In: Accounting
What are the critical factors to consider in a company ́s financial management?
Considering the following:
1. Key elements in accounting(specifice lements)
2. The relevance of accounting in businesses
3. Financial accounting's role in communicating business
results
Instructions: Write an essay answering this question and considering the 3 points given.
Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise.
1. Scope/Elements
2. Relevance of Accounting in Business Organization
A business organization involves an individual or a group of people who collaborate so as to achieve certain commercial goals.
Planning
Budget
Budgeting is a core factor in every business. Planning budgets help
business to make strategies, save money and noticing any
expenditure exceeding the budgeted amount. To make a budget you
need various previous records. In order for these documents to be
available, they must be very well maintained through accounting
since they are the basis of planning and making budgets.
Banks and
lenders
In order to get any loan from the financial institution, you must
be able to present your financial status in acceptable order. So in
order to make it, you need to have proper accounting system so as
to present various books of records such as profits recorded,
assets and liabilities, taxes paid among others. Financial
institutions will scrutinize them carefully before landing to a
decision of awarding loan.
Keeping
Records
Every business needs to keep records and act upon them in order to
run smoothly. In this case, accounting plays a big role in keeping
records. All records are collected, organized, and interpreted in
order to be communicated to the end users, therefore helping in
making an economically viable decision which will lead to the
positive productivity of the business organization.
Decision
Making
Any economic or any decision regarding the business organization is
made depending on the financial statement of the organization. A
financial statement is as a result of accounting. Without proper
accounting in a business organization, the executives can’t make a
sounding decision since they will be operating in blindness hence
making it impossible to achieve organization objectives.
Information to
Investors
Financial statements and accounts are used to represent the
organization to the stakeholders such as debtors, creditors,
government, and investors, customers and employees. Many investors
will run away from your organization if you lack financial records
and accounts to presents so as they can know the business
progress.
Reporting
Profits
The key objective of any business is to make profits. Every
business, being a small or large organization, must maintain
accounting system so as they can ascertain what they are making on
their business transactions. This also enables interested parties
to make the decision on the progress of the business
productivity.
Managing and Monitoring
Cash Flow
Proper accounting systems will take care of working capital and any
other cash requirements within the business
organization.
3. ROLE
Accounting plays an important and useful role by developing the
information for providing answers to many questions faced by the
users of accounting information :
15
(1) How good or bad is the financial condition of the
business?
(2) Has the business activity resulted in a profit or loss ?
(3) How well the different departments of the business have
performed in the past?
(4) Which activities or products have been profitable?
(5) Out of the existing products which should be discontinued and
the production of which commodities should be increased?
(6) Whether to buy a component from the market or to manufacture
the same?
(7) Whether the cost of production is reasonable or
excessive?
(8) What has been the impact of existing policies on the
profitability of the business?
(9) What are the likely results of new policy decisions on future
earning capacity of the business?
(10) In the light of past performance of the business how should it
plan for future to ensure desired results?
Above mentioned are few examples of the types of questions
faced
by the users of accounting information. These can be satisfactorily
answered with the help of suitable and necessary information
provided by accounting.