Your accounting system should provide an accurate picture a status of your business and how it is doing. Setting up a good accounting system and understanding the numbers is responsible for the success and prosperity in the long run. The financial statements produced from your accounting system will help you with the following:
Providing an accurate pricing for your product
Pricing your product is the first primary task you need to take care of in business. It is a simple equation: you need to charge your product higher than its actual cost. What about paying back that loan that you opened last winter when you could not meet your workers compensation bill? What about the tools you put on your MasterCard for the last job? What about product liability insurance? There is a long list you are likely forgetting, or if not forgetting, discounting beyond reality. Nearly anyone can figure out the direct costs of their product or service resourceful references would guide you in the process. And that comprises all the difference between making a profit or loss.
Know if you are actually making money
However, even after you price your product, you have to know how your pricing compares with reality. If you are making some bad decisions with your pricing, and you are waiting until next April 14th to find out whether you have lost or made money, it may be too late to change the outcome . Running a business profitably is tough. It can take a long time for some of your decisions to prove right or wrong, even with good references.
Know your short term and long term cash flow
Work with bankers
you need to pay full attention for having your numbers organized on a cash flow spreadsheet before you go to the bank. If you are already working with a bank, impress them with good numbers; good in the sense of accurate rather than whitewashed. Reliable references will allow you to predict problems beforehand. Discuss the issue with your banker in advance and you will have a better chance of keeping him on your side.
It is important to note that your relationship with your banker is adversarial by definition. Quite the contrary, the relationship has to be one cooperation and understanding. You should not view your banker as an adversary from whom you need to hide your shortcomings. Or else you would be committing a huge mistake. Find a banker you communicate with openly and easily, and keep him/her posted on all updates whether good or bad. Once you develop such a relation with your banker, you are safe and good to go!
Once you start using references that you have already prepared, you can easily predict results. If your references are fully-reviewed and you are aware of all sorts of taxes you have to pay before the end of the year to pay, there is a good chance that you can save yourself money by paying ahead, or by buying tools that you know you will need later. Your tax accountant can help you finish your planning scheme. However, such a task cannot be fulfilled if good information is not available.
Cash vs. accrual accounting
There are two ways handling your accounting records: cash or accrual. The cash method does not account for payments due or bills due. When you write the check, you enter the expense. When you receive money, you enter the sale. The accrual method keeps track of what expenses actually apply to the current period. To expound more on the difference between cash and accrual around the cash method: if you receive a check for deposit on a house in December, and start the work in March, you are going to be taxed one year on the money you have taken in, and the next year show a loss because of your expenses of building the house. With the accrual method, on the other hand, you put the money in the accounting period where it is actually used. You pay the expenses the same month as you enter the sale. Most small businesses will want to use the accrual method of accounting. Even if you are not required to do so for tax purposes, you will have a better idea of where you stand month to month if you record your expenses as they are incurred.