Most entrepreneurs and startups first begin their ventures to pursue their passion and share their creative ideas. While countless creative ideas and products are introduced on daily basis, we can all agree that a successful venture in long run is not only about those ideas and products - but a combination of different business functions and structures.
While there are many functions to grow businesses, one of the most essential function must not be overlooked - accounting. But why accounting? Well, after all we always want to know where our money is going, as one of my favorite author and investor - Robert T. Kiyosaki, describes “the financial literacy”. Thus here are three important functions which accounting practices will provide to your business.
Before I discuss certain functions that accounting can accommodate in any form of businesses, it is important to firstly answer, “what is accounting really all about?”
On a surface it is a story based on numbers, which a business has went through and will go through, it keeps track of all business transactions (historic and anticipated) and records your current and future business positions. Therefore it is similar to series of journals, like a personal diary. Interestingly, that is exactly where the basis of accounting begins - journal and bookkeeping.
Earlier I have discussed that how basis of accounting is similar to journals for a personal diary, in accounting the procedure of recording business transactions or any other financial affairs is called “bookkeeping”, and a page where those transactions are recorded is called a “general journal”.
In a way, it is very similar to writing down your personal expenses on your diary, as we all did in one point of our lives. So, why is this bookkeeping so important?
The answer is, while the general journal is the starting point of accounting procedure, by itself has very little use, however what it can produce is massive. By sorting and organizing all datas, many other statements or records can be produced such as: balance sheet, income statement, statement of changes in equity and cash flow statement. It is these information that is essential to any type of businesses and that really tells the story of any businesses.
It seems complicated and time consuming to, first record general journal, second derive all other statements and analyze all of them. The truth is, it used to be, however thanks to the ever growing information technologies and the miraculous internet there are many softwares and cloud services, that can create and analyze these information in a single click.
Regardless of the venue and type of businesses there is one common characteristic across every venture - they are a seller and a buyer of goods and services. Which is next important function that an effective accounting practices can help - organizing and managing invoices to your customers and paying to your providers.
Because not all transactions are handled with cash on hand, treating these transactions as simple sales or purchase can create misleading information. Therefore an effective accounting practice should be able to differentiate between sales or purchase based on cash and based on future payment (receivable or payable).
Once again, these affairs can be easily managed by using accounting software or online services - especially considering the fact that invoices are sent digitally in modern times. Some services allow you to customize your invoice formats so that it can represent your business and send that tailored invoice instantly to your customers’ email. Not only that, you can also review and get reminded on any invoices or payments due - from both your customers and suppliers.
As an old saying goes “know thyself”, it is crucial to be able to pinpoint your revenue generating assets at any given time in any type of businesses. Effectively tracking these assets are important for three main reasons which are; expense control, customer satisfaction and time consumption.
Hence, first - expense control. Any overstocking of inventories or supplies with low demand is an expense of the business, because it takes money to buy them and money to keep them as well. Not only that, but any shortage of goods or services in high demand is also an indirect cost, for missing an opportunity to generate income.
Secondly, an effective inventory management represents an expertise to customers when the customers want to satisfy certain quantity of goods. The ability to deal with their inquiries can promise any future transactions as well.
Lastly - time consumption. There are two main ways to track these assets from a business - perpetual or periodic. Regardless of which methods, it should be done with ease and consistency. An effective inventories and supplies management can reduce huge amount of time in terms of planning and predicting future forecasts.
There are many accounting programs which allow their users to directly track their supplies and inventories, with ease and plot them on a graph to visualize them, which is a big time-saver.
To sum everything, accounting is essential to any and all types of businesses because it provides a lot of information and keeps track of all transactions needed to effectively manage a business. Bookkeeping, invoice, payment and inventory/ supply management are few examples of accounting functions, which can be used as a basis of business management.
With that in mind, traditional accounting procedures were long and difficult, however with increasing platforms it is becoming easier, faster and more cost effective. Therefore it should no longer be a boring subject but supporting data basis for decision making and managing.