Robert Schwinn, CPA
Importance of Updated Accounting for Your Small Business
Updated: May 20, 2022
Having up-to-date accounting records is an essential component of running your business. Whether you update the accounting yourself or hire an accountant or bookkeeper, the time spent is well worth the effort. I'll briefly outline some of the critical advantages of having up-to-date records.
Timely Business Decisions
Updated accounting records are essential to making timely business decisions. By viewing current financial reports, a business owner can make informed decisions on hiring, production, & expanding (to name a few). Suppose an employer is considering hiring a new employee. In that case, they can use the information from their updated accounting to project future revenue and expenses to decide if the company can afford to hire a new employee.
Reviewing current accounting financial reports allows for "trend" analysis, which compares one period to multiple periods, making it possible to review and interpret changes. For example, while reviewing a monthly profit & loss statement covering the last six months, you might observe that an expense has been steadily increasing over the previous four months.
You would then want to review the expense detail to determine why there was an increase and what corrective measures to take.
Key Performance Indicators (KPIs)
Updated financial reports allow for analyzing key performance indications, commonly referred to as "KPIs." A key performance indicator is a type of performance measurement that could relate to different business areas. For example, there are KPIs relating to sales metrics, finance metrics, & customer metrics. Examples of financial KPIs could include net profit, gross profit margin, debt-to-equity ratio, revenue per client, and revenue growth.
The ability to project and plan for taxes is also made possible by having updated accounting records. An accountant can use current financial information to approximate your current tax liability and then project out the annual tax liability. An accountant could then plan ways to reduce the projected tax for the year and avoid surprises when filing your tax return.
With accurate, current financial information, you can make assumptions to create goals for future periods. Current information can be used as the basis for revenue and expenses at current levels. Then assumptions can be made for marketing and sales to achieve higher sales. Costs would then be projected out based upon the sales goals.
If a budget was created, the actual results from updated financial records would be compared to the prepared budget. Variances in budgeted versus actual results would be reviewed, and any necessary adjustments would be made to bring expenses back in line with the budget.
Cash Flow Projection
Analysis and planning should be performed before any significant capital expenditures, such as purchasing an expensive piece of equipment, adding or expanding a business location, or hiring additional employees. A cash projection can be prepared to ensure the necessary funds will be available to support the proposed cash outlay with current financial data.
Stay on Top of Your Business Finances
For a small business, there are many obstacles to financial success. With updated financial information, you will be better positioned to make quick adjustments and better plan for the future.