As small business owners, we must understand the importance of keeping accurate and timely reports. Such reports provide precise information that will help us make the important and necessary decisions needed to run our businesses efficiently.
It always amazes me the number of small business owners I meet that have no idea about the financial health of their business. As a result, these businesses usually have a life span of no more than two years.
Small business accounting is as important to a business as gasoline is to a car. For your car to perform at an ideal rate, it must have gas. This analogy also applies to proper accounting records for both large and small businesses. Without it, your business will seize to run.
Most small businesses view accounting as a necessary evil at year-end when their tax returns and tax payments are due. As true as this may be, accounting also provides us with several reports that help us make smart decisions. How can you plan for future sales/services and expenses for your business without the proper reports guiding your decisions?
Because most small businesses operate on a cash basis rather than an accrual basis, the cash flow statement is one of the more valuable and relevant reports needed. This is not to say the balance sheet and income statement are not equally important, because they are, however, each statement has its use.
The cash flow statement provides us with information about sources and use of cash. Sources of cash stem from your company’s operations whether sales or service. Use of cash represents the expenses your business incurred for those sales or services over a specific time.
One of the common reasons the IRS audits small businesses is to examine deductible expenses. The IRS knows that small businesses neglect their bookkeeping and accounting. As a result, small businesses are easy targets for an IRS audit. These audits usually result in an increase in tax liabilities which can be devastating to the bottom line of a small business. Maintaining timely and accurate records helps businesses keep track of their expenses, which can result in a successful IRS audit with no change in tax liabilities.
The bottom line is that accounting is a necessary part of any successful business. Without it your business is not sustainable.