Small-to-medium enterprises, or SMEs, are the lifeblood of the UK economy. They constitute 99.9% of the nation’s business population and account for more than 60% of the country’s employment. The UK is the nation for small businesses, and there is no better place to start one – but there are some key elements to starting a business that should be properly understood first. One such element is accounting.
The Sheer Importance of Accounting
The importance of accounting to any business cannot be overstated. As the leader of a new and emerging business, especially if you are new to start-ups and business leadership, it can be easy to dismiss the accounting process as a simple administrative task. But accountancy is much more than the logging of information; it is a crucial tool for growth, development, and legal compliance.
Proper accounting enables you to keep a close eye on the financial health of your business and can act as a fundamental resource for explaining certain successes or customer patterns. More than logging your profits each year, it can give you vital cash flow information, which can, in turn, inspire investor action and help you target your growth strategy.
Most importantly, though, accountancy ensures that your business remains legal and tax compliant. A complacent approach to bookkeeping can find your business party to HMRC audit and potentially in line for criminal charges.
On a more positive note, proper accounting – in tandem with advice from professional consultants – can give you the tools and knowledge necessary to expand beyond national boundaries. With a forensic approach to bookkeeping, you are in a strong position to take your SME international.
Bookkeeping and Tax
Tax compliance is an essential underpinning of a legal business, and one of the key reasons for the importance of accountancy. There are numerous obligations your business has in this regard and various burdens of proof on your financials as a result.
Between corporation tax, VAT, income tax and National Insurance contributions from your PAYE staff, there are thousands of pounds worth of dues which need to be accurately calculated and dispensed – and which, oftentimes, justify the hiring of an external bookkeeper to manage your data.
Accountancy and Growth
As briefly mentioned earlier, accountancy can foster positive growth through the tracking of financial trends within your business. One of the most important trends for you to track is cash flow. Cash flow is distinct from profit, in that it accurately describes the money coming in and leaving the business. Profits may be high, but cash flow could be negative – i.e.: you are spending more than you make – as a result of investment or paying off debts.
This is crucial because negative cash flow can indicate an imminent downturn. This can have a knock-on effect on investor trust and could see key investments leave before you get a chance to grow. Proper accounting lets you spot this and rectify it before it kills your business.