August 27, 2021
1 26 - 10 Reasons Every Business Owner Needs a Good Understanding of Accounting

Accounting can be a tricky subject, especially if math is not your strong point.  Your entrepreneurial flair may be better suited to artistic talents, teaching, catering, or anything else you have decided to create a business from doing.  You may make a stunning success of this but if your understanding of accounting is weak your business will suffer in the longer term.  According to the U.S Bureau of Labor Statistics, 20% of businesses fail in the first year and 50% fail in the first five years. This is mostly due to poor financial practices rather than a lack of interest in the product or service an entrepreneur is providing.  Here are ten reasons every business owner needs a good understanding of accounting. 

It Helps to Keep Your Costs Down

If you can do basic accounting yourself it means that you can put the figures and spreadsheets together yourself. It’s always a nice idea to have an accountant on hand to check through the figures you have provided, especially if you need to submit your records to the IRS or pay your tax bill. However, if you have done a lot of the accountant’s job for them it will only take them a fraction of the time to review your figures rather than put them all together for you and they will charge you for their time, accordingly, thus saving you a lot of money.

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It may seem a little unnerving to review your accounts yourself, especially if math was never your strongest subject in high school.  However, most of the computer programs that will help you do this, and achieving an online MBA degree accounting principles from Suffolk University will give you the information you need and the confidence you need to do it. 

To Keep You Organized

However, if you are on top of your accounting, you can get on and concentrate on the rest of your business without worrying that it will fall down around your ears.  Apart from the business itself, your accounting is the next most important thing to concentrate on when it comes a success of your business, and understanding the accounting process and keeping your books in order is the key to that success. 

To Understand Your Incomings Vs Your Outgoings

You may think that this is simple enough but that isn’t always the case, and this is where a lot of businesses fail.  If you are selling your product for $50 and you have sold 100 of them, then you have made $5,000 right?  If you have spent $10 on materials and $5 on shipping costs per item, you need to take that money from somewhere.  The profit you have made is therefore, $35 per item which means that if you have sold 100 of them you have made a profit of $3,500, not $5,000. Many entrepreneurs forget that they must consider the cost of making the product when calculating their profit and therefore believe that they have made more money than they actually have.  This can lead to them overspending and eventually, the business will fail.  These figures have been kept simple on purpose, but they become more complicated as your business grows as you will also have to factor in things such as staffing costs and the cost of rent and utilities for your business.  You will also need to incorporate other figures such as tax and variable overheads into this.  It now sounds a little more complicated but if you can get your head around these figures, you will always know how much profit you have made and therefore how much money you can spend. 

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To Help You Budget

Once you understand how to calculate your profit, you can decide how you want to spend it.  This is not so different from organizing your household budgeting.  After all the bills and overheads have been taken care of, you can decide if you want a big night out or put the money towards a new sofa.  The same is essentially true in business.  Many companies will pay themselves the whole of the profit and not put any money aside for leaner times or to pay for expansion aspirations.  This can leave them short of money if they want to take on more staff or lose a client.  This is an easy way for a company to fail.  

To Keep Track of Payments

Landing a big order is a great reason to celebrate but making sure you get paid for it is even more important.  Many firms go bust waiting for payment on a big order every year as they have had to pay costs upfront to produce the product or service they have been asked for.  Larger firms can be notoriously slow at paying up and many big companies that go into liquidation take small companies, who are still waiting for their invoice to be paid, with them.  With a good understanding of your accounting, you will know who you have to chase for payment and when the invoice becomes overdue.  That way you can make sure you are more likely to be paid on time.  A big order may be easy to track but several unpaid invoices for small orders add up too and if you are not careful it can be these ones that slip through the net.  Make sure you keep on top of every invoice you have sent out and know when and if they have been paid.  After all, you are putting a lot of hard work in for them all. 

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To Review Outgoings

Your outgoings may be changeable but if you have a good understanding of accounting, you can understand what your outgoings are.  Then, you can start to focus on where you could save money on your outgoings and maximize your profit.  When you start your business, you will be unknown in the industry, and the materials you need to make the product or provide a service are going to be small.  This may seem as if you will have lower outgoings at this point.  Suppliers will be much happier to give you a discount if you are buying in bulk and you should not be afraid to negotiate this.  If you do this regularly you will find that your outgoings reduce.  For example, instead of your product costing you $10 to produce it will cost you $9. This will increase your profit.  Unless you stay on top of your expenditure, you are not going to be aware of where you could cut costs.  

To Make Use of Allowable Deductions

It may be that you can offset part of your outgoings against allowances made by the IRS.  These can be different depending on what industry you work in and what state your business is based. It may also be that you are eligible for grants and low costs loans depending on your business and personal circumstances.  You may also be able to apply for a business grant if you need one rather than having to borrow money from the bank which will invariably cost you more money in interest.  Keep up to date with accounting practices and you could save yourself a lot of money.

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To Keep Control of Your Business

The newspapers often report stories of how some unwitting entrepreneur lost everything because someone else was embezzling all the profit they thought they had.  This can often come from staff or accountants, and it usually involves an entrepreneur who had no interest in how the accounting of their company was run.  Don’t turn yourself into another statistic.  Take full financial control of your company yourself and have a good understanding of accounting so that if there is any money being lost you will be able to find it and know who is responsible. Although that sounds like a horror story, it does happen.

On a smaller scale, money can go missing from your company in other ways.  For example, someone could be helping themselves to stock.  This may not be immediately noticeable but over time this will add up to a lot of money.  Checking the stock and keeping on top of your accounting will be the best way of minimizing this risk. 

Accidents do happen and human error can lead to your accounts being incorrect.  This could mean that you believe yourself to have a lot more, or a lot less, money than you have.  

For Mandatory Financial Reporting

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You will need to produce figures for the IRS to show them how much profit or loss your company is making and submit your tax return.  Failure to keep on top of these figures could lead to a hefty fine. It is also more likely that your company will be audited rather than just having the figures checked over. A good knowledge of accounting will help you avoid these issues. 

To Understand the Financial Future of the Company

A good understanding of accounting can help you to plan for the future.  For example, if you are selling more than one product or service you may find that you can make more profit through streamlining your business.  Your accounting knowledge can help you make that decision. If you decide that it is time to expand your business, you may need a bank loan.  If you can apply for the money with a good knowledge of accounting and a realistic forecast for the future, the bank is more likely to take you seriously and lend you the money you have requested than if you go into the meeting without this knowledge.

Eventually, you may decide that it is time to sell your business.  A good knowledge of accounting will help you realize when it is time to sell up and how much money you should ask for.  It will also assist you at the negotiating table once you have received an offer for your company. 

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There are a lot of fantastic reasons why every business owner needs a good understanding of accounting and it’s imperative that you have this if you want to set up and maintain a successful business.  To make sure that you stay in profit, stay on top of your accounting and make sure that you know what your records look like so that you know the business that is creating you a profit in the first place.  That way your business won’t fail because the figures don’t add up.

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