How does a good accounting system increase your company’s likelihood of staying in business and earning larger profits?
It helps you answer questions like these:
How much business am I doing and how much of that business is tied up in receivables?
A good accounting system will not only help you track your company revenues, it will help you track how much cash is actually being collected on those revenues. Closely monitoring your collection of accounts receivable is critical to good cash flow management for any business. An effective system will also help you determine what your losses from credit sales were, who owes you money, who is delinquent and who you should continue to extend credit to.
How much cash do I have in the bank? How much is my investment in merchandise? How often do I turn over my inventory? Have I allowed my inventory to become obsolete?
A solid accounting system will give you a complete picture of your company’s assets. It will also tell you if you are utilizing your company assets efficiently. A good system will tell you your cash position at any point in time. It will also tell you how much inventory you are carrying, the makeup of the inventory you have, and how quickly it is turning over.
How much do I owe my suppliers and other creditors?
Knowing how much you owe your creditors and when those bills need to be paid is key to managing your company’s cash flow. It can help you take advantage of favorable credit terms with your suppliers, as well as avoid late payment penalties. It will also help you to maintain strong relationships with those same suppliers.
How much gross profit did I earn? How much profit did I earn and what are my resulting taxes?
Profit: it’s why most business owners are in business. Knowing your company’s gross margin and profit margin is key to having a sustainable business, putting cash in the bank, and paying your taxes. Also, since these are common measurements across many industries, knowing these metrics for your business will allow you to compare your company’s performance to competitors in your industry, as well as best in class in other industries.
What were my expenses, including those not requiring a cash outlay?
This is critical to effectively managing your business and earning a profit. You need to know what your current expenses are in total, as well as the major drivers of those expenses. It is also critical to know how those expenses have changed over time and what they are forecast to be in the future as your company grows.
What is my weekly payroll? Do I have adequate payroll records to meet the requirements for worker’s compensation, social security, unemployment insurance, and withholding taxes?
Having employees that enjoy coming to come to work each day is key to having a productive company. Your employees are depending on you to handle their payroll accurately and on a timely basis. So, keep your employees happy and get your payroll right the first time. Your company’s profitability depends on it.
What is my capital position? How much of my assets would be left after paying my creditors?
Knowing what your company is worth today and what it will be worth in the future will help you to ensure that your company is on track to achieve its short term and long term goals. It will also help you focus on those items in your business that increase its value over time. Furthermore, it could help you position the company for a sale or public offering if that is in your plan.
Are my sales, expenses, profits and capital showing improvement? Did I do better than last year?
If your company’s financial position is not improving, you need to know what is driving it. Being able to analyze the financial performance of your business on a monthly basis will help you understand how your company is changing over time. It will also help you identify those problem areas early on rather than later, so that you can make minor course corrections in your business to stay on track with your goals.
On what line of goods or in what departments am I making a profit?
For companies that provide several products or services, this can be very important. Oftentimes, there will be products or services your provide that are very profitable and others that are not. Knowing the breakdown of these products and services in your portfolio of offerings can help you determine which products or services to provide more of when you are resource constrained.
A good accounting system should be able to answer all the questions above and more. If your not getting this kind of information out of your accounting system on a regular basis, maybe it’s time for a change. If used effectively, a good accounting system can significantly increase your company’s likelihood of staying in business and earning larger and larger profits.