10 reasons why accounting matters

It is common for entrepreneurs and self employed people to see accounting as purely an administrative task, necessary for tax and compliance purposes.

What is often misunderstood is its importance for business management and business strategy. Building a good working relationship with an accountant who understands and adds value to your business is very important.

Accounting is the process of recording the transactions an enterprise has incurred in the course of its operating activities. Keeping an accurate and up to date record of transactions is the first step in understanding how well your enterprise or venture is performing.

These records can be used to produce a suite of ‘management information’ that tells owners and managers how the enterprise is operating and helps them make commercial and strategic is common for entrepreneurs and self employed people to see accounting as purely an administrative task, necessary for tax and compliance purposes.

Such decisions include:

• which products/ services to allocate marketing spend to;
• whether to spend on fixed assets;
• whether to proactively reduce or freeze fixed costs;
• whether to diversify business activity;
• whether to take on extra staff;
• whether to apply for a loan;
• whether to raise equity capital;
• whether to exit the business.

Good quality and timely management information can help owners and managers answer key questions that inform the these type of decisions. Building a working relationship with an accountant who can help prepare and present useful management information should be one of the first strategic actions to take.

Robust accounting will allow you to confidently answer the following 10 questions, which are important for effective business management and strategic planning.

1. How much operating profit is the business generating per sale, per month, per quarter, per year?
2. What is the operating margin per product/ service?
3. What is the gross profit per product/service?
4. What is the ratio of fixed vs. variable costs?
5. How much cashflow is the business generating per month, per quarter per year?
6. What is the timing of these cash inflows compared to cash outflows?
7. Which products/ services are the best sellers (contribute the most to revenue and profit)
8. Which products / services are the worst sellers? (contribute the least to revenue and profit)
9. How many customers are contributing overall sales?
10. Who are the key customers based on the share they contribute to total sales

Ask yourself what else you need to know about your business and add to this list to create your suite of management information.