miss tax deductions that can save the money, or fail to pay their taxes altogether.
Accounting is all about recording a business’s financial transactions according to defined standards and in a timely manner so that financial statements can be accurately drawn.
Accounting is not only essential for larger businesses but also hold the same importance for small and medium-sized entities as well.
So if you are starting a small business, here is everything you need to know about accounting practices and why financial accounting is important for a business:
1. Separate Business Assets and Personal Assets
The first thing you need to do as a business owner is to separate your business assets from your personal assets. The best way to do this is to open up a separate bank account for your business plan and set up a bookkeeping system that is relevant to the nature of your business.
Hire finance and accounts expert in India if the budget constraints you.
2. Record All Transactions in your Business
All the transactions that occur in your business every time a transaction is done, you must record. There are five major transaction types that you must know such as revenue, expenses, assets, liabilities and equity. Now, it is essential that you understand these five transaction types because they will determine how your reports are organised and influence how you interpret your role of accounting and finance in an organisation.
Here are some of the key points to understand why financial accounting is important for a business?:
- Accounting is required to account for the economic resources, including all business and non-business activities.
- Language serves as a means of communication; therefore, accounting is the language of business. It assists in keeping and managing records and transactions of a business, organisation, or firm.
- Accounting not only provides valuable information about all the financial operations of a business but also highlights net gains or any loss made at the end of a financial year. And thus, finance and accounting draw an accurate picture of the business.
- The finance and accounting process also helps in making important economic decisions by analysing past performance.
How does accounting help businesses?
Businesses need cash to operate. They need money to pay salaries, buy inventory and make large purchases. Sometimes called capital purchases such as equipment to run their business. Businesses get cash primarily from two sources: banks and investors.
You can think of the stock market as an investor because stockholders are investors of large corporations,
But, an owner of a small business is also an investor of the small business. So, how do investors and creditors decide who to invest or lend money to?
This is where accounting comes into the picture.
Accounting records the financial transactions of a business and communicates this information to potential investors and creditors, marking the importance of finance and accounting for defining the success of a business.
Accounting is so important because it helps you make decisions to grow your business. It also prevents financial mismanagement that can result in financial stress, headache, or even the closure of your business. So, hire finance and accounts expert in India and run your business without accounting stress.
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