What is Accounting and Why Do Small Business Owners Need It

For those in the startup or beginning stages of business, the terms “accounting” and “bookkeeping” may be completely terrifying, and rightfully so! Accounting can be confusing and hard to wrap your head around all the different terms and rules. Ledgers? Tax? Debits and credits?

Thankfully, accounting has gotten so much easier with the introduction of cloud-based accounting software. Especially software tailored at small businesses who want a simple, yet effective bookkeeping tool. Still, it is important to understand why it is a fundamental part of all businesses and how it works.

What is Accounting?

There are two different categories when talking about accounting: financial and managerial.

1. Financial accounting focuses on data and information that is important for stockholders, creditors, and regulatory bodies. As a small business, this isn’t something to really worry about until much later on, so don’t sweat it!
2. Managerial accounting is the handling and organization of all internal, non-public information. This includes things like salaries, profits, and the cost of goods purchased. Why does tracking this information matter? Well, it allows managers and executives to make financial decisions. With clear records, it is easier to analyze and make crucial business decisions that will help your small business grow.

Because you’re a truly small business owner, we’ll only be focusing on what you need to know— managerial accounting.

So Why Do It?

All decisions you make as a small business owner should have data and information to support it. Going out on a whim might sound exciting, but it can be very risky in the small business market. Accounting allows you to track your business’ assets, liabilities, and income. With this data, you can get a clear overview of your companies health, projected growth, strengths and weaknesses, and next steps.

There are two major aspects that proper accounting highlights:  income and expenses. Understanding and documenting your income and expenses will allow you to make changes to your business based on your current revenue. Customer satisfaction is a good measure when looking at income over expenses, and understanding this gives you a stronger ability to make your customers happy!

Want to make sure you get paid? Accounting and bookkeeping tracks who owes you, who you owe, and what has or hasn’t been paid for. Tracking things like payroll, loan and interest payments, budgets, and tax is also an important function in growth (and not getting into trouble from the CRA…).

Can I do Accounting Myself?

Yes you can! But it’s important to find an efficient method based on the size of your business. Lots of small businesses have gone through the struggles of manual accounting on paper, or using tools such as Microsoft Excel. Alternatively, many hire expensive professionals to do all their bookkeeping for them. Thankfully, we have developed software for “truly small” businesses, that allows them to handle all their accounting and invoicing in one simple application (if you are a truly small business, click here to learn more). As a new entrepreneur, it can be super beneficial to save your hard earned money and do it yourself! Plus, as the owner of the business, it’s important that you understand all this information anyways.

Stay Accountable

As we have discussed, accounting is an important tool for analyzing and planning for success in your business. Aside from making profitable gains and documenting your growth, it is also important when playing defence. Proper bookkeeping hedges your exposure to risks such as fraud. The government can also choose to audit your books whenever they see necessary, financial history will quickly become a life-saver! In a weird, in-direct way, accounting is really the quantifiable conscience of your small business.

Still not convinced you are ready for a cloud-based accounting software? That’s okay! Every business grows at a different rate, and maybe you don’t need a bookkeeping tool yet. Ready to send invoices? check out TrulySmall Invoices!