Every entrepreneur begins with a vision. They dream of the day that their business will eventually become successful. However, the success of a business largely depends on their ability to react and improve on the company’s current situation. To make a sound decision, you need timely and relevant business insights, which come from the accurate reporting of financial data. Cloud accounting is the solution to access actionable business insights.
As technology continues to evolve, cloud accounting is becoming a popular choice for the modern-day business. It provides you with real-time visibility of your company’s financial health, enhanced profitability tracking, better understanding of the company’s financial position, improved cash flow management, and easier collaboration.
Real-time visibility of the company’s financial health
Cloud accounting provides real-time access to your company’s financial data anywhere from any device with access to the internet. You could be working with the same set of financial data on multiple devices while also be sharing the same data internally or with your accountant. Cloud accounting ensures you are always working with the most up-to-date version. The relevancy and timeliness of the financial data provide a clear view of your company’s financial health.
The key to having real-time visibility is to perform cloud bookkeeping on a regular basis. Bank feeds will pull the statement line items, but you still need to record the business transactions appropriately. This is critical because the insights you can extract depends on the accuracy of the reports, which is impacted by the way how transactions are recorded. You should be proficient with double-entry accounting and fully understand the interaction between income statements, balance sheets, and cash flow statements to accurately perform bookkeeping in-house.
Enhanced profitability tracking
Enhanced business insights on profitability is possible with cloud accounting, as it allows you to easily review the company’s gross margin, operating margin, and the growth of the business.
Gross margin is the percentage of profits left after subtracting the direct cost to produce or service the revenue. If the actual gross margin is the lower than the target percentage, it is an indication that your business may be struggling to manage its direct cost or there may be a problem with the company’s pricing strategy.
Operating margin is crucial because it measures the effectiveness of managing the company’s operations as a whole. Operating expenses, to a great extent, reflect the infrastructure of a company. If the actual operating margin is lower than the target percentage, you should investigate which component of your business operation is causing a reduction in operating profit.
The growth of the business can also easily be monitored with cloud accounting by looking at the revenue trend and profit trend. It is important that your company is not only generating revenue, but also be proactive and effective in managing costs, so the business is earning a decent return. If revenue growth is higher than profit growth, you should review the fixed and variable costs to determine if you are overspending in certain areas of the business.
If the company is not earning a healthy profit, it means you are not generating cash or building equity. Conversely, if profit is growing faster than revenue, it means you are efficient in managing costs, but this may be the reason why revenue is not growing as quickly because you have not invested enough resources into the business.
Better understanding of the company’s financial position
Does your business have a short-term cash problem? Cloud accounting provides more visibility on the company’s short-term liquidity with the current ratio. It is a key metric to quickly assess if your business is in the possibility of running out of cash in the near future.
Another common question that often comes up is – how much taxes do you owe? If your company earns a profit, you should expect to owe the CRA when the corporate tax return is due. With all business transactions recorded in the cloud accounting system, you have access to real-time information on the estimated taxes you expect to owe the CRA. You can use this information to set aside sufficient cash in advance, so your business will be safe from cash shortage when taxes are due.
Depending on the nature of your business, you may also wish to assess the effectiveness of your company’s assets in generating revenue. Cloud accounting can facilitate this analysis for you. If you have inventory, you can see how quickly your business is turning over its inventory, if your business has excess cash, and how the fixed assets are performing. Ultimately, it gives you a better understanding of whether or not your business is building sufficient equity.
Improved cash flow management
With insights obtained from the cash summary, cloud accounting can greatly assist in improving the company’s cash flow because you have clear visibility on how the business uses and generates cash. You can see why profits do not equal cash, and how effective your company is in converting the former into the latter. You will also be able to see that not all cash is created equal in a business, which enhances your understanding on the sources of cash.
You could also evaluate the effectiveness of your cash collection effort. How long does it take for you to collect cash from clients? Should you adjust the cash collection terms? How can you encourage clients to pay faster? Do you need a better process for invoicing and to manage accounts receivable?
Since financial statement reports generated from the cloud accounting system is in real-time, you are always working with the latest version of the financial data. It makes collaboration with your accountant more effective, and you can be certain that the advice you receive is trustworthy and reliable as the source data is accurate. You can even collaborate with your accountant online, which is ideal for the modern-day business landscape.