Since 1948, the Faroe Islands are a self-governing and autonomous nation under Danish sovereignty. This land, where the cold streams of Arctic waters meet the warm Gulf Stream, is unique. Through the ages, the Faroese people have developed the skills to make the most of valuable natural resources.
Making business in the Faroe Islands, it’s not easy to manage the finances of a company.
In this post, we will simplify the accounting basics for employers in the Faroe Islands. By the end of this article you will know the How What and Why of accounting in the Faroe Islands. Let’s start.
Accounting Is the Language of Business
During a CNBC interview in 2015, Warren Buffett said: “Accounting is the language of business.” Generally, financial accounting helps in making decisions for investors, business managers, and business owners to grow the businesses. But curiously enough many small businesses often overlook their accounting until tax time or don’t do it at all.
According to INC., 96 percent of businesses fail due to a lack of financial management. It is a big reason why companies do not survive. It may result in their failure to meet financial obligations, like rent or paying their workers, miss tax deductions, or make wrong decisions to grow their business.
Accounting is not the reason why you decided to go into business. Everyone knows it’s not the most exciting thing in the world. If you’re reading this, you probably have a good service or product that you’re proud of. And we’re sure your product will attract customers and beat the competition. However, it will be best that you’re prepared for the reality of accounting. Because after some time you will be faced with it.
What Is Accounting?
Let’s discuss what accounting means by definition. Accounting is an information science that organizes financial data for companies or individuals. It is concerned with analyzing and collecting finances.
So, accounting is the process of interpreting, analyzing, and recording financial information. The main part of the accounting process is to record all the transactions that happen in your business. There are five major transaction types: revenue, assets, liabilities, equity, and expenses.
Why Do We Need Accounting?
Here are five purposes of accounting:
1. Recording of transactions
Firstly, businesses need to record the sales that they’ve made, the money that is coming in, as well as any loan capital which is coming into the business. And they must understand the costs that were incurred in day-to-day operations, the payment wages, rent, payment for raw materials, and so on.
They must also ensure that payments are made on time. So, you must have a reliable accounting partner to ensure that you don’t get evicted from your premises or anything like that.
2. Management of the business
When it comes to the management of the business, accounting practices allow for effective planning. Because you know how much to actually budget your costs on as well as your income budgets, your revenue budgets. You can monitor those budgets and your cash flow situation. Also, it helps to control your finances to ensure that you’re not overspending because you have set budgets.
Compliance is obviously about complying with the law. You are legally responsible to comply with legal obligations in financial reporting. Of course, businesses have a responsibility to declare the profits that are made and pay those necessary taxes.
Internal accounting can help to ensure that there is no fraud, that no one is perhaps actually taking any items that they shouldn’t, and so on. So, it really helps to improve the efficiency of business operations as well as complying with legal responsibilities.
4. Measuring performance
When it comes to performance, it means that you can calculate your profit, specifically your gross and your net or your operating profit. You will also be able to understand your sales revenue and you can compare each of these different areas to previous periods.
That comparison element is very effective when it comes to monitoring and evaluating your business and its performance. You can also evaluate the actual efficiency. So how efficient you are in actually collecting payments that are due to you for sales that you’ve made. It can also help to measure the actual expenditure and ensure that you aren’t paid too much for certain goods and control the level of costs being incurred.
You can control your trade receivables. So, if you are selling goods, you want to make sure that people are actually paying you and that those payments are being collected efficiently. You may encourage them to pay on a quicker basis within 7 days and offer a small discount, perhaps 10%.
Also, your employees need to get paid accurately and on time. And here having your accounting partner can help you to really monitor that as well as to ensure that you are making those necessary payments properly.
Now you can save yourself from these financial headaches by having a reliable partner from the very beginning. We are talking about an Employer of Record. Swapp Agency helps companies in the Faroe Islands grow and manage their finances. With our resources and tools, you can manage your employee relationship and HR compliance with confidence and ease.
In this article, we discussed why accounting in the Faroe Islands is important. Accounting helps you make decisions to grow your business and it prevents the financial mismanagement that can result in financial stress, headache, or even the closure of your business.
While there are many ways to analyze and report your finances, there is only one way to get started. Using an Employer of Record in the Faroe Islands, you can easily record and manage your financial information.
We truly hope you found this article useful and interesting. If you did and have any questions, don’t hesitate to contact Swapp Agency. We’re an Employer of Record company that helps people grow their businesses and manage their finances.