If you’re not trained in accounting or finance and you run a small business (SME), doing your own bookkeeping can seem like a daunting task.
Nonetheless, there’s no excuse to ignore it. You could have the best business development, research, sales and marketing teams in the world, but if your finances are in a state of disarray, chances are your business will not be sustainable.
Therefore, it’s important that you give your accounting the attention it deserves. Commonly known as “the language of business”, it tells various stakeholders how well a company is doing, which is important since it obviously affects those individuals.
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Using this knowledge, you can then make informed decisions about the company. For instance, if your computer systems are due for an upgrade, which month in the year is the right time to do it? Should you place a bulk order of a raw material, or buy it in smaller batches? How will giving your team a two-month bonus at the end of the year affect your bottom-line?
Another vital aspect of accounting is understanding when you will be paid for your revenue earned, after performing a service or selling a product. This is contrasted against paying suppliers and employees who have helped you get the job done. Ideally, the lag time between the two should be as small as possible, without ruffling any feathers.
Larger organisations have the luxury of hiring an accountant to manage this function, but if you run an SME, you might not be able to afford it. This is why it is important to start by understanding its importance and use. The next step is to collate the numbers, then know how to analyse, interpret and apply that information to running the business.
It is also necessary to know that there are two types of accounting: Financial and Management.
The former provides a complete picture of the financial health of the business to both internal and external stakeholders. It includes the preparation of reports such as the balance sheet, cash flow and income statement.
Management accounting is the customisation of reports to individual managers within an organisation to give them relevant, accurate and timely information so they can make good decisions. These include all the different departments such as operations, human resources and sales.