4 Things You Should Get From Your Accounting System
Business accounting is about more than just getting information to do your taxes. It should provide you with useful information that helps you understand how you are doing, provide a way to manage cash flow, prevent fraud, and do tax planning.
- Providing useful information to assist in decision making.
A good accounting system lets you track the revenue sources of your business and their profitability. For example, we have an Air Conditioning Contractor who thought that the new construction part of their business was the most profitable, as it created large sales and made the service part of their business look insignificant. When in truth once we set up their accounting system to track revenue and expenses by profit center, Construction vs Service, they found that service (with only 30% of the sales) produced 70% of their profit.
- Managing cashflow is essential. Managing cash flow allows you to understand how much money you will need to meet obligations before it comes time to write the check and you discover there is no money in the bank. To do this you need to record expenses payable at the time of purchase along with the due date the expense needs to be paid. An up-to-date accounts payable system along with an up-to-date accounts receivable system are crucial to knowing how much cash you will need and when you will need it.
- Prevent fraud before it happens. Fraud prevention has become an important tool for every business. In a world where bank and credit card fraud are ever increasing, it’s important to verify charges to your bank and credit card accounts, and not just use what is on the bank statements. Recording your actual payments and charges when made gives you something to check the statements against so that unauthorized charges don’t slip through.
- Tax planning before tax time. Tax planning lets you take every legal advantage of the tax code, including setting up pensions, accelerating expenses, hiring relatives or your children, etc. The first thing you need to have when doing tax planning is the knowledge of just how much income you will have as taxable income. With that knowledge your tax professional can suggest strategies that are best for you.
An accurate up-to-date accounting system is the key to all of these things. There is no better way to use that information than to review it at least monthly so that you can adjust how you operate your business for changes in the market and profitability.