At first blush, accounting might seem like an unappealing part of operating a small business, especially if your company isn’t an accounting firm. However, accounting is a vital element of business, for yourself, for lenders, and for the Internal Revenue Service. Because of this, you should know some basics of accounting, even if you mostly outsource this task.
What Is Accounting?
In a basic sense, accounting is the task of interpreting a company’s financial history, understanding its current financial state of affairs, and predicting its financial future. Accounting includes making decisions about how to categorize different records, like deciding if a payment to a certain vendor is a short-term or long-term expense.
Accounting is both backward- and forward-looking, which is why accountants are both obsessed with financial records, like income statements and receipts, while also forecasting how a company will fare in the months and years to come. Accounting takes into consideration macroeconomic trends and usually makes multiple predictions at once, typically based on whether the economy grows, stays the same, or enters into a recession.
What Is the Difference Between Accounting and Bookkeeping?
The terms bookkeeping and accounting are often seen as synonymous, but there are important differences. Bookkeeping is generally seen as the maintenance of records, particularly of cash inflows and outflows. An accountant uses these records to create important financial statements and make forecasts.
In terms of qualifications, accounting is generally seen as requiring more certification and education than bookkeeping. If you’re the one in charge of the financial end of your business, know that, while keeping accurate books is vital, you should also be taking time for accounting, i.e., deciphering your company’s financial progress and articulating business plans.
Why Is Accounting Important for My Business?
Accounting is critical for multiple reasons. First, you need to know your money situation—how else can you really know if your business is succeeding or not? You want to know how your company performed in the past and have access to educated prognostications about its future.
By staying on top of your accounting, you significantly increase your chances of qualifying for a business loan. Ongoing, accurate accounting throughout the year also takes a lot of the pain when April rolls around and you’re preparing your taxes.
Should I Hire a Professional?
You might find that hiring a financial professional is not in your budget currently, but you really should make it a priority no matter how big your business is. The expertise is well worth it. Many small business owners, especially sole proprietorships, get by doing their own accounting, but your best bet to improve your revenue and avoid an IRS audit is to hire professional help.
Even seeing an accountant or tax preparer once a year around Tax Day can relieve a tremendous burden. Engaging with a professional over time can give you a better picture of how your company is faring and what you should do in the future.