There is no denying that many transactions occur each day in any business, no matter the type or size. Unless you want to lose control of your business, knowing the numbers is critical. Only the companies that keep track of where their money is going and coming from are most likely to reach the optimum success level. That is where accounting and finance come in handy. Without it, business owners won’t even know their business’s financial health and probably shoot arrows in the dark.
A prominent accounting field, financial accounting, refers to recording, summarizing, and reporting the various transactions to determine a business’s financial health. Companies can outline these transactions in preparing different accounts such as cash flow statements, balance sheets, and income statements. These accounts record the overall company’s financial performance over a particular period.
Moreover, financial accounting plays a crucial role in boosting efficiency and increasing profits for any business. Are you still feeling unsure how financial accounting can act as a savior for your business? Then, read on below the comprehensive guide to learn some benefits that demonstrate the significance of financial accounting:
- HELPS IN DECISION MAKING
A company can’t develop a sound strategy without good management and financial records. So whether the manager wants to hire more staff or wishes to make some decisions related to supply management, financial accounting plays a significant role. Put it this way, financial accounting can help managers get a bigger picture of how their company is performing.
The more accurate financial information you have at your fingertips, the better measures and decisions you make for your business. Financial accounting helps you perform risk analysis before you take any major decision. For example, you can consider various historical financial records of your company and predict whether you would be making any profit or not. Moreover, you can encourage your employees to enroll in masters in accounting online to strengthen critical thinking and decision-making skills. In this way, they can continue their further education at their leisure and serve your business in the best possible manner.
- MAINTENANCE OF FINANCIAL TRANSACTIONS
Answer this. Which vendors or customers have not paid you yet? Or, how many debts do you have that you need to pay? Every organization, irrespective of its size and type, needs to keep its book of financial records updated at all times. No matter how strong your memory skills might be, there are still some limitations. Sometimes, you might forget about minor transactions. Remembering every transaction from day one is not possible. However, with financial accounting, you can keep records of each year in your accounts. Since these records are systematic, you don’t have to worry about their accuracy.
- OFFERS HELP IN PREPARATION OF FINANCIAL STATEMENTS
The financial statement refers to the written financial records that provide any entity’s detailed activities and overall financial position. The three most common financial statements include a balance sheet, cash flow statement, and income statement. No wonder every business owner wants to learn how much profit they are earning or the amount of loss in their business. Such information can help them determine the actual worth of their business. Therefore, financial accounting helps in providing relevant, accurate data to help them prepare financial statements. The systematic record offers professional accountants to create the balance sheet and determine the company’s current financial position.
- COMPARES FINANCIAL RECORDS
Preparing financial statements is one thing. But, how often do you compare the financial records? It is advisable to review records each month to meet your business objectives. With the help of financial accounting, businesses can prepare financial statements containing specific information. Financial statements allow companies to compile each information into an aggregate financial record. As a result, companies can review the statements and identify the trends or conduct any other analysis.
The best part of financial accounting is, companies can store and record information systematically for many years. So accountants don’t need to waste their time and energy in fetching and comparing the data. Furthermore, financial statements offer businesses to stay abreast of their accounts payable and account receivables. After all, you don’t wish to find out that a particular customer has never paid your invoice at the end of the year-end.
- SERVES AS LEGAL EVIDENCE
One of the most dreadful times for any business owner is when they have to file taxes. You need to have all your financial records to file your tax accurately. Neglecting even a minor financial detail can adversely affect your business. Indeed, you don’t wish to get audited by the IRS and end up with unnecessary legal trouble.
However, with the help of financial accounts, you no longer need to scratch your head comparing numbers or making some corrections at the last minute. You can maintain a systematic and updated book of accounts containing all the financial transactions made by your company with financial accounts. Moreover, you can use the financial transactions as a piece of evidence in the court of justice to settle any business dispute or clear any misunderstanding.
- MONITOR CASH MANAGEMENT
It is no secret that one of the leading reasons why many businesses fail is because they have poor cash flow management. Simply put, cash flow management refers to identifying how much cash flows in and out of your business at any given point.
You can examine financial accounts to discover how much money is in your company account or how much money you need to collect from your customers. In this manner, you can learn about any working capital shortages. And can take the necessary steps to ensure your firm has adequate funds to operate for at least six months. Moreover, financial accounts enable you to manage trade credits more effectively.
It is no secret that your company’s smooth functioning is highly dependent on how you maintain and update your books. Moreover, a company’s accounting system can’t be complete without financial accounting. Failing to keep an eye on the company’s finances can lead to catastrophic situations. These situations may include low cash flow or, worse, bankruptcy. Therefore, the best way to determine efficiency and overall productivity is to accurately maintain and track financial statements.