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How Does Financial Accounting Help Business Management?

How does financial accounting help business management

Accounting is necessary for small business owners as it helps the owners, managers, investors, and other stakeholders in the business judge the performance of the business. Even the smallest business has more accounting data. Financial accounting helps business management by recording, summarizing, and reporting the stream of transactions and economic activity resulting from business operations over a while. 

Almost every transaction a business makes is recorded in the company’s financial records. This information can be compelling in the right hands. Understanding some of the ways accounting data is used to make business decisions can help you make your business even better.

These financial statements are then used by company managers, investors, analysts, lenders, and other stakeholders to make informed decisions.

Accounting known as the Language of Business, translates numbers to different users for decision making. So, how financial accounting helps business management are:
Business Budgeting And Planning

Business owners need to plan how they allocate their limited resources including labour, machinery, equipment, and cash towards achieving the objectives of the business.

Firstly, the budgeting process starts with sales projections and cash collection estimates. After these budgets are intact, the purchasing and expense forecasts are completed. Last, a projected cash balance is completed and forecast financial statements are created. 

Recording Transactions

The main purpose of accounting is to prepare a systematic, accurate and complete record of all financial transactions of a business. These records are the backbone of the accounting system. Business owners should be able to retrieve and review the transactions whenever required.

Decision Making

Accounting assists in a range of decision-making process and help owners in developing policies to increase the efficiency of business processes. Business owners use managerial accounting information to make business plans and control company operations. They also rely on this information. For example, they use it to evaluate complex business choices like deciding to expand operations or discontinue manufacturing a product.

Business Analysis and Performance

Many small-business owners review accounting information monthly by comparing actual sales, expenses, and profit performance to projected performance. If there are substantial variances in projected versus actual performance, small-business owners can implement changes in the organization to correct these differences. 

The financial reports are a reliable source of measuring the key performance indicators, business owners can determine how well a business is performing against their past performance as well as against the competitors.

Financial Position and Liquidity

The financial statements generated at the end of the accounting cycle reveal the amount of capital invested and depict the financial condition of a business at that time.

Accounting helps in determining the liquidity of a business which refers to the cash and other liquid resources at your disposal to pay off financial commitments. However, the information reduces the risk of bankruptcy through the detection of bottlenecks. 

Financing and Control

Accounting helps business owners prepare historical financial records as well as financial projections which can be used while applying for a loan or securing investment for the business.

By placing various checks across the organization, accounting helps in avoiding losses caused by theft, fraud, errors, damage, obsolescence, and mismanagement. Also, the internal controls safeguard the business assets and avoid long-term losses.

Legal Requirements

Indirect and direct tax filing purposes also require financial statements and information. The law requires businesses to maintain accurate financial records of their transactions. They must also share these reports with shareholders, tax authorities, and regulators.

About Finline!

Finline is an online platform for creating financial reports for getting bank loans and investments. It’s like ‘Canva’ but for financials. If you are an entrepreneur looking for a bank loan, you need to have a well-crafted project report. We, at Finline will help you with that. Our team will help you create a powerful business plan in ten minutes. That too in your language. Also, all public and private sector banks working in India accept our reports. Click to create your report.

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What is Cash flow statement?

Businesses prepare three financial statements to show how they’re doing. These statements are the balance sheet, income statement, and cash flow statement.

A cash flow statement is a financial record that details the company’s cash intake and outflow during a specific time period. Additionally, it examines the differences between this year and last year.

The cash flow statement in an annual report of a corporation, when the time period is mostly one year, is often examined.

Why do you need a Cash flow statement?

What is the purpose of a cash flow statement if a corporation already discloses its net profit in its income statement?

The income statement is constructed on accrual accounting.   Whether there is a cash inflow or outflow at the moment of the transaction or not, organizations using accrual accounting count their revenues and costs.

For example, in a business, when they sell things on credit and give the customer 60 days to pay, they figure out how much they sold on credit and how much money they made from those sales. The difference between a company’s net profit and actual cash is related to whether or not they obtain their reimbursement after 60 days.

Businesses utilize cash to pay for a variety of expenses including salaries, interest, and day-to-day costs, it is regarded as the lifeblood of the business. When a business doesn’t turn its gains into cash, it is a highly risky situation for the business.

Investors carefully study the firm’s cash flow statement. They do this to understand the importance of cash and to figure out where the company gets its cash and where it spends it.

Purpose of Cash Flow Statements
  • Assessing cash positions
  • Make planning and control easier
  • Make comparisons easier
  • Decide on capital budgeting

Each company’s cash flow statement is broken down into three categories: business operations, investment activities, and interest expenses. Additionally, in each division, net cash flow is calculated by deducting cash outflow from cash intake. The change in cash flow is discovered by aggregating these three net profits.

What are the sections of the Cash flow statement?

 The cash flow statement reports a company’s major cash flows in the following categories:

  1. Cash flow from Operating Activities:

The first section of the statement includes regular business activities. Revenue from the sale of products or services, dividends received, interest, and other cash receipts, outflows include payroll, overheads, taxes, and payments to suppliers and vendors.

The first entry in this operating activity section is the net income from the income statement for a corresponding period. The below table shows the cash flow from operating activities:

    Particulars Amount (Rs)
    Cash flow from operating activities
    Net income XXX
    Additions
    Depreciation and Amortisation XXX
    Increase in current liabilities XXX
    Deductions
    Increase in current assets XXX
    Net cash flow from operating activities XXX
      1. Cash flow from Investing Activities:

      It is one of the main components of a cash flow statement. Cash flow from investing results from activities related to the purchase or sale of assets or investments made by the company (long term). It can be identified from changes in the fixed assets section of the long-term assets section of the balance sheet. Examples of cash flow from investing activities:

      •       Cash outflow from the purchase of an asset (land, building, machinery, etc.).
      •       Outflow of cash from the acquisition of another company.
      •       The inflow of cash from the sale of an asset.

      The table showing items recorded in this section are:

       

        Particulars Amount (Rs)
        Purchase of fixed assets (XXX)
        Purchase of marketable and non-marketable securities (XXX)
        Proceeds from the sale of fixed assets XXX
        Proceeds from the sale of marketable and non-marketable securities XXX
        Loans advanced (XXX)
        Loan repayment realised XXX
        Insurance proceeds XXX
          1. Cash flow from Financing activities:

          These activities are related to cash transactions for business. For example, borrowing, raising money from debt or stock, repaying, sales of your company’s securities and outflows include dividend payments and servicing debt. It also provides stakeholders insight into the company’s capital structure, how it is managed, and how far it can sustain with showcased capital.

          The components of financing activities are shown in the table below.

          Particulars Amount (Rs)
          Proceeds from the issuance of short-term borrowings XXX
          The net change in short-term borrowings (XXX)
          Repayments of long-term debt (XXX)
          Stock repurchases (XXX)
          Dividends paid (XXX)
          Dividends paid to non-controlling interest (XXX)
          Other financing activities (XXX)
          Net cash flow from financing activities (XXX)

          For any business having a positive and high cash flow is a good sign, though it does not by itself lead to success. Even profitable businesses have negative cash flow.

          About Finline!

          Finline is an online platform for creating financial reports for getting bank loans and investments. It’s like ‘Canva’ but for financials. If you are an entrepreneur looking for a bank loan, you need to have a well-crafted project report. We, at Finline help you with that. Our team will help you create a powerful business plan in ten minutes. That too in your language. Our reports are accepted by all public and private sector banks working in India. Click to create your report.

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          What is a Profit & Loss Statement?

          A profit and loss statement simply known as a P & L account or income statement is one among the financial statements which provide the company’s revenue, expenses, profit & loss over some time.

          The P&L statement will help the investors and creditors to determine the past performance of the company. With the help of a profit & loss statement in a project report, we can predict the company’s sales, expenses, and cash inflows.

          What is the Structure of Profit & Loss Statement?

          The following items usually appear on the debit and credit side of a P & L Account.

          On the debit side:
          1. Gross Loss (Transferred from Trading Account)
          2. All Indirect Expenses
          On the credit side:
          1. Gross Profit (Transferred from Trading Account)
          2. All Indirect Revenues
          What components include the P&L Statement?
          1. Revenue or Sales
          2. Cost of goods sold
          3. Gross profit
          4. Selling, General, and Administrative Expenses
          5. Depreciation
          6. Interest income/expenses
          7. Taxes
          8. Net profit/income
          How to prepare a Profit and Loss Statement?

          To prepare this statement you need to prepare another statement and collect data to make this statement. Follow the steps to prepare the statement.

          1. Prepare ledger accounts: With the help of a journal book, prepare a statement to get the ledger closing balance.
          2. Create trial balance: Trial balance gives the lists of all ledger accounts with the closing balance from the individual ledger.
          3. Preparing profit and loss statement: All ledger accounts having the nature of the purchase, sales, direct expense and income, indirect expenses, and income are posted to P&L statements.
           What is the Format of Profit & Loss Account?
          Particulars Amount Particulars Amount
          To Opening Stock xxx By sales xxx
          To Purchases xxx By Closing stock xxx
          To Direct Expenses xxx
          To Gross Profit xxx
          xxx xxx
          To Operating Expenses xxx By Gross Profit xxx
          To Operating Profit xxx
          xxx xxx
          To Non-operating expenses xxx By Operating Profit xxx
          To Exceptional Items xxx By Operating Profit xxx
          To Finance Cost xxx
          To Depreciation xxx
          To Net Profit Before Tax xxx
          xxx xxx

          About Finline

          If you are an entrepreneur looking for a bank loan, A project report is a necessary document. By submitting a good project report, you increase the chances of your loan approval. Finline helps you do the same. Using Finline you can craft a compelling project report in less than 10 minutes. That too in your language. Our reports are accepted by all public and private sector banks working in India. Click to create your project report.