When you think of business accounting, the first thing that comes to mind is budgeting and computing business income. Jim Woodruff’s article in Chron highlights the true purpose of accounting within a business, which is to provide financial information to company owners and its stakeholders.
However, its role goes beyond simply giving a financial overview.
While accounting has played a major part in aiding business owners to assess a company’s financial standing, it can also be a call-to-action as it provides insight into how finances can be better managed.
Here are three purposes of accounting and the impact it can have in each sector of a business:
Financial Health Assessment
As stated in the introduction, accounting can help give an overview of how the company is doing, where the money is being invested, and if there were profit losses or gained. If needed, this can also determine the company’s liquidity should they need to pay off financial commitments. As FreshBooks noted on their website, accounting statements can help reduce the risk of bankruptcy as it will be easier to detect bottlenecks.
Other entrepreneurs use it to measure key performance indicators and the business’ status when compared to previous months or years. Furthermore, monthly and annual financial reports are a reliable basis on which parts of your business can be improved. This brings us to the next role and purpose of accounting, internal management.
Bizfluent states that there are two types of accounting: financial accounting and management accounting. Financial accounting is mainly focused on gathering reports and relaying information to outside entities such as tax companies and investors.
On the other hand, management accounting is used more for internal financial oversight. What you see in the accounting books can give some insight into company management. Which sectors of the business are contributing to company profitability and which ones are draining your bank account? Looking through your accounting statements might be a good place to start.
A thorough assessment of statements can help with decision-making. For example: How do you budget for a specific venture? Are you ready to hire more people, given your current expenses? When you start offering a new product, what will be the forecasted revenue if you based it on how your current offers are doing?
Are you pricing your offers fairly? This is one question that your accounting records might be able to answer.
This article from Investopedia perfectly explains what cost accounting is and why it is important. To summarize, cost accounting is focused on the fixed and variable costs. It is a branch of accounting wherein you record and assess the money spent on products, services and production to manufacture your offers.
Pricing strategy comes into play because management can use this information to determine a fair price, according to the costs spent to bring the products to the market. It gives some insight into what kind of price tag will gain more profit and which will be enough to break even.
These are just some of the roles accounting plays in a business. More than assessing where the money goes and recording monthly expenses, accounting can help companies and managers make informed financial decisions.