Why Accounting is Important
When you hear someone talk about having their financials prepared, what do you think of? Oh, they must need to their taxes prepared, right? Or maybe they are trying to obtain financing with a bank. These are common instances where business owners quickly prepare their financials for the past year or so. These annual financials are never reviewed or analyzed by the business owner. They are usually just filed or thrown away.
What if I told you that most business experts recommend that you prepare financial statements monthly; quarterly at a minimum? You would probably ask: Why? Why would business experts recommend financials be prepared so frequently? It’s because there is actually a much more important reason to have your financials prepared rather than tax preparation or to qualify for a loan, and that is to run your business!
How do financials help you run your business?
In most everyone’s mind, financials are used by outside parties to measure the performance and value of a business. That is because accounting is the true language of business. Each business, no matter the size, industry, or country of origin, holds a story that can only be told through its’ financials records and reports.
A business owner is similar to a captain of a ship, without a map he can lose his direction during a voyage. Think of the financial statements as your map during your business’ voyage to success. By keeping your financials in order, it is much easier to navigate towards your goals.
There are three typical financial statements that a small business should have and understand well, because these three statements provide the most comprehensive financial view of any business. They are:
- Balance Sheet (shows financial position)
- Profit and Loss (Income Statement. shows financial performance)
- Cash Flow Statement (indicates where cash enters and exits a business)
If you know a little about financial statements then you will know that all of these statements are a snapshot of the past. Yet, small businesses live very much in the present, with a need to make informed decisions about the immediate and near-term future.
In terms of running a small business, you should rely on the three typical financial statements to inform you of the income, expenses, cash inputs and cash outputs that your business has experienced in the past. You should review and analyze this information to help you prepare your 2 most important small business financial management tools:
These two forecasts can assist you in making informed decisions about your business going forward.