Accounting is indeed a key success factor for any business endeavor. Let us consider the benefits of having a proper accounting set up for any business, this will make it clear that it is not only a KSF but also integral part of any business.
- Capital deployed - In most of the businesses, investment is not only upfront when setting up but also ongoing to manage the liquidity position of the business. In the absence of accounting, these are not adequately tracked and can lead the business to underestimate the capital invested and consequently, the value of the business.
- Receivables management - Businesses tend to focus in the present and consequently closely track current receivables. Accounting helps the business to track receivables on an ongoing basis, thereby, helping them to negotiate better with their customers and take a calculated risk when extending credit lines to existing customers. The historical records available when accounts are maintained also helps them to offer better terms to customers with regular payments and increase rates or reduce credit terms with not so regular customers.
- Payable management - Similar to receivables, accounting records helps to track the level of credit extended by our suppliers. This in turn helps the business negotiate better terms of credit by highlighting the history of payments.
- Project / Cost Center based data - Accounting allows the businesses to segregate, company cost and project costs. This in turn helps them to quote more attractively to prospective customers. It also helps them evaluate the customers by project profitability. For bigger or multi-product / service businesses, accounting is the only way to track product-wise/service-wise profitability.
- Income and Expenses - While all businesses generally track income and expenses, in the absence of accounting this is done on a gross basis and in many cases incorrectly. For e.g. Security Deposits are taken as an expense, while advance rent paid for the year / quarter is considered as expense for the month in which it was paid. Accounting streamlines the recording of these income and expenses into proper categories and reflects the current position by way of allocating prepaid costs only to the extent applicable for the period. The level of granularity that can be achieved by proper accounting of income and expenses also helps businesses focus on cost control in a much better manner.
There are several other aspects based on which accounting adds value to businesses, these will be touched upon in the subsequent blogs.
Why are we highlighting the benefits of Accounting? Simply because in this non-tax environment, accounting is limited to the organised sector big businesses, the majority of businesses are only looking at accounting from the point of view of meeting VAT requirements which will come into force at the start of 2018.