Financial Accounting_ How It Can Impact Decision-Making
Financial accounting is paramount in any business to ensure the financial health of the company. There is a set of accounting principles that every company must implement and adhere to. But all these accounting principles all boil down to what accounting basically does —keep track of all financial transactions in a business.
When it comes to financial recording, accounting data should be reflected in financial statements, whether it's a balance sheet, income statement, or cash flow statement.
Given the crucial aspect of financial accounting, there are three main areas where it can impact a business in its decision-making.
Here's how financial accounting can impact business decisions:
1. Financial accounting help investors make investment decisions
The Financial Accounting Standard Board (FASB) has set forth and established the current financial accounting standards. It requires all publicly traded companies to create and report their finances through financial statements. Therefore, a company's balance sheet, cash flow statement, and income statement are all essential for fundamental analysis.
That said, investors use these financial statements to make decisions about a company's valuation and creditworthiness. Without these, investors won't have a deep understanding of the company's financial history and overall financial health.
Since FASB creates standards and consistencies in financial reporting, investors will be able to make objective and sound decisions, regardless of what company they review and invest in.
2. Financial accounting provides lenders with a better sense of a company’s creditworthiness
Aside from investors, financial accounting is also crucial for lenders. This is because lenders get a better sense of a company's creditworthiness through these financial reports. These statements reflect all the company's assets as well as short-term and long-term debts.
Lenders rely heavily on common accounting ratios, such as debt-to-equity (D/E) ratio and times interest earned ratio, recorded in the company's financial statements. Even privately-owned businesses provide some sort of financial accounting information, despite not being subjected to FASB requirements and guidelines.
The ultimate goal of lenders is to know how much risk is involved in lending money to a company. Lenders will be able to make sound business decisions as they will know exactly how much to lend and what interest rates to give.
3. Financial accounting aids in improving corporate governance
Finally, reliable accounting isn't only for lenders and investors. Financial accounting is primarily beneficial for the company or business itself.
Financial accounting helps a business be compliant with the legal and regulatory obligations outlined for public companies. This means that a company should be honest about its financial activities, and data must be recorded accurately and published regularly.
Moreover, financial accounting helps a business monitor its financial health. A company will be able to make sound business decisions by analyzing product performance, creating a budget, and developing short-term and long-term strategies.
Indeed, financial accounting plays a vital role in a company. Not only does it keep track of business operations, but also the financial health of the company.
A variety of financial statements, whether it's a balance sheet and income statement, should be properly recorded. Through these accurate financial records published publicly, investors and lenders will have the right tools to make sound and objective decisions. But most importantly, financial accounting helps a company make the right business decisions.
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