If you’re a business owner, accounting is an essential element that should never be neglected.
Accounting processes raw financial information and then creates stories about the financial well-being of your company. These stories enable you to make good decisions so that your business grows.
The same applies to your personal finances. Proper accounting helps to grow your personal net worth.
Today, we’ll look at why accounting is important from both perspectives.
3 Reasons Why Businesses Need Proper Accounting
As a business owner, you’ll want to concentrate on the things that move the needle – that increase revenue and reduce costs.
That being said, accounting still has to be done, but it can be time consuming and tedious. Hence, you can either employ staff to handle accounting tasks or outsource to a professional accounting services provider.
Either way, here are three reasons why proper accounting is critical.
1) It satisfies statutory requirements
Depending on the type of company you’ve incorporated and the size of its financial activities, different regulatory requirements apply.
If your company is required to file annual financial statements, such reporting must be true and accurate.
Failure to do so signifies non-compliance with regulation, and may bring about unwanted trouble. Having to deal with such matters takes away precious focus from your core business activities.
2) It evaluates the performance of your business
Bookkeeping is a subset of accounting, and it basically entails recording and categorising all financial transactions that happen in the company.
The function of accounting is to analyse these financial data so that meaningful evaluations can be made.
When such data is presented in an organised fashion, it is easy to see what went right or wrong.
3) It improves decision-making
The success of any business, apart from a good idea, is the relentless execution of it.
Along the way, there will be hiccups. Dealing with these setbacks requires consistent smart decision-making.
Reviewing your financial statements regularly allows you to determine whether the business is going off track or not, as well as see exactly which area needs to be improved on.
Only with complete financial statements will you then be able to budget properly and perform any form of strategic planning. Without them, you’ll be operating blindly, not knowing the true financial health of your business.
Why Is Accounting for Your Own Personal Finances Important As a Business Owner?
From a business perspective, it’s obvious why accounting needs to be done.
Similarly, accounting for your personal finances provides immense benefits too.
For most individuals, having a “personal balance sheet” and a “cash flow statement” will suffice. That way, you’re able to track and monitor your assets, liabilities, income, and expenses.
Why do all these matter to the business owner?
Firstly, your business should give you the highest returns on investment. A dollar into the business can give you multifold back in the long run, so you want to reinvest as much as possible.
However, if you’re not keeping your personal finances in check and/or require an unsustainable amount of money to upkeep your lifestyle, overspending tends to occur, and that can drain valuable “profits” from the business.
Therefore, you should make adjustments to your personal finances along the way. That can reduce your expenses so that there is more money being reinvested back into the business.
Secondly, most businesses are created for profit. Ultimately, you want to improve your life and, most importantly, the lives of the people around you.
By noting down your personal financial information and updating it along the way, you ensure that such information is available to your family members should an undesirable event (e.g., death) occurs. If this is not done, certain assets (e.g., cryptocurrencies) you have might never be accounted for and your family will not have access to them.
Do Business Owner Account For Their Personal Finances?
When we look at Business Owners’ spending habits, the picture isn’t that great.
52% of adults in Singapore don’t even know how much they spend monthly.
And that increases the likelihood of overspending.
Of the respondents who do track their expenses, 71.9% say that they don’t usually overspend.
This shows the impact of performing some form of “accounting” on your personal finances, which allows you to save and invest more back into the business or in other alternatives, creating greater net worth in the long run.
3 Things You Can Do as a Business Owner
Accounting for your personal finances is often easier than for a business.
Similarly, it should be kept simple enough so that you can maintain focus on the money-maker, your business.
Here are three thing you can do:
Firstly, on a personal level, take some time to go through what kind of assets (e.g., unit trusts, cash in the bank) and liabilities (e.g., car loans, home loans) you have. List down the important details about each item. You can record them in an Excel spreadsheet and update it from time to time.
Secondly, consider tracking your personal expenses. It can be tedious if you want to key in every single expense item; therefore, as a more hassle-free alternative, you can pay for all expenses using one card. That way, you can go through your expenses on a monthly basis and decide for each item whether to leave it, find a better/cheaper alternative, or eliminate it.
And lastly, once your personal finances can be kept in check easily, ensure that you have good accounting practices for your business in place. Other operational matters should also be outsourced if possible.
All these help you keep your processes lean so that you have more time for strategising and running your business, which is what you’re good at. In due time, you’ll generate even more revenue and profits.
