Even Small Businesses Need Business Software for Accounting and Finance
Business software for accounting and finance is not just for score-keeping (or bean counting). Instead, the software helps you with the business-critical functions of:
- Monitoring profitability
- Managing cash flows
- Avoiding bankruptcy
We now look at how accounting and financial software performs these functions.
Controlling Profitability
Profit is the surplus of your net revenues over your expenses. Accounting software helps you by accumulating your revenues and expenses under meaningful accounts. As against a manual system of accounting, software-based accounting can generate profitability statements daily (if you keep your accounts uptodate - an easy task with accounting software, but extremely difficult with a manual system).
With regular monitoring of profitability, you will be promptly informed of any adverse developments in the market conditions or cost escalations. That means you can take timely actions (such as revising selling prices or finding new markets, for example).
In effect, the speedy processing possing with business accounting software helps you exercise effective control over your profitability.
Managing Finances
Cash is different from profit. You might have surplus cash but no profits. Or the reverse, a cash deficit but high levels of profitability. Let us elaborate a little.
You can get cash by borrowing from bankers or other sources. This can mean surplus cash until you have spent the money. You can have such surplus cash even before you start operations and begin generating profits. Thus controlling cash is something different from controlling profits.
Cash inflows occur when:
- Cash is received from customers
- Owners bring in cash
- When money is borrowed
- You sell a business asset
Cash outflows occur when:
- Cash is paid out to suppliers of merchandise, services or business assets
- Owners withdraw cash from business
- Borrowed money is repaid
- You purchase a business asset for cash
If outflows exceed inflows even temporarily, you coud find yourself in serious trouble. For example, you might not be able to pay suppliers in time and they might refuse to supply merchandise needed for your business.
To prevent such an eventuality, you estimate likely cash inflows and outflows for the forthcoming periods - week, month, quarter, year - and make fallback arrangements to meet any cash deficits. For example, you might arrange with your bank to extend you a line of credit to be utilized only when needed.
Avoiding Bankruptcy
Bankruptcy can occur in two ways.
You are not made aware that your business is running at a loss. For example, you might be able to sell your merchandise at prices above the costs you paid for them, but the prices might be too low to recover your standing expenses on shop or office rental, employee payroll, interest on borrowing and other items. As your losses accumulate, you will find that you have no money to run the business.
Another scenario can occur even if your business is running profitably. As mentioned in the last section, cash is different from profit and you might have to meet heavy cash outflows (much in excesss of inflows) during a particular period. You then find that you are unable to pay your creditors and the latter might file a suit to recover their money. You might be forced to shut down your business in such a case.
The moral is that you have to control both profitability and cash flows to avoid bankruptcy. And this is what your business software for accounting and finance can help you to do.