Running a business and ignoring or having inadequate accounting software is like building a house on top of a bonfire and not bothering to fit a fire alarm. Many small businesses run into difficulties sooner or later, it is a fact of business life. Timing and how those crises are dealt with are critical to both the success and in some cases survival of the business.
All medium and large companies hold regular meetings at which the financial accounts are presented and discussed. While all businesses have problems from time to time rarely do medium and larger businesses actually go out of business and if they do it is invariably because financial mistakes have been made.
Small business should take note of this fact and especially self employed business that often do not have regular presentations of the financial statements and the ensuing discussion. Considering the financial state of a business is a critical area that is so often missed from the management of a small business.
Every business has to prepare a set of financial accounts. Those financial accounts may be produced manually or using financial accounting software. The main objective of producing the accounts is all too often to satisfy taxation requirements and not the financial control and management of the business.
When accounts are prepared on an annual basis the day to day financial management of the business is reduced to the size of the bank balance. When that bank balance reaches a critical low level the small business will react but the action required to fix the problem may well have been endemic for many months. Early action is always best.
By using accounting software and the financial control it can offer the small business not only provides an early warning system but also indicates where management action is required. Financial accounts should be prepared by all small business on a monthly basis to maintain financial control.
Accounting software can be a simple system of producing a monthly profit and loss account and for many small businesses that may be sufficient as the smaller the business the more intimate knowledge the owner has of its finances. Other types of accounting software can produce balance sheets and with a balance sheet the value of creditors, debtors, bank balances and assets. In larger organisations the financial accounts will be more sophisticated and produce analysis of all main areas of the business.
During the financial life of a business there are types when sales grow and times when sales decline. The amount owed by customers is called debtors and the debtor balance may grow in line with sales turnover but can also move according to the efficiency of the financial control and credit control systems in place. The movement in the debtor balance potentially having a critical financial effect on the liquidity of the business.
The overall movement of the debtor balance on a day to day basis is not always obvious and only by producing a specific total at the end of each month can the debtor balance be viewed and questions asked to maintain strong financial control. Slippage in credit control procedures must be tackled at the earliest stage to avoid a serious financial impact on the business.
Purchase expenditure can also increase and reduce and the creditor balances can increase and decline. There is a tendency in businesses not making sufficient profit for the creditor balance to grow as the time taken to pay suppliers is extended. Such action may be necessary and is a natural reaction but the real cause should be addressed, that cause being an inadequate level of profitability.
The profit and loss account for a small business should not be viewed as an administrative headache but a vital tool in the financial management and control of the business. A monthly profit and loss account produced by accounting software should be viewed more of a financial health check on the business.
The profit and loss account will show the sales turnover and a list of purchase expenses producing a net profit or loss for the month. By comparing the current month to recent previous months the trend of financial performance becomes obvious. This is a critical function of accounting software to produce real numbers that will indicate where action is required.
The accounting software retains previous financial information entered that enables sales to be monitored and the effect of sales and marketing campaigns to be seen in real numbers. Purchase expenses and business costs can also be viewed and patterns can be easily detected. Any numbers produced by the accounting software can then provide the basis for management action to either improve financial control or take management decisions to grow higher sales or reduce costs.
By using a financial accounting system to critically review the business finances on a regular basis provides both opportunities for sales growth and higher profit levels but also serves as an early warning system of business problems. A profit and loss account and in larger businesses a balance sheet too are essential tools in achieving financial control of the business and producing the desired financial performance.
The absence of a suitable accounting software system or used purely for tax purposes once a year leaves the financial performance of the business to the intuition of the management and is unmeasured. Imagine if the same criteria were used in a sporting context.
A long jumper practises every day and believes he is jumping well but never measures his jumps or analyses his physical condition, training schedule, run up speed. It would come as no surprise if another long jumper with similar ability who monitored fitness levels, worked on the run up and jumping technique and measured every jump would in competition jump the farthest.
And so it is with accounting software and regular financial control. If the numbers are produced on a regular monthly basis the numbers can be diligently analysed and an improved financial performance will follow but most importantly business problems can be detected and fixed before they become terminal.