If you don’t know much about the numbers behind your business, you’re not alone. According to Wasp Barcode Technologies’ Small Business Report–Accounting, only 40% of small business owners surveyed said that they feel “extremely” or “very” knowledgeable about accounting.
However, this lack of accounting knowledge could put you at a severe disadvantage. Running a business without a proper accounting background feels like driving a car while blindfolded–you won’t know where you’re going. Accounting provides you with the answers to several key questions, including the following:
- Are we making a profit?
- Can we afford these expenses?
- If we need to move money around, how can we do that?
- How much is our business worth?
Therefore, whether you run a tech startup or a cannabis dispensary, for instance, you’re going to need an accountant.
In this article, we’ll delve into the ways that accounting helps your business. After reading and considering your own business needs, we invite you to contact our accountants at MI Tax CPA for your free consultation!
What Exactly Is Accounting?
First of all, let’s define “accounting.” Accounting comes in several forms, such as management accounting, forensic accounting, government accounting, and cash or accrual accounting. In all cases, though, accounting refers to the process of recording and analyzing financial transactions.
Why Does Accounting Matter?
Often called “the language of business,” accounting conveys crucial financial information that stakeholders need to know in order to make decisions. For example, you’d never want to hire new employees, make an investment, or conduct a merger without knowing where you stand financially.
However, raw data can be confusing to look at. That’s where business accountants come into play. An accountant can interpret and explain your financials in a way that makes them easy to understand.
Without further ado, let’s examine the roles accounting plays in your business.
Ensuring Compliance with Government Regulations
As a business, you must adhere to state and federal regulations, which include paying taxes. For instance, businesses in our state must pay the Michigan Business Tax (MBT). The MBT charges a 4.95% business income tax as well as a 0.8% gross receipts tax.
Accountants will help you comply with government statutes by making sure that you file for taxes accurately and on time.
Filing Financial Statements
In addition to taxes, you also have to file your financial statements. In Michigan, you do so with the Corporations Division of the Department of Licensing and Regulatory Affairs. You may have to file your statements with other entities as well, including stock exchanges. Of course, accounting will help you prepare these financial statements.
Assessing Your Performance
Without accounting, you’ll have no idea how well your business is performing. Looking at up-to-date financial records will help you keep track of your gross profit margin, expenses, possible debt, and other figures related to day-to-day operations.
If you hold onto all of your accounting records, you can even compare your most recent numbers with previous reports to track your progress and adjust your budget accordingly.
Making Informed Decisions
To run your business, you need accurate data regarding the company’s profits, cash position, assets, and liabilities. Fortunately, accounting will provide you with all of this important information so that you can make your next move.
When considering an investment, you need to analyze costs and cash flow projections so that you can determine your return on investment (ROI). Maybe you want to open a new production facility, launch a new product, or choose a new supplier. These decisions involve weighing the initial cash outflows against the eventual cash inflows of each option.
Accounting produces the financial data necessary to calculate the ROI for each possible course of action. When the accountant presents their findings to you, you’ll have the facts and figures you need to make the right decisions for your business.
Monitoring Production Costs
As its name implies, cost accounting helps you calculate manufacturing costs, determine how much you need to sell in order to break even, and set ideal inventory levels for a complete sales plan. When pricing your goods or services, you need to know how much they cost to produce so that you can set a price that will help you make a profit.
Depending on your industry, it can be easy to let costs get out of control. However, setting standard operation costs to use as benchmarks can help you keep your spending in check. After establishing these figures, you can keep an eye on production costs on a regular basis—perhaps every week or month—to make sure that you don’t exceed them.
Planning for the Future
Successful business owners typically don’t act spontaneously; they use accounting processes to create detailed plans before making decisions.
When planning, you need to make cash flow projections based on your previous financial data as well as business trends. You also have to set a budget, which will depend on your aforementioned production costs in addition to these projections. With this information, you can create a reasonable sales plan.
Now that accounting has helped you gather and analyze all of the necessary financial numbers, you and your colleagues can intelligently discuss strategy.
You have all of the data you need to navigate a variety of “what-ifs”:
- What would happen if you decided to increase salaries?
- What if you started using higher-quality materials?
- What if you decided to lower your prices?
In this latter scenario, you’d make less money per unit, but hopefully an increase in sales would give you a greater profit in the end. As you can see, accounting gives you the ability to navigate any potential financial scenario going forward.
Contact MI Tax CPA for All of Your Accounting Needs
As a full-service CPA firm, we at MI Tax CPA have the expertise to help Michigan businesses understand their finances. Instead of merely crunching the numbers, we’ll always take the time to explain what they mean so that you can make the best decisions for your business.
Call MI Tax CPA to schedule your free consultation!