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Business; Importance of Accounting in Small and medium Businesses

Updated on May 8, 2011

My first experience of business failure

I always get scolded at when I tell people how terribly wrong I was by not implementing all what I leant about accounting in my first business. ‘How can you do that’ is their standard phrase. Please, pardon me for the supposedly wrong title of this hub, it would have in fact been titled the importance of accounting/ accountancy in business but, that would have classed it among those form of textbook/ traditional schooling kind of learning.

The first business I started crumbled just because I thought accounting was useless. I opened a business center in my neighbourhood where I equally sell recharge cards. And I didn’t bother to account for income/sales revenue that comes from different sources (you can imagine how terrible this could be). This was against the training I had as an accountant. Wow, a world apart? Now, before you go on nailing me to the wall, hear this, I was not the only one who made this mistake- was it really a mistake? Ok, whatever. There are millions if not billions of people out there with knowledge of; accounting, finance, economics, business etc who still make this mistake. If you think is not true, what then could be responsible for the high rate of business failures in our society today? And the most interesting part of it is that most of these people are not ordinary B.Sc. holders but, Masters and PhD holders, what an irony?

People make this mistake on a daily basis and this is more common to those that have accounting and business related background. The reason for this is not yet established but, I feel it could be as a result of the theoretical nature of our schooling system and also an oversight on the part of these people, my humble self included. If I had had the opportunity of experiencing this while school then, maybe I wouldn’t have been a victim of my own ‘knowledgeable ignorance’.

The above bitter experience of mine that I shared above is what made me decide to bring together this piece of information. Note however that this is not going to be a form of regurgitating what are already in textbooks but, my own side of the coin. So, enjoy!

Importance of Accounting and Accounting information

Decision making/Analysis/guidance:

Decisions made in ‘financial darkness’ stands the chance of not seeing the light of the day. Accounting information gives us insight so as to allow us make an informed decision that is in line with economic realities. Through the analysis of accounting information, companies and individuals make decisions that are based on reasonable forecast.

Avoidance of trouble:

Do you know I entered into so many troubles with the tax authority over my assessable income and eventual tax to pay? Though, taxation is not taken too serious in this part of the world, but my case was a different one. And the lessons I leant then made me not to fail in filing my returns every year now.

Monitoring of events/ for control purposes:

You never can tell if you are making a profit or a loss if you have no record. If I had kept record of the activities of my business, maybe I would have known the aspect of the business that wasn’t bringing in profit and simply discontinue it. Or at least monitor the cash-flows from my business. Every accountant will tell you that a profitable company could still collapse if it has no sufficient cash inflow to take care of her day-to-day activities.

Establishment of credibility:

Keeping good records of company’s activities presents a business in a favourable light when seeking business partners and associates. I lost several business opportunities within the short time I operated without having accounting records. I friend of mine that is well placed in his company wanted to help me get a contract to supply computers to his company. But, I missed the opportunity simply because I could not present the accounts of my company.

Fund raising tool:

Accounting and accounting information forms a large portion of bankable business plan, banks rely to an extent on the accounting information provided by potential customers for them to make decision on whether to give the loan or not. Without keeping record in an acceptable format, those that which to raise fund will not have access to the desired fund.

Stewardship (in cases where ownership is different from management):

The creation of legal persons by the various enactments made it possible for ownership of a company to differ from its management. The case of SALAMON vs. SALAMON is a well celebrated case on this. The only way that owners of the company could have an eye in the company is to make the stewards account to them on the affairs of the company. To make this information relevant and reliable, owners of companies seek the service of assurance service professionals (e.g. Accountants/Auditors).

My last few words for you

My dear friend, I hope you got one or two things from this my somewhat bitter past experience (caused by my own laziness)? Please, note that qualification has nothing to do with this. All that is needed is simple motivation and discipline to implement all what you have learnt- especially when there is no boss on your neck demanding for the account/ accounting information of your business.

The importance of accounting and accounting information in business can never be over emphasized and I will not stop preaching against this laziness amongst knowledgeable people. Always keep record of things, not only in business but, also in your personal finance life.

To your success in business!



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    • chinweike profile image

      Chinweike 8 years ago from Glasgow, UK

      Oh sorry about that Nelle. We (in Nigeria) use recharge card to mean credit voucher used to recharge your cell phone. Sorry about that costly asumption that i made and thanks for finding time to read my hub and commenting on it

    • profile image

      Nelle Hoxie 8 years ago

      I agree completely that good business records help you make better business decisions as well as keeping your tax records legal. I enjoyed reading about your business alot. But I was wondering what is a "recharge card."