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Insight: Accounting, a compass for small business success

The right setup is indispensable for managing operations effectively, says Raúl Burgos, president of Global 1080 Business Solutions and G1080 Consulting.

I have spent most of my life next to an accountant, my dear father. I can recall from my preteen years him coming home from work often with a stack of these long, greenish books with pencil annotations throughout them.

As I grew older, I would often wander into the bedroom, which had evolved into an office of sorts, and stare at him while he, in an almost Zen manner, would manage these ledger books with his left hand while entering numbers into an adding machine with his right hand. That was a skill born out of almost 40 years as an accountant.

Interestingly, for those accountants providing services to small and medium-sized businesses, there had been no technological advancements during those four decades, aside from maybe a better manual adding machine and the advent of mechanical pencils. The accounting process was still reliant on knowledgeable human resources, time and a monk-like dedication to capturing every single entry correctly.

During my teenage years, I asked my father once about why he spent so much time doing all this accounting, which would at times invade his evenings and weekends. His answer to me was simple: “If we do not have timely accounting, the business will not know where we are; and if we do not know where we are, it will be very hard for the business to get to where it needs to go.” Lesson learned!

So, how much thought, time and resources have you allocated to having the right accounting setup to run your business?

In today’s world, this may seem like a rhetorical question to a business that is already in operation, but in reality, it is not. In my consulting practice, I have encountered businesses whose operational problems ultimately were traced to not having the right accounting setup, undervaluing its operational importance or simply not mining the data to understand how the operation is performing and thus making educated business decisions.

Most of the interactions had been reduced to paydays, annual taxes and monthly generic statement reporting, which was seldom discussed or reconciled. A dangerous trend…

Although seldom overlooked and placed on the backburner of starting a business, the right accounting setup is indispensable for small businesses as it provides the financial information and insights necessary for managing operations effectively, complying with legal requirements and achieving long-term success.

Some of the important reasons as to why a well-defined and structured accounting process is vital for small businesses are as follows:

Financial control: Proper accounting provides insight into the financial health of your business. Tracking income, expenses and cash flow helps you understand where your money is coming from and where it’s going. This knowledge enables better financial decision-making.

Legal compliance: Small businesses are subject to various legal requirements regarding financial reporting and taxation. Accurate accounting ensures compliance with regulations, reducing the risk of fines or legal issues.

Tax obligations: Tax laws can be complex, and small businesses must comply with tax obligations to avoid penalties. Effective accounting helps in accurately calculating taxes owed and filing tax returns on time.

Business planning: Accounting data is crucial for business planning and budgeting. It helps in setting realistic financial goals, forecasting future cash flows and identifying areas for growth or cost-cutting.

Access to financing: When seeking financing or loans, lenders often require financial statements and records. Proper accounting provides the necessary documentation to demonstrate the financial stability and viability of your business to potential investors or creditors.

Decision-making: Sound financial data derived from accounting enables informed decision-making. Whether it’s determining pricing strategies, evaluating the profitability of products or services, or deciding on investments, accounting information provides the foundation for making strategic choices.

Business performance evaluation: Regularly reviewing financial statements and reports allows you to assess the performance of your business over time. It helps in identifying trends, evaluating the effectiveness of strategies and adjusting as needed to improve performance.

Risk management: Accounting helps in identifying financial risks such as cash flow shortages, excessive debt or declining profitability. By recognizing these risks early, you can take proactive measures to mitigate them and safeguard the financial stability of your business.

Resource allocation: Accounting helps small businesses allocate resources efficiently. By tracking expenses and revenue streams, you can identify areas where resources are being underutilized or where there’s potential for growth. This allows you to allocate resources effectively, maximizing profitability and minimizing waste.

Cash flow management: Small businesses often face challenges with cash flow, especially during periods of growth or economic uncertainty. Proper accounting enables you to monitor cash flow closely, anticipate cash needs and plan accordingly. This includes managing accounts receivable and payable, optimizing inventory levels and making strategic decisions to maintain healthy cash reserves.

Financial transparency: Maintaining transparent and accurate financial records builds trust with stakeholders, including investors, lenders, employees and customers. Transparent financial reporting demonstrates accountability and integrity, which is essential for fostering strong relationships and attracting support for your business.

Performance measurement: Accounting provides metrics for measuring the performance of your business. Key performance indicators (KPIs) such as profitability ratios, liquidity ratios and efficiency ratios help assess how well your business is performing relative to its goals and industry benchmarks. This information is invaluable for monitoring progress, identifying areas for improvement and celebrating successes.

Business valuation: As your small business grows, you may encounter opportunities for expansion, partnership or even selling the business. Accurate accounting records are essential for valuing your business and negotiating favorable terms in such transactions. Potential buyers or investors will scrutinize your financial statements to assess the value and viability of your business.

Author Raúl Burgos is a business executive with 30-plus years’ experience, and is president and managing partner of Global 1080 Business Solutions and G1080 Consulting. Send comments to [email protected].

Risk mitigation: Small businesses face various risks, including financial, operational and regulatory risks. Effective accounting practices can help identify and mitigate these risks by providing early warning signs of potential problems. Regular financial analysis and internal controls can help safeguard assets, prevent fraud, and ensure compliance with laws and regulations.

Continuous improvement: Accounting is not just about recording transactions; it’s also about learning from past experiences and improving future performance. By analyzing financial data, identifying trends and conducting variance analysis, you can gain valuable insights into what’s working well and what needs adjustment. This continuous improvement mindset is essential for adapting to changing market conditions and staying competitive in the long run.

In conclusion, accounting is a fundamental aspect of running a successful small business, and I always recommend keeping it as close to business management as possible and outsourcing as little as possible. The right setup provides the financial information and insights necessary for making informed decisions, managing resources effectively and achieving sustainable growth. By investing in sound accounting practices, small businesses can enhance their financial health, mitigate risks and seize opportunities for success.

There are no excuses in today’s world for not having an effective accounting setup; an experienced in-house resource combined with the right technology and experienced guidance and assessment from a proven accounting firm will add to your story of success.

In my father’s words, know where your business is so that your business can get to where you need it to be.

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This story was written by our staff based on a press release.

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