When you keep your business's financial information in your head, you're shooting yourself in the foot. After investing so much time and effort into ensuring success, a lack of proper accounting habits can cause your business to fail or limp. Good accounting records are like the dashboard of your car – they provide you with the information you need to make decisions and plan your business. With the right information, you can navigate your way to a successful and profitable business.
A lack of attention to accounting skills is one of the main reasons why small and medium-sized businesses fail.
These are 5 factors that make accounting skills essential for business owners and managers.
1. Accounting skills for shareholders and investors
The purpose of accounting is to track financial data for your business. By entering these transactions into an accounting system, you have a record of what has happened for your business. A lack of good accounting practices can cause headaches because it can make it difficult to sell your business or attract investors. An investor or buyer will want to see your accounting records to get a financial picture of your business.
Without proper accounting practices, interested buyers or investors may lose confidence in your business.
2. Accounting skills for tax, finance, and investment management agencies.
Every business is subject to regulation by state agencies regarding taxation, finance, and investment. Although economic transactions are financial in nature, each transaction is carried out within a profound legal context. For example, what constitutes a sales transaction? Suppose you have delivered goods but not yet received payment; what type of transaction is this? Determining the type of transaction dictates how it is recorded in the accounting system, and therefore determines the reported results and all subsequent information.
You must possess sufficient accounting skills to apply them appropriately to your business transactions and know how to organize an accounting system suitable for your business operations, thereby ensuring you fulfill your responsibilities to government authorities.
3. Assessment by the Bank and Creditors
If you run a manufacturing business and you need a source of materials on credit, your supplier will want to see proof that you can pay your bills on time. If you don't maintain good financial records, you won't be able to show them that you can pay your bills, and you'll lose your ability to secure credit.
Banks pay particular attention to your financial statements, both to assess your profitability and efficiency in using borrowed capital, and to ensure compliance with the State Bank of Vietnam's credit risk management regulations. If you cannot provide your financial records completely and on time, and your financial management skills do not meet the bank's requirements, the likelihood of your business being granted credit is very low.
4. Evaluating Marketing and Advertising Activities
As a business owner, financial reports provide you with an overall view of your business operations. These periodic reports allow you to track the pace of your business after a business cycle to see if your business is performing well. For example, if you need to assess the success of a marketing or advertising campaign, you can review your accounting records to see how well your business has performed over that period.
Without accurate accounting records or skills, you won't be able to understand the impact of your marketing efforts.
5. Increase productivity
Accounting and finance activities account for a large portion of transactions within and across departments of your business. They can directly increase or decrease the productivity of individual departments and the entire business. For example, if all the workers at your construction site have to take time off while waiting for materials to be delivered, this depends on your payment system. Too much or too little finance can both lead to inefficient departmental operations.
Productivity is also relevant in terms of where you decide to invest in your company, a decision that depends on the financial data related to each department.
6. Business Operations Analysis
Accounting data can be used to examine your business operations from different perspectives. You can analyze employee costs, product profitability, and understand the business's income stream over a cycle to plan your budget and business strategy. Accounting reports can show you where a particular product might be losing money. You might discover that the raw materials used to create your product are more expensive than you expected. Knowing this, you can choose to find a new supplier or decide to discontinue the product entirely.
Accurate reporting helps you make decisions that can improve your business operations.