Why Is Accounting Important for Business?

why is accounting important

Statistics show organizations in the United States invested $155 million in accounting and other associated services in 2018.

Looking at the numbers is big business. But why is accounting important? For any business, its financials are an essential scorecard that guides the operations. Unless you know how much you’re making, how you’re making it, and what you spend the money on your firm will likely fall. Only an accounting function can give you such insights.

Let’s take a closer look at specific ways accounting can benefit your enterprise.

1. Separating Business and Personal Expenses

One of the most significant challenges new business owners face is separating personal finances from the organization’s. It feels much easier to handle the business’ funds through personal accounts. Or maybe you have not figured out the ideal legal business structure and, thus, can’t open a business account.

Regardless of the reason behind it, you end up commingling the money that belongs to you and the business.

Setting up an accounting system at the very start can help you avoid operating blindly. For example, instead of using a personal card for business expenses, an accounting system will require you to get one for the firm. As a result, you can then have a clearer view of where the organization’s funds are going.

Setting up a legal business structure, in the beginning, can help you develop your accounting muscle. Since each structure has its legal tax obligations, it will require you to track the firm’s inflow and outflows. You can better manage the resources your business has by exclusively separating them.

2. Identify Workers Better

Your business will rely on two broad categories of workers for its operations. These are employees and contractors.

For either of these two categories, you will need to give proper information on them to the Internal Revenue Service (IRS). The information you provide helps the IRS identify and track those who work for your firm for taxation purposes.

According to the IRS, an employee is someone who you have financial control and behavioral authority over in the long term. The body also recognizes that for one to be your employee, you must have a working relationship with them.

The IRS views people you hire on a short-term basis as contractors. The IRS further defines contractors by their ability to exercise control over their schedule and business decisions.

Before you hire an employee or a contractor, you must define them correctly. Failure to do so will lead to a hefty fine by the IRS.

For every W-2 form belonging to a contractor you fill incorrectly, the IRS will charge you $50. What about when you provide incorrect employee information? It gets worse. The IRS will levy a penalty of 1.5% of the wages together with a 40% penalty on the Federal Insurance Contributions Act (FICA) tax.

If the taxman believes that you intentionally mis-classified your workers, other penalties apply. You will end up paying fines of up to $1,000 or even receive a one-year prison sentence.

An accounts system helps you avoid all this unpleasantness by enabling you to understand each worker’s proper classification. Thus, you will track the right tax and contributions for each worker.

3. Benefiting from Deductions

Many business owners know that some tax deductions can help them get more money back in the business. However, for many of these entrepreneurs, there is so much to do during the financial year that they don’t pay close attention to the deductions.

When the year comes to a close, it’s when many business owners run around to figure their deductions out. But by then it’s too late.

When you put an accounting system in place, it offers you guidance and advice on your deductions throughout the year. Through this advice, you can then make strategic decisions throughout your financial year to benefit from tax deductions.

Consequently, you don’t have to leave money on the table because you forgot about depreciation and other deductible items.

4. Keep an Eye on Accounts Receivable

A significant portion of the business that happens nowadays is not through upfront cash payments. For many organizations, selling their goods or services on credit is how they operate.

The difficulty with this strategy is that you end up having more money tied up outside than you do in the company. If you don’t carefully track how much your clients owe you (accounts receivable), you might end up in a cash crunch.

Having an accounting system your firm can rely on means you can keep tabs on the overall percentage of accounts receivable. When the balance is too high, your accounting system can alert you to it so that you begin taking necessary measures.

Using an accounting system when you operate through accounts receivable is especially helpful in maintaining good relationships.

Since the system helps you monitor how much each client owes, you can avoid high debt levels. That then ensure that you don’t end up calling debt collectors on your clients and soil your reputation.

5. Avoid Auditing

A compelling reason to invest in excellent accounting for your business is the fact that it helps you avoid government auditing.

Although many firms dread auditing, far too many don’t take proactive measures to avoid it. Relying on accounting in your business can help you sidestep this mistake.

Through the financial insight from your accounting system, you will know what tax form mistakes to avoid. The system can also enable you to refrain from excessive write-offs that can trigger the government’s alarm.

If you are tempted to think of investing in accounting as a cost center, look at it as a long-term partnership that keeps an audit at bay.

Why Is Accounting Important?

You likely understand the need to know how your business is performing. But why is accounting important, and how does this relate to your firm’s output? The accounting function is a tool that gives you insight into your financial performance. When you know your numbers, you can alter your performance to meet the objectives of the business successfully.

Gonzalez & Company is passionate about enabling small businesses to simplify their operations. Talk to us today for accounting solutions that can help improve your business.