When starting any trip most people will look at a map, MapQuest or use their navigation system to find where they are going. Doctors will take blood and run tests to determine a patient’s health. The same can be said about businesses. Good accounting records are the life blood and road map of a business. Accurate records can tell a business owner their results of operations and can help with decisions to correct any problems.
Good accounting records start with the accurate recording of transactions. Revenues and expenses, assets and liabilities need to be recorded with care. Once this information is recorded adjustments are made allowing the records to be ready for reporting results. In its most basic form the accounting records can report the results of operations (profit or loss) for a given period (monthly, quarterly, or annually). Moreover the records can show what is owned and owed as of a particular date. Additionally the flow of cash (how it was obtained and used) can be shown.
This information is important but is only the starting point. The basic statements discussed above can then be used analytically to determine a lot more.
Analytic procedures are used for many things. It can help determine what products or services are contributing the most growth. It can tell you that sales are up or down when compared to other periods. It can determine if the cost to produce your product is up or down and what your gross profit percentage is, an important factor in determining profitability. Analytics can shed light on expenses and if certain expenses (i.e. wages) are too high or are rising to fast. It can compare results or certain items to prior years to determine if there’s a trend up or down.
Analytics can determine the health of the organization by looking at the current ratio (current assets divided by current liabilities). In addition, ratios such as return on: Sales, Net Worth, or Assets all are helpful in determining how well a company is doing. By using analytics there are dozens of ways of testing and comparing how well your company is doing in specific areas and importantly can help correct the problem, or continue an uptrend.
Good records can also help compare your results to various benchmarks and industry standards to determine how you compare where you are strong or weak. Good accounting records can help in the case of an audit. Proving to the auditor that your numbers tie out exactly, shortening the duration of the audit and having no additional taxes that are due.
It is essential that companies sit down with an experienced CPA to help construct good accounting records. Good accounting records are the tool that allows businesses to find their way to profitability and success. Good records are good business.