Accounting is often seen as the lifeblood of business because it provides companies with the best information regarding the inner workings of their operations. Financial transactions from the business operations and financial transactions regarding company assets are all recorded and presented by internal accountants. Executive management needs accurate financial information for several reasons, including planning, decision making, and profitability reporting.
Before most businesses even start operations, some level of planning is done to determine the level of success that can be achieved from operations. Businesses will examine current economic trends like consumer demand, market size, and number of competitors. This analysis helps companies determine which industry best suits their goods and services and then focuses on planning for the necessary plants and equipment needed to create successful business operations.
Once a business starts producing goods and services, executive managers must review each level of the company to ensure that each department is functioning at its peak. Some departments may need to be overhauled to re-create a competitive environment that produces high-quality goods and services. Additionally, management will use accounting information to decide if their company could improve operations by purchasing a competitor or enter a new market with their existing production facilities.
The biggest need for accounting information is to determine overall profitability. Sales, costs of manufacturing, inventory, and expenses are all recorded and presented to company management so the company’s profit levels can be determined. Financial statements like the balance sheet or statement of cash flows may also be prepared so executive management can assess the value of the company and the cash-generating functions of business operations.
Once companies have a solid understanding of their profitability, they begin to make decisions on investing their cash and retained income from business operations. Executive management will decide what amount of cash should be reinvested into the business and what amount should be invested in interest-bearing securities. Companies will use these securities investments to generate cash outside business operations, giving them higher cash flows. Accountants must track these investments to ensure that the company does not take on too much investment risk.
After the financial transactions of a company are properly recorded and presented in financial statements, accountants will review the information to determine the strength of business operations. Accountants use financial ratios to break down the financial statements and compare them to the industry or competitors. This analysis will help management find weak areas in the company and help allow them to find solutions for strengthening these operations.