Accounting is the language of business. Accounting in business helps to track, record, summarize, interpret, and communicate a company’s financial information. For any enterprise, accounting is extremely important as it enables key decision-makers to make well-informed choices that can propel the business toward success.
Without effective accounting procedures, companies would be sailing in choppy waters without a compass. Here, we will explore why is accounting important and indispensable aspect of business operations and strategic planning.
Provides Quantitative Data for Informed Decision Making
Accounting provides exact, numerical data regarding a business’s financial position. Reports like balance sheets, income statements, cash flow statements, etc., furnish quantitative information about:
- Operational costs
- Profit margins
- Asset valuation
- Liabilities
Enables Tracking & Controlling Finances
Accounting enables a company to keep its finances on a tight leash. Daily bookkeeping provides updated status reports on the following:
- Account payables & receivables
- Petty cash expenses
- Inventory management
- Revenue from sales & services
Accounting Tools for Small Businesses
While Fortune 500 companies have expansive accounting teams, small businesses can utilize various software tools to manage finances. Basic accounting software helps generate invoices, record transactions, create reports, and track milestones. Advanced tools offer enhanced capabilities like:
- Tax planning assistance
- Automated bank feeds
- Bill payment reminders
- Expense tracking with mobile apps
- Project costing
Ensures Legal & Tax Compliance
Maintaining updated accounts as per established procedures is mandated by law. Statutory bodies can ask companies to produce financial statements for scrutiny and levy fines for non-compliance. Accurate tax records also help companies claim deductions and resolve disputes, if any. Vetting by independent auditors validates that accounting standards are being followed. Some key legal requirements relate to:
- Transaction documentation
- Timely tax payments
- Employee PF contributions
- Workplace safety norms
Essential for Access to Credit
Before extending a business loan, creditors need to assess if companies can service the debt. Past financial statements reflect profitability, surplus cash flows, defaults, if any, and the ability to repay interest. Companies like retail chains, construction contractors, etc., rely on credit for smooth operations. Thus, accounting forms the basis on which capital flows into businesses.
Communicates Company Performance
Published financial statements like quarterly earnings reports and annual reports convey a company’s operational and financial performance to external stakeholders. Key players like prospective investors, shareholders, banks, regulators, etc., depend on this vital information. Year-on-year comparisons also indicate improving or worsening prospects over time.
Conclusion
Without efficient accounting mechanisms, companies would fumble in the dark, left feeling their way around important money issues. However, backed by the illuminating quantitative inputs of a robust accounting system, managers find the best pathways to profitability. For those interested in a business in accounting, this crucial business function transforms mere numbers into an invaluable navigational tool.
FAQs
1. How does accounting help new business ventures?
Accounting is invaluable for startups by:
- Estimating costs & projected revenues
- Managing limited resources optimally
- Separating business finances from personal
- Tracking milestones to advance further funding rounds
2. Can accounting software replace human accountants?
Although new-age accounting tools automate routine tasks like data entry and report generation, the contextual interpretation of financial data requires human intellect. Software may lack skills like identifying data patterns needing action, fine-tuning outputs to be decision-relevant, and assessing deviations from norms.
3. Is financial accounting relevant for non-profit entities?
Yes, even charitable organizations, schools, hospitals, etc., need to demonstrate fiscal responsibility through accounting compliance. This builds credibility to attract more donations and grants.
4. Can a freelance consultant manage without accounting?
Maintaining accounts is useful for freelancers, too, for objectives like:
- Estimating quarterly taxes
- Tracking client expenses for reimbursements
- Managing income and debt
- Separating business & personal finances
5. What aspects does management accounting focus on?
Managerial accounting generates information to guide business planning in areas like –
- Pricing policies
- Budgeting
- Cost optimization
- New market entry
- Shutdown decisions
