The importance of maintaining accurate financials is something that cannot be understated. The story these numbers tell plays a key role in the decisions that you make, strategies you implement, and can ultimately determine your success or failure. They inform your business decisions and tell the story of your business to the world. Below are six examples of how accurate business records can help to increase the value of your business.
When it comes to your financials, even the smallest numbers have a big impact. Assets continually lose value from the date they were purchased. Certain percentages need to be deducted to reflect the depreciation.
Companies may report certain numbers as the revenue they have earned. How much of these earnings are actual cash, though, and how much of the earnings are in accounts receivables that aren’t being accurately reported.
All of your numbers need to be reported. Your profits before taxes, profits after taxes, profits after interest payments, asset depreciation, and taxes. These numbers will help you understand how your business is performing and can show future investors a lot about the business.
Taxes as a small business owner or corporation can be incredibly high. If a business is generating large profits, the taxes that they are required to pay are high.
Small business owners can find themselves getting overwhelmed at how much money they actually have left once they have paid their tax bill to the local government.
Are there ways for them to reduce their tax burden? If they can, it’s going to require accurate financials to help an accountant or CPA paint a clear picture to the government.
If they can’t reduce their burden, they could see savings accounts depleted very quickly. The government could also use the inaccuracies and lack of detail in the financial statements to levy further penalties and fines during an audit.
Accurate and detailed financials are also required to help you catch potentially costly mistakes or internal wrongdoings before they become major problems for you.
If there is illegal activity happening, the easiest way to catch it is by spotting discrepancies in your accounting statements. If there is an error, reconciling your books can make it easier for you to find the mistakes and get them fixed.
This is why large companies and corporations spend so much time reconciling their books on a regular basis. It tells them if someone has tampered with the business or if there have been accounting mistakes made that are costing them money.
Investment banking is one of the best examples of accounting errors and crimes being committed over the years. Inefficiencies in their recording systems made it easy to hide those losses.
Regulators have begun ensuring that banks and other trading institutions scrutinize their internal accountants far more heavily because of this. You can treat your business the same way.
Maintaining accurate financials will help build trust within your company, especially in the eyes of outside investors. They will know that their money is being put to good use and see the return on their investment.
It isn’t enough for your balance sheets to show you turning a profit. Investors want to see all the numbers to verify that massive losses aren’t hidden up in another area.
To understand this concept, take a look at large corporations like WorldCom and Enron. Both were successful firms that ultimately closed because they had a role in hiding losses inside their financials.
Today the world is extremely concerned with ensuring companies are maintaining accurate and detailed financial statements.
Governments are regulating accounting techniques, and increasing fines for breaking compliance in an effort to ensure companies are dissuaded from “cooking the books”.
Improving Payment Cycles
In order to make sure your accounts receivable and accounts payable cycles are being met, the accuracy and level of details in your financial statements plays a critical role.
Salaries, wages, dividends, and other expenses need to be documented, your inventory needs to be properly managed, and your creditors need to be paid on time.
You’re unable to meet these obligations if your financials are inaccurate and poorly kept. If you owe a loan payment, for instance, you will need to understand how much of that payment is interest. Running proper calculations can only be done if you’re starting with the correct figures in the first place.
Make Better Decisions
At the end of the day, you want to ensure you’re making the best decisions for your business. When critical decisions are made, your managers are going to look at the numbers to verify they’re able to move forward.
If your financials are off, it has a large impact on other areas of your business. It creates a bigger mess for you down the road when you finally realize and begin to clean it up.
Your day-to-day operations are affected when you’re not maintaining clear, accurate, and detailed financials. Maintaining poor financials makes it harder for you to know where the business truly stands.
Hopefully You Are Convinced
Each of the areas I’ve addressed above emphasizes the importance of maintaining proper financials in your business.
They are critical for painting a clear financial picture of your business so you can make the right decisions. If you are planning on selling the business one day, the accuracy and level of detail in your financials could make, or break the deal before you even get a chance to start negotiating.
While financial records might not always be the most exciting part of doing business, they are absolutely essential to your success and may just keep you on the right side of the law.
Guest Author: Jock Purtle is a business owner and entrepreneur. He has contributed to numerous websites and podcasts, sharing his knowledge about business. Jock is passionate about helping others start and build the business they want.