financial accounting tool for business decision making

financial accounting tool for business decision making

The Role of Financial Accounting Tools in Facilitating Effective Business Decision Making

1. Introduction to Financial Accounting Tools

In financial accounting, numbers are the primary source of financial information. These numbers are produced by carefully determined, agreed-upon rules. An analysis of how and why these numbers are produced lies in the domain of economics and will not be discussed in this analysis. These financial numbers are for the most part used as a comparison or a facilitator in decision making. They are not themselves what insurance practitioners would define as loss financing or financing of future political risk. They illustrate a part of why financial management skills will continue to be an important tool in business school education. Financial accounting tools make the creation of financial numbers possible. They are the set of rules followed so that all users of a business’s financial information can have a common frame of reference. In their design, they involve many of the same considerations and judgments that are inherent in the decision-making process itself. To put the importance of financial accounting in its context, an organization can survive for months or more with prudent management but no external financial reporting. It cannot exist for more than a few weeks if decision making suddenly ceases.

Businesses exist to solve problems. A variety of problems exist, which range in complexity from coordinating the ordering of office supplies to managing catastrophic physical disaster or catastrophic liability. The business decisions on the best solutions to solvable problems range in difficulty from a decision that can be made in less than a second to decisions that require months of careful study. There are millions of people in the United States trained in the arts of solving complex business decisions when an event happens. Yet all of us frequently need to access information on a business’s financial health quickly. For many decisions, financial numbers, or more precisely the simplification of those numbers into a number of ratios, can be an important and useful information source. Financial accounting is the collection of tools that can generate this information and then make it readily accessible to a much broader audience than is trained in finance, financial accounting, or tax.

2. Key Financial Statements and Ratios for Decision Making

Section one attempted to answer the question: Why is financial accounting so important? This section seeks to take the discussion further by identifying the key financial statements that are used in financial accounting to represent a variety of business activities and providing an overview of the different financial accounting tools used by managers to make informed decisions. Major tools such as ratio analysis, variance analysis, budgeting, breakeven analysis, trend analysis, and cost-volume-profit analysis that could be employed to solve practical problems in financially managing organizations are identified. The third section provides a brief overview of some accounting models and measurement systems that are used for internal decision making within the organization.

Accounting information is used by different categories of users, either for business transaction record-keeping purposes or for decision making. Shareholders, investors, health consumers, and other stakeholders of organizations require accounting records in their decision-making processes. Based on the approach that economic entities of all kinds are directed by decision makers rather than “stewards,” accounting is the study of information gathering and reporting that helps managers and other decision makers make better decisions and is a major function of business because it allows managers to more effectively plan, monitor, and control the economic activities of firms, cities, hospitals, schools, and other organizations.

3. Utilizing Financial Accounting Software

Pre-approved journal entries significantly minimize the possibility of input errors. The answers to most frequently asked questions concerning the use of accounting software access the company’s accounting professional expert routines, with templates and pre-coded macros, allowing for financial solutions which are not regularly encountered. The capability to send and receive email or, through the use of dial-ups, transmit customized financial reports and, of course, financial data, streamline flow charts through the process and procedures. Another advantage of the tools mentioned is speedy chart and financial report consolidation, often making the data available, together with financial consolidation reports including percentage analysis, either of accounts or data for a single account. The software speeds up the account reconciliations and analysis process, the Head Office having the capability to monitor the consolidated financial transactions per location and there are individuals to report real-time possibilities of fraud or collusion between two or more individuals. Budgeting, forecasting, and projections can be done in record time. The financial data, once transmitted to the Head Office, can be used to make global period comparative analyses, which can be utilized as the basis for strategic decision making in the formulation of business solutions; the possibilities are endless, so don’t limit your thinking.

With the advent of computers, businesses have a far more powerful tool to help in strategic and day-to-day business decisions. Most organizations take advantage of technology by utilizing financial accounting software. This software provides numerous advantages. One of the simplest, yet extremely important features, allows multiple users at various levels and in different departments and locations to have access to the same financial data. Managers and employees who need it can input entry-level financial data which, through the use of pre-approved templates, follow the standard procedures and input checks.

4. Case Studies and Real-World Applications

The study focuses on the role of financial accounting in efficient business operations. A functional relationship is established between business decisions and the costs of manufacturing assets. As business success results in the production of goods or services with greater perceived customer values at costs generally below these values, the company must have adequate accounting information that reflects the capabilities of its manufacturing operations, the costs and potential profitability of capital investment opportunities, and overall company success.

The following three examples present some of the uses and consequences of business decisions regarding product pricing, product production scheduling, and project investment. These decisions are based on financial accounting information that reflects company manufacturing capabilities. The availability of this financial accounting information enhances the company’s ability to make informed decisions by directly reflecting business objectives and thus the costs, limitations, and capacities of manufacturing assets. In the three cases, manufacturing operational measures were introduced and used to improve accounting reports to facilitate the decision-making process.

5. Future Trends in Financial Accounting for Decision Making

Finally, new international harmonized legislation has and will continue to have a huge impact on the future of accounting. Examples of harmonization or unification of legislation are: International Financial Reporting Standards (IFRS), United States Generally Accepted Accounting Principles (US GAAP), and the harmonization of European Union Accounting Legislation (HRE). This harmonization or unification of legislation will be supported by the enormous antifraud potential of XML-based accounting software. It has already been mentioned earlier that future Internet technology will enable more transparency of financial accounting to a wide range of interested people.

Also, management accountants will gear more and more towards environmental accounting. This is an important tool for managers who have to support strategies for achieving sustainability. The enormous amount of available macro-related data is a treasure trove that presently carries quite a bit of dirt. Future accounting packages might look like what Vakalis had in mind and are described by Zamagni. The total costs of doing business, all costs of every company, and of any unit or person of the company are followed by special software. They are then summed up in software that enables the company to become a transparent company. The sum of all these numbers represents the costs of society for the business.

In the future, both micro- and macro-accounting software will play an important role for businesses in decision making. Microaccounting software will become even more user-friendly than it is today and will improve in forecasting. Accounting costs for micro-companies are still prohibitive. One way to overcome this problem could be to follow what is happening in Estonia. There, they have a rule that only every fourth invoice in each tax group must be reported with new and certified software. This way, the work of the tax authorities is facilitated because their data processing device can handle the data, and businesses can still use their old and cheap accounting device. In addition, this rule fosters competition in accounting software because companies are forced to change their microaccounting software packages. On the other hand, we will have more and more unified accounting legislation not only in the European Union but on a global scale. This will again enhance standardization, which will stimulate the use of outdated software.