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Why is Understanding Accounting Important?

For any business owner, it is critical to understand how accounting works, the value it holds, and how to use it to make wise financial decisions. 

When it is fully understood and applied, accounting can serve as a valuable tool, unlocking important information you need to grow your business. 

Understanding Accounting Helps You Understand Your Business

When you utilize accounting methods properly, you are able to track your business’s income and expenses. This helps you to generate essential financial reports.

These reports provide you with information on the financial health of your business. They can help you make decisions and pinpoint areas where you are struggling.

There are three primary financial reports tied into your accounting. Each of them provides different information you can use to grow your business. Let’s take a closer look:

  • Statement of Cash Flows: This is critical for cash flow management and overall business success. It outlines the money flowing in and out of your business. Keeping a keen eye on this statement ensures your business is operating properly without the risk of running out of money.
  • Income Statement: An income statement outlines the profit and loss of a company over a period of time. It outlines your total expenses and revenue which is essential because even with solid sales, your business may not be profitable. 
  • Balance Sheet: The balance sheet is a comprehensive statement that provides a list of all assets, liabilities, and capital for the business. Essentially, it is an overall snapshot of your financial position.

You can derive important information from each of these reports to gain an overall understanding of the financial state of your business. 

Helps You Meet Government Regulations

Understanding accounting also helps you with meeting compliance requirements set by local, state, and federal agencies. 

Every business needs to follow rules and regulations to run legitimately. If you fail to meet those rules, you’ll face fines and risk losing your business.

One key area of this is tracking your income tax, sales tax, and other tax obligations. Proper tracking makes tax time a much smoother process.

Not only does it provide you with the tools you need to complete your taxes and pay what you owe, but accounting also helps you to plan ways to save on taxes. When you use it correctly, it can work as a tool to help you to estimate your tax liabilities and pinpoint opportunities to reduce them. 

More so, your accounting backs up all of this information, so if you need to use the data later, you can.

Guides Cash Flow Management

Cash flow is king when it comes to running a business. Your business will likely fail if you do not have a strong cash flow

When you have cash flow problems, you: 

  • Don’t have enough cash to pay your bills or cover costs in an emergency
  • Spend more cash than what is available to you
  • You have a mismatch between the timing of bill payments and payment collection from clients

These common problems can be avoided when you understand your accounting.

For example, one of the easiest ways to improve your cash flow is to improve your accounts receivable days. This is a metric derived from proper accounting that measures the number of days it takes your clients to make payments to you. 

Ideally, tracking this metric and following through with your plan for improvement will lead to a stronger cash flow. 

This is just one of the many ways you can leverage accounting metrics to manage your cash flow

Aids in Decision-Making and Financial Management

Accounting provides you with insight into the health of your business. With it, you can see what is doing well and correct financial issues before they turn into larger problems.

Without a strong understanding of accounting and how numbers tell the story of your business, it becomes much more difficult and even impossible to spot these mistakes.

However, when you are aware of how your numbers work together, you can use your accounting data to make decisions for your business. Decisions like…

  • Whether or not you can afford to make a new hire
  • If you can expand your business with a new branch
  • Introducing new products to your market 

…should all be made after you’ve reviewed your data and determined the best course of action.

Want to Ensure You Are Fully Understanding Accounting for Your Business?

A strong understanding of your accounting can be the difference between a successful business and a business that barely stays afloat. 

In addition to meeting government regulations, accounting helps you see the big picture of your finances, manage cash flow, and make the right business decisions. 

If you are not leveraging your accounting to reap these benefits, it’s time to turn to an expert.

Vertical CPA will help you gain a greater understanding of your accounting and provide guidance for moving your business forward.

Contact us today to learn more about Vertical CPA and our accounting services.

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