Warren Buffett was once quoted as saying, “In the business world, the rearview mirror is always clearer than the windshield.” Financial accounting may well serve as that rearview mirror because it produces the figures that give a clear picture of how the business is performing in the form of reports.
Accurate financial information helps businesses to:-
1. Evaluate the efficiency of their current operations.
2. Serves as the basis from which insights, to improve business outcomes, can be generated.
Financial accounting information can do the following
- Provide facts. In any business organization, it all comes down to the numbers. Is the company earning? Has it seen any growth over the past 12 months? Can the increase in sales keep up with rise in production costs? Are the staffing costs justifiable given the sales figures? These are only some of the questions that managers and business owners ask when evaluating business performance.
- Financial accounting collects and converts company data to produce the essential financial reports that can answer the above questions and more. Balance sheets, income and cash flow statements are a few of the most significant reports needed by management to evaluate performance.
- Operating budgets. Operating budgets are essential in all businesses. Key to creating budgets for a new business period is the review and analysis of financial information found in the current reports.
- Managers have the job of assessing which operating expense accounts they can maintain or even decrease as per actual, and which they will have to increase. They can even dig deeper from earlier reports to determine trends in specific expenses and resource costs, so as to develop the most realistic budgets.
- Planning. A company plans its growth based on the numbers of today. By closely examining historical financial data and reports, business owners and managers can analyze trends in production, deliberate on ways to improve operational efficiency, and determine potential opportunities for growth.
- The figures quantify what the organization has accomplished so far, and from these, managers can come up with new objectives that are yet to be achieved. Sales goals can be set, performance forecasted, and generally, a financial roadmap drawn from current financial information.
- Cash monitoring and management. Financial reports allow managers to track the inflows and outflows of cash. In a business environment where purchasing of goods and services may be done on credit from other businesses, cash flow management is crucial because it basically shows whether the company has enough cash on hand to pay its vendors or suppliers (accounts payable).
- In addition, efficient cash management through financial accounting also helps managers determine whether invoices have been properly raised and how much money still needs to be collected from clients or consumers (accounts receivable).
- Securing external financing. Financial accounting data also plays an important role in providing for the funding needs of an organization. Expansion in business operations for instance, often requires additional capital that the company may not be capable of raising on its own. To secure external funding from investors and/or lenders, businesses must prepare financial statements which these potential sources can then evaluate.
When enterprise owners and company managers take today’s metrics and evaluate this along with other key business data such as operational output, employee performance, revenue and industry trends, and others, they are guiding their businesses based on insight, rather than on instinct.
At the end of the day, numbers aren’t just numbers. They speak volumes of what a company is doing, or isn’t getting done. Owners and managers are always better off when they know their numbers.
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