Starting A Business – Choosing An Accounting System
Before discussing how to choose an accounting system, it’s important to understand the role and function of a business so that you understand how an accounting system is an integral part of the business process.
This post is the eighth in a series about Start-up Business Basics. This article will expand on the eighth point in that post: Choosing an Accounting System.
A Business Is Like A Machine
A business, like a machine, can be defined as a repeatable process. You offer something of value and then deliver it to the people who want it. You do this at a price that they are willing to pay and in a way that meets their needs and expectations. However, you have to do all of this by getting one simple equation right: revenue must exceed overhead.
A business, like a machine, has moving parts that work in relationship to each other. Should any of these moving parts malfunction, the machine will stop working.
There are five parts in a “business machine.” These moving parts consist of value creation, marketing, sales, value delivery, and finance. You create value by finding out what people need and then offer a product or service to fulfill that need. You market to attract attention and to build up a demand for what you’re offering. You sell to convert prospects – those who have responded to your marketing – into customers. You deliver value by giving what you promised to satisfy customer’s needs. Finally, finance is when you bring in the money, manage it, and make all the effort of starting and running your business appear worthwhile.
The Accounting Cog In The Machine
Using the analogy of a business as a machine, accounting, then, fits like a cog in the fifth moving part, financing.
Although accounting may only be a cog in the machine, without it, the whole thing can grind to a halt.
Here’s why accounting is so important:
It’s one thing to bring in the money, either through loans, credits, or sales, but it’s quite another to manage it. This, unfortunately, is where many businesses go wrong. They are so focused on the other parts of the business that they tend to neglect their accounting. As a result, they mess up on the equation that holds the whole business process together: Instead of revenue exceeding overhead, overhead begins to exceed revenue.
Choosing An Accounting System
Now that you understand why accounting is so important, let’s look at how to do it well.
Most of your accounting needs can be adequately fulfilled by using an accounting software package. Most packages have improved over the years. They are much more user-friendly. They come with manuals that are easy to understand and a responsive support system. If the software is difficult to install, the software company will usually send an account representative to do it for you. The rep will likely also explain how to use it.
This accounting software can be acquired in two ways:
The first way is to buy it: you can either download it from the software company’s website or install it from a CD.
The second way is to rent it on a monthly basis. This is known as software as a service (Saas). It is supplied by Application Service Providers. The software and all your data are secured in a centrally hosted cloud.
If your business requires simple accounting, then an outright purchase will work. However, if you need high-end software, which would be too expensive to buy and that might require considerable technical skill to install and maintain, then opt for Saas.
When choosing an accounting software you need one that offers the following features:
* It supports the general ledger system by providing a chart of accounts.
* It supports financial reporting by providing financial statements and a statement of cash flows.
* It supports an inventory management system. (But you will not need this feature if you only provide a service.)
* It supports payroll functions. (But this may not be necessary if you have no employees. Alternatively, if you have a large number of employees, payroll can be so complicated and time-consuming that it is better to outsource the work to a professional payroll service.)
* It supports accounts receivable.
* It supports accounts payable.
* It supports the creation of an audit trail.
Invest in the Best Accounting Software
When starting a business, you need an excellent accounting system. If you need to cut costs in your business, don’t do it by buying cheap, low-quality software that does not offer you all the features that you need. Now that you understand how important accounting is to the business process, you should research and choose the best one for your business.
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