Many new home business ventures are unsuccessful because they lack the financial systems necessary to keep track of their finances and cash flows. It’s very common for home-based business owners who don’t like the idea of ​​keeping their own accounting records to think that as long as money keeps coming in, their business will be fine.

However, it’s really not that simple when you’re in business.

If your goal is to stay in business for a long time, you’ll need to understand your cash flow and financial situation for several reasons. (I’m not pointing this out to scare you, but to make you aware not to make these common mistakes!)

Cash Flow
This is critical to running a business. Without cash, your business can fail, no matter how much profit you’re making on paper. Cash is king. If you run out of cash, your creditors may take you to court to get payment or even try to liquidate your business.

Taxes.
As one of the few things in life that are certain, taxes are very important to any business as non-compliance can lead to serious penalties and even the loss of your business.

Therefore, you need to keep track of all your income and expenses while ensuring that the relevant tax entries are made correctly.

Reports
You will need to produce reports for various reasons. Depending on the state of your company, different types of reports and presentations to the relevant authorities will be necessary. Some examples are an annual profit and loss statement, a balance sheet, and a cash flow. If you’re operating on your own, you’ll still need to file annual returns, though not as onerous as for a corporation.

controlling your business
One of the best techniques used to monitor a business is through the use of financial data. Your monthly reports tell you how well (or poorly!) your business has performed and can highlight areas where improvement is needed. It can point to certain indicators that all is not well. Things to look for are:

• Turnover: was it high enough?
• Profit margins: are they within the range?
• General Expenses – Are your costs under control?
• Net profit: do you really get any profit?

This is best done in comparison to a budget or forecast. Most larger organizations prepare budgets for the upcoming fiscal year and these act as a goal or business plan. It then compares the actual results to the forecast to see how your business is performing and make any necessary adjustments if it isn’t.

Hopefully now you understand the importance of having a good accounting system.

Setting this up doesn’t have to be complicated. We are in the digital age and computers make bookkeeping so much easier than in the days of big written ledgers!
Before choosing an accounting software, you should read my previous article on “Small Business Accounting Software” as this will help you decide what features to look for in relation to your own business.

If you have a very small business with few clients and little paperwork, you can simply use a spreadsheet to keep track of things. (I personally do this at a home based business that I operate on my own and it works great).

However, one of the advantages of using accounting software programs is that they will balance your account books for you, eliminating a potential headache!

All you have to do is enter the data on a page and the program will take care of everything else. Most accounting software programs will automatically perform the required accounting process and immediately update your statements. Retrieving your data from an accounting program is also easy. The financial reports your business likely requires can usually be generated by the software (Check this out before you buy!)

This gives you such a huge time savings that the software will pay for itself many times over.