Accounting information is the map for your business decisions, here are details why you need to care.
The business enterprise is money-based, generating money through sales and spending money on inventory, salaries, and operating expenses. No business can last long without making more money than it spends.
Accounting is the process of tracking and summarizing information about the money coming in and going out of a business. Accounting is relevant to business decisions because it provides essential information that helps you determine if a particular endeavor will increase or hurt your bottom line.
These are the reasons that accounting information is closely related to business decisions #
1. Maximum profit #
Your business doesn't make the same amount of money on every product or service you sell. Some products have lower margins but enough sales volume or customer appeal to justify this margin reduction.
Product mix is the careful balance of products that make up what you offer to your customer base. Successful product mix decisions depend on detailed accounting information about the cost of selling each product and the amount of revenue that item generates.
The faster you rotate your inventory, the more money your business will make. If it's taking too long to turn inventory, consider holding off on extending the time owed to the seller or paying more attention to which items sell fastest.
2. Invest in human resources #
Detailed and accurate payroll information is relevant to staffing decisions as it tells you if your company can afford to add staff if you feel a shortage. To ensure that the products and services provided to customers meet the standards.
If your payroll accounting shows that your payroll costs make up an unsustainably high percentage of your sales revenue, a personnel performance review and a reassessment of the payroll system will be helpful. makes more sense than hiring more employees.
Wage/revenue ratios vary across businesses, but most industries aim for payroll costs of 15 to 35 percent of gross revenue. Service-based businesses that incur few costs other than payroll can sometimes maintain payroll costs up to 50%.
If your payroll costs are more than 35% and your business is unprofitable, your accounting data can point you in the direction of business decisions like layoffs or if you have to perform labor productivity assessments.
3. Optimizing cash flow #
The amount of money your company has on hand at any given time is strongly correlated with your daily revenue and expenses. You may have sold inventory and not yet received payment, purchased inventory that you have not paid for, or borrowed money that you will have to pay back in the future.
Cash flow is the process of managing the funds your business has available and allocating them in your favor. Accounting is relevant to cash flow decisions because it tells you how much money you have right now and how much you are likely to have in the near future.
The information in your cash flow forecast can help you determine the most efficient use of cash flow, when you will need to borrow money, and when you will be able to pay it back, allowing you to make informed decisions. transparency and avoid unnecessary financial charges.
4. Decision on expansion and investment orientation #
Healthy businesses tend to grow, and business growth requires careful management with a close eye on the numbers. A good accounting system will provide accurate details and give you important information about whether your business can pay off the money you borrowed to scale and how long it will take. do that.
If your business seems ready to move to a larger facility or ramp up production, your accounting system will let you know if you have enough sales to do so and if so. no, how much more do you need in daily sales revenue.
Accounting data can help you decide when is the right time to invest in expansion. If your sales are growing steadily and you're accumulating excess capital, your business may be well positioned to expand.
Investing in facilities and infrastructure can allow your business to be more efficient and profitable. But this is very dependent on an assessment of your cash flow situation that will let you know when you can afford to make these changes.