Why Accounting is Critical to Success

There are three primary reasons accounting is critical to the success of every business:

  • Tax Planning
  • Cash Flow Management
  • Management Information

Lets go through each of them in the order above.

Tax Planning

How would you like to be the coach of a basketball team, but were not allowed to see the score, nor the statistics until the end of the game? Does it surprise you that many small business owners run their businesses this way?

Many small business owners just collect all their financial information in a box during the year. After the year is over, they will drop these on a tax preparer’s desk, and hope the tax person can figure the assortment of papers out. The tax preparer then does his/her best to sort through the materials, and arrive at the information the IRS is looking for. Then a phone call to the wearied business owner will notify him/her of the damages.

It doesn’t take much imagination to realize that this is no way to manage a business. With information available throughout the year, a business can take advantage of tax deductions and tax planning concepts that will reduce taxes for the owner. It’s not unusual to save the business more on taxes than you charge them in fees for a year.

Cash Flow

Every business owner knows that cash is the “life blood” of the business. Without it, the business suffers and in many cases is forced to close. On the other hand, with proper cash flow management, a business owner can make the best use of his/her cash and anticipate cash needs in time to arrange for financing, if necessary.

Furthermore, knowing the bank balance is not enough. A business can have a sizable bank balance, but be in terrible shape. Our role is to go beyond the bank balance and see further cash needs and resources.

Not only will you be able to provide the business owner with accurate lists of cash resources (current assets) but you will also assist them in collecting accounts receivable, reducing their tax burden, and acquiring financing through preparing all the necessary documentation for the bank, investor, or finance company. The fact that you are helping them with their accounting will improve the chances of them getting a loan as banks deeply recognize the value of good financial record keeping.

Management Controls

Would you ever drive your car blind-folded? Of course not, that would be not only foolish but probably have tragic consequences. Yet, so many businesses have the blindfold on when they operate their business. They have no idea where they’ve been, where they’re at, or where they plan to go. Is there any wonder why one-third of all businesses close in the first 6 months of existence?

This is where you should use a presentation book. A presentation book is a sample of complete books of accounting for various types of businesses. You can create one, or Universal has such a book you can buy. Show the business owner what type of information you will be able to provide that will help him/her in running their business.

Review each journal. Identify the value of knowing how much sales a business had each month and where the money was spent. Emphasize that payroll will no longer be the fearful subject it now is as you take over the burden of maintaining it. If they already have a payroll service processing their payroll, congratulate them and offer to help them understand payroll even better.

Show them an income statement and balance sheet. The income statement provides the monthly “score” for the business. By comparing the current month to prior months a business can not only determine if they are improving or not, but also why profits were up or down.

The balance sheet provides information on financial resources and obligations. This will help to determine the strength and solvency of the business. By tracking key indicators, such as current ratio, you and the business owner can identify potential problems before they become insurmountable.

In each of these benefits, you want to emphasize that information is power. The more information you can provide to the business owner the more capable they will be at running their business effectively.

As you’re finishing, ask the prospective client if these benefits are appealing. If he/she says “Yes,” then you will want to negotiate a fee that will be fair for them and fair for you at the same time. If not, this would be a good time to thank them for their time, leave your card, and move on.

For information on how to calculate a fair and worthwhile fee, see the article entitled How to charge your Accounting Service Clients

For more infomation about getting started successfully with your own accounting and bookkeeping service, check out our courses.