Is accounting knowledge necessary when running a small business?
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Before we answer this question, let's draw a distinction between monthly accounting and financial accounting.
Monthly accounting involves bookkeeping, payroll and tax. Your month-end accounts are important so you can calculate your tax correctly, that your business is on the right track and to allow you to look at certain ratios that guide your management decisions.
Financial accounting includes the calculations that allow you to price your products and services. This is important to make sure you are selling and buying at the right price. For example, you should have a good understanding of profit margins, because small changes in margins can have a large impact on profit.
Many small business owners who produce accurate monthly accounts, don't know how to then use those numbers the monthly accounts have produced, to carry out financial accounting.
On the other hand, many entrepreneurs who feel confident about their accounting knowledge take it upon themselves to do their own monthly accounting. The thinking behind this is sound: "keep your fingertips on the numbers the business is producing".
Producing the goods
Unfortunately, what usually happens is that many don't fully understand the rigours of monthly accounting and the processes needed to run an efficient system. The inevitable result is business owners that are unable to provide accurate records that are reconciled to their bank account.
This situation is compounded further when:
- Your external part-time accountant (who charges you for his time) has to spend more time than necessary processing your work
- He lodges returns with SARS that are not accurate, leaving you exposed to potential penalties
- You cannot afford to spend time with your accountant to get your internal monthly accounting system working, because your accounting budget has now been exhausted.
So to ensure that accounting knowledge is used to efficiently and effectively run a small business, you can either:
- Develop your own financial knowledge of both monthly and financial accounting through study and practice, do it yourself and do it properly, or
- Let someone do it for you and let that person guide you through the financial performance indicators you should focus on
Option 1 is difficult if you've never studied accounting and are under the time constraints that most business owners face.
Option 2 can also be problematic, as you may not be able to afford to hire an in-house Chartered Accountant. And in-house bookkeepers typically do not have the business knowledge to help you analyse what the numbers mean.
A sign of a successful entrepreneur, and the best option, is to do what you can with what you have!
- Make sure your books are in order, up to date and reconciled to your bank account
- Gain financial accounting knowledge to understand what your accounts are telling you. This doesn't mean you have to study accounting, but seek guidance from those who have – in the least expensive way of course!
Outsourcing your monthly accounting requirements to experts, at an affordable rate might be the best option for a business owner with an early-stage business: your monthly accounts are in order, and experts are on hand for financial accounting guidance when you require it.