How Does Financial Accounting Help with Decision Making?
The success of a business lies in how well it’s executives plan for the future and make the most of opportunities that come its way. Decision making has always been at the heart of any organization and financial accounting drives these decisions.
Financial accounting is the task of keeping track of all financial information of a company. This financial information is then interpreted and used to prepare financial statements and complete other tasks.
Here are some ways in which accounting helps in a business’s decision making:
Balance sheets determine financial position at a point in time
A balance sheet is drawn up to show the financial position of a business at any point in time. The balance sheet helps determine if the business model is viable. For example, if your sales are majorly made on credit terms, is that negatively impacting your current assets? Executives of the company can look into making a shift from credit to cash terms to improve their financial position.
Cash flow statements helps in determining liquidity
Cash flow statements determine the changes in cash levels of a company. Having cash on hand is essential for performing day to day activities and any one-off expenses that need to be paid. If the company is running low on cash reserves, getting rid of excess assets is a good way to improve cash flow.
Strategic decisions made depending on financial position
Accounting also plays a vital role in long-term decisions made by the business. The growth of the company can be measured over the years and trends can be formed to help forecast for the future. Businesses can never get complacent with their growth and therefore always require future plans. Here are some examples of strategic decisions accounting can help with:
The majority of entrepreneurs begin their business in the hopes of expanding it as much as possible. Keeping track of your progress over time can help your figure out if your business is ready for the next step of expansion. Expansion can come in the form of moving to a bigger office or opening more stores. The investment decisions to carry out this expansion must be carefully made e.g. will it be financed by debt or equity?
If a company has been consistently doing well, the upper management will want to review its dividend payout. The company could increase its dividend payout or utilize the extra profits in other profitable investments for the business. A cost-benefit analysis of the two decisions can help with making the right decision.
Faber is an accounting firm that has been in the industry for over 20 years now. We have worked with corporate clients of all sizes, providing them with services like tax planning, business audits, and consultancy services. Our team works tirelessly to help clients in achieving success. Get in touch with our experts in Edmonton, Alberta today at 780-432-5262 and book an appointment.