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Accounting is an essential part of running a business, whether big or small. It is the process and method of recording, analysing, summarising, and extracting reports about the transactions of an organization or company. Accounting the company’s transactions makes the financial dealings easy and transparent to track and understand. It helps all the stakeholders easily understand the transactions, cash flows and financial performance of the company.
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Accounting records the details of the business transactions of the company in the books of accounts. These records are essential for the owners, investors, managers and other stakeholders in a company to have the ability to view and evaluate the financial details of the business. It is only when there is a precise and accurate record of every transaction that the overall financial performance of the business can be studied. The books of accounts can be summarised into reports that tell the stakeholders about:
The ability to measure these aspects of a business is essential for planning and decision making in the company. Financial records are also required to be in compliance with the tax reporting and other requirements of government agencies. Financial records are required at various levels of management to manage and control the operations of the company.
Accounting is the means of recording, studying and communicating financial information within and about a business. It is referred to as the “language of business” for this reason. Financial information about a business drives decision making. The main purposes of accounting are:
At the simplest level, financial accounting is the recording of the transactions of a business. This day-to-day recording process is the basis of the entire financial accounting system. When transactions are recorded, you are able to look up and retrieve details about a specific transaction whenever you need to. You can also easily compare current data to historic data to see trends. Financial accounting enables us to study and measure the performance of a business over a period of time.
Budgeting and planning
Most small businesses work with a fixed amount of resources to fund their operations. It takes planning and budgeting to properly forecast the resources that the business would require. Budgeting and planning are guided by past records of financial transactions that can be used to project and anticipate future trends. Financial accounting helps the management plan ahead and allocate resources appropriately for the near and distant future.
Financial accounting records help drive decision making at all levels of the organization. Every level of management uses the financial data pertaining to their scope of operations in order to make decisions. These decisions could be as simple as determining which supplier is more cost-effective. Managers use these reports to make the operations more efficient and profitable. Financial accounting reports could also be used to make major decisions such as extending the operations of the company to another location. Accurate reporting also makes it easier for the management to avoid losses and mismanagement.
Financial accounting reports quantify and measure the success and failure of a company in monetary terms. Business owners can ascertain exactly how much profit or loss the business has made over a period of time. Key performance indicators (KPIs) can measure different aspects of business performance. These KPIs can be studied over a period of time to study the past performance of the business. It can also be used to compare companies with each other. Regular monitoring of reports helps the business owner identify bottlenecks and potential problems and address them before they become a bigger problem.
The financial position of a company is of interest to the owners, shareholders, investors and lenders. The precise financial position of a company is seen in the financial accounting reports. These reports tell the business owner or stakeholder exactly how much is invested in the business, its assets and liabilities, profit and loss and cash flows. It also facilitates accurate reporting of the financial information about a company to the government, tax and other regulatory authorities.
Many small businesses fail due to the mismanagement of cash. When you are involved in the daily operations of your business, it may be easy to lose sight of the bigger picture. Studying the financial accounting reports will tell you exactly how much liquidity you have. It will also tell you about how much money is owed to you and how much you owe to others. Using this information to manage your commitments reduces the risk of bankruptcy or financial crisis.
A company that approaches lenders or investors will have to present accurate financial records and projections. Lenders use this information to study the health of the business and decide if it is worth the risk of lending money. Investors can also determine if it is worth investing and also evaluate how well their investment is performing. A company communicates its financial health and builds credibility by presenting accurate and reliable financial accounting reports.
One of the deciding factors between a successful and a failed business venture is proper financial management. Many small businesses fail, especially in the first year on account of poor financial management. When you are a small business owner, you have limited resources and money to work with. Financial accounting helps you for many reasons such as:
You will find accounting important for a small business owner for many reasons:
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