Are you a business owner? Do you understand accounting? Relax, most business owners aren’t accountants; they rely on skilled professionals to do the numbers for them.
However, having a basic understanding of accounting terms can help you improve your business skills, grow your company with less risk, and achieve your business goals.
Here are a few reasons why accounting is essential for your business, and how it helps you navigate the dynamic business environment.
Manage Your Expenses
Do you know where your money is going in your business?
Understanding your cash flows is critical to improving business efficiencies, and ensuring that your company has the cash it needs to maintain and grow operations.
If you don’t have a clue as to what your spending money on, and how much money is entering your companies bank account every month, then how can you expect to know the financial status of your company. Understanding your cash flow starts with getting acquainted with your income and cash flow statements. Visit your accountant and ask them to explain to you the difference in these systems, and what you should be focusing on to watch the money flows in your company.
Predict the Future
Your working capital ratio allows you to identify how much capital you have on hand to execute new strategies and grow your business to new heights. The working capital ratio helps you determine your business debt and income, letting you calculate the company’s financial leverage.
The working capital ratio allows you to identify your company’s cash position, giving you the ability to measure your company’s liquidity and solvency. The WCR enables you to see if your company can meet its payroll obligations and trade balances.
Manage Your Bottom Line
Understanding your company’s financial statements gives you the opportunity to identify weak areas in your company that need to improve on their expenses and outputs. For example, if you’re spending too much on your wage payroll, and not seeing enough productivity from your staff, the financial statements allow you to put your finger on the areas of the company and team that are costing you money. Business is about using the resources you have to create a profit, and if you have staff members or equipment that are slowing down your growth, the financial statements put you in a position to make the tough calls to grow your company.
Apply for Finance
Every business requires capital to grow at some stage of the business cycle. Understanding your WCR, income and cash flow statements, and their effect on the bottom line of your company is critical for sourcing new funding for your company. Lenders want to see that you have a thorough understanding of your business model. With this accounting information on hand, you create certainty in lenders, giving them the reasons they need to take a risk on your business.
Wrapping Up – Accounting is Everything for Business Owners
Accounting is a skill overlooked by many business owners. However, this lack of awareness always comes back to bite you at some stage in the future. Take a short class on accounting basics online, and get the information you need to empower your business into the future.