We can look at accounting as an information system that gives financial data to the decision makers of a firm.
Even the smallest of businesses has a large amount of accounting data, so much so that it is likely to pile up high. Every transaction that a business undertakes is recorded into the financial records of the firm. This amount of information can be very powerful if it is in the right hands. So, understanding a number of the ways that accounting data can be used to make business decisions could help you use this information that happens to be in your hands, to make your business even better.
Use it in Business Planning
A very common use of accounting data is that of using the data to create budgets and forecasts for the purpose of business planning. In most businesses, the budget is a basic of yearly planning. By using accounting data from past years, those creating the budget can get a figure with which to start the process from, in helping them be able to project sales and expenses for the forthcoming year. Also, this can help them with the budgeting process, beginning with sales forecast and a cash collection estimate. When all of these budgets are finished, then the purchasing and expense predictions can be completed. This then leads to the final stage which is that of the expected cash balance and in effect, a forecasted financial statement can be created. At each and every stage of the process, previous periods of accounting data is used so that current year estimates can be created.
Used in Business Analysis
Also, accounting data is not only utilized to forecast performance in the future, but the information can also be used to study the businesses performance after the fact, thus giving businesses the ability to review the accounting data on a monthly basis so that actual sales expenses and profits can be compared to what the projected performance was. This actually is allowed if there are large differences between the predicted and the actual figures, and then the business owners can execute any changes in the business that might be needed so that these differences can be corrected. So the more often the accounting data is reviewed, there is a greater the chance that any small issues will be seen to quickly before they become even larger problems.
Used in Investment Choices
If a company is in the fortunate position of having excess cash, like in the case when it obtains the proceeds of a loan or a new investment from an investor, the management of the firm can use accounting data when they are deciding as to where to allocate these new funds. So by viewing the company’s cash projections, the management can understand what amounts of cash will be needed for the short term and how much could be needed for the long term. When this has been realized, the management can then choose such things as stocks, bonds or another investment that is favorable for keeping the cash for the period of time that it is needed to be held. Whilst deciding upon investments, the management can often review the financial data or the investment information reports from the proposed investment possibilities, this being another use of accounting data.
Used in Benchmarking
The reviewing of a financial performance to that of internal budgets is not the only way that a business owner can use accounting data to measure performance. Benchmarking is the process of comparing company financial information to the industry or another company’s financial data, and thus benchmarking allows managers or owners to evaluate their company’s performance to that of their peers. Now, benchmarking can be useful but small business owners should be very careful when doing so, as it is often the case that the companies that are used for the comparison often tend to be large public listed corporations. In conclusion, these companies might not be the best to be used as a comparison. So, management should be very careful with the final results and furthermore, always take the final result with a large grain of salt.