Financial accounting is a process of keeping track of company records and reporting all the financial data of inbound and outbound business operations. So basically to keep track of financial transactions, the accounting data is recorded as statements including balance sheet, income statement, and cash flow statement. There are a series of accounting principles that a company follows to make better decisions in the future to whether to take up projects and buy new equipment and machines for the business. Here are the three main areas where financial accounting can help in better decision making for businesses.
It provides the investors to decide better on the financial health of the corporations with better comparisons with efficient analysis. It also helps the creditors assess the solvency, liquidity, and creditworthiness of the business.
The fundamental analysis depends on the company’s balance sheet, which records the statements of cash flow and income statements. All of the financial statements of a business are created and reported according to the financial accounting standards by the Financial Accounting Standard Board.
The investors make use of the information from the financial statements to make future decisions about the credit worth of a company and its value in the market. Without the financial statements, the investors will have a blurred idea about the company’s financial health.
Financial accounting is also beneficial for lenders to make decisions on finding out their real creditworthiness. Because the financial statements outline all its assets and bank details, the lenders can make good choices in lending and taking credits to other parties. Although the process of applying for business finance has many differences when compared to an individual applying for personal finance, there are still some aspects of the application process that are similar. For example credit checks can still be performed on the individual directors of a company to confirm their creditworthiness and also ensure that there has been no history of Bankruptcy or any outstanding debts that may affect the individual/businesses ability to repay the full loan. These same checks are also carried out by many consumer finance companies such as Payday Pixie to ensure accurate lending decisions and to confirm an individuals creditworthiness and affordability.
The accounting ratios,debt-to-equity ratios and times interest earned ratios are derived from a company’s financial status. Even for small private businesses which do not follow the guidelines of FASB, no lending institution provides large business loans without critical information from financial sheets. The lender wants to know how much risk is involved in lending money from the company’s deposit, which can be determined by financial accounting. With proper financial accounting, the lender can accurately decide the amount their company and lend and at what interest rates.
A well organised financial accounting also serves the corporate themselves. With lenders and investors, reliable accounting benefits the firm too. The general benefit which an organisation gets from their financial accounting is meeting the legal and regulatory obligations outlined for similar company lines. The companies must be honest about their financial activities and must publish the data as accurately as possible on a regular basis.
Apart from these three major reasons, financial accounting also benefits in managing budgets, understanding public perception, tracking the efficiency of the company, analysing the product performance, and develop short term or long term strategies.