The question “Why accounting is important?” is one of the most asked questions. With business activity increasing each year, the need to understand accounting reports is more critical than ever.
Even a new business should look at the accounting system and the reports they regularly require to run their business smoothly. Business owners may need reports along with investors, banks and management.
While the number of students learning about accounting has been on the rise for many years, it is still surprising how few businesses know how important it is to understand this vital part of the business world.
7 Reasons Why Accounting is Important
- Understanding your business
- Accounting keeps the business organised
- Produces the reports for year-end returns
- Helps decision making
- Required for investments and loans
- Measures business performance
- Legally required
- Understanding your business. The first reason why accounting is essential is to understand your own business. It is impossible to run a business without keeping track of all of your expenses and revenue. As a business, you need to look at the whole picture; income and expenses are a small part of the entire picture. The balance sheet and forecasting can show a completely different view to the profit and loss account.
- Accounting keeps the business organised. Without accounting procedures in place, you wouldn’t know how much money a business has available. It is good practice to complete accounting regularly and having up to date reports.
- Produces the reports for year-end. It doesn’t matter if you are a large limited company or self-employed year-end submissions to Companies House and HMRC are required. The minimum reports required are the Balance sheet and Profit and Loss.
- It helps Decision Making. Every business has to decide how they run it, how much stock to keep and if changes are required. Looking at the accounting figures will help make these decisions.
- It is required for investments, loans and sale of the business. If you need a business loan or investment, they will look at your accounts to decide if it is a good investment. Depending on how significant the investment is will depend on how much information required. Complete due diligence may also be required.
- Measures business performance. There are lots of accounting ratios to help measure business performance. We have produced a list with ratio calculators.
- It is legally required. It is a legal requirement for businesses to keep records of their accounts. Year-end accounts need submitting to either companies house or HMRC. Documents need keeping for a minimum of six years.
Why Accounting is Important? – Minimising risk
Another reason why accounting is important is to minimise the risk of business failure. There are many different types of business: rental companies, estate agents, restaurants, bars, computer companies, and law firms, to name a few. All of these businesses have an accounting system in place.
Accounting systems are designed to help manage the books so that there is proper record-keeping and no confusion about who owes what to whom. Accountants also use their bookkeeping skills to perform year-end accounts or audits.
Many accountants also work as financial analysts for their clients. The financial analysts’ jobs entail examining the financial records of a business to find out if there are any problems. Finding problems early on is easier to do with accounting information than figuring things out later when the problem may have become much more severe.
Creating a Financial Plan
Financial planning is an essential part of accounting for a business. A financial plan will show how a company will perform in the future. It is important for several reasons:
- Business growth – If you are planning to expand, there will be additional expenses and revenue. A plan will help you to see if you can afford to expand
- Cash flow – keeping track of cash will show when you might be short of money or have money available to reinvest. See our planning example below for a seasonal business.
- Investors or banks – will require a forecast to see if it is viable to invest or loan money.
Why Accounting is Important – Business Planning Example
One of the reasons planning is important is for a business with seasonal sales. An example of this is a garden furniture manufacturer. The company starts in January and manufactures a large stock of furniture. The stock is mainly sold from April to September.
The business will need to plan for the whole year to ensure that it has enough capital to get through the quieter months. This is where cash forecasting is an essential part of a business.
An accountant isn’t always required for small businesses, but they might be able to add value. They can add value by knowing taxation rules and what a business is entitled to claim.
However, if a company is going to hire accounting services, it needs to make sure they have the appropriate services required. Some accountants specialise in the size of businesses or by type.
One of the first things a client should do is ask an accountant if they have the proper certifications. There are several accounting bodies in the UK. They will have taken an extensive education course and have gone through a background checking process to qualify to perform their duties fully. Their regulatory body will ensure that they are fully trained, have a backup and insured.
Hiring a bookkeeping service
Hiring a bookkeeper can add value by allowing you to continue to concentrate on the business while they complete the accounting records. A good bookkeeper will ensure that important business accounting reports are published on time.
They can help chase debts, raise invoices, produce reports, enter transactions and put systems in place. Some bookkeepers will file annual accounts without the need for an accountant.
Conclusion Why Accounting is Important
With the correct accounting procedures in place, a business can run smoothly.
Reports can be used to see where a business is losing money and what steps need to be taken in order to turn things around. It can also be used to provide accurate and up-to-date financial information.
All of this information can help the business make intelligent decisions regarding what to invest in, how to grow their company, where to buy shares in, and anything else that they feel may be important to its future growth.
Further Reading Why Accounting is Important?
As part of our bookkeeping templates, we created a budget Excel template. Using this template will assist your business in setting a budget and then comparing the actual figures to the budget.
Further reading on why accounting is important? is available on an accounting software site called FreshBooks.