While financial reports and accounting can seem time-consuming and confusing, that data is essential when it comes to running a business. Accounting data is especially important when you need to make big decisions as it’ll help you choose the option that’ll guide your business forward.
This guide will explain how accounting helps in decision making for things like:
- Business loans
- Operational analysis
Whether you’re a sole trader or a small business owner, Countingup can help you keep track of your finances to make more informed decisions.
How accounting helps in decision making
We’ve listed five ways accounting helps you make decisions in your business.
- Business loans
New and established businesses may find themselves needing to consider a business loan. You might need financial backing to get your startup off the ground or to fund an expansion to your existing business. But how do you know if you need a business loan? That’s where accounting comes in.
By looking at your accounting information, you can determine whether your business has enough money to fund its own venture or if you need financing to pay for it. Lenders also need your accounting information to decide if you’re a viable candidate for a loan. In other words, they need to know you’ll be able to pay back what they lend you plus the interest.
Your financial data allows creditors to make informed decisions about how much money you can receive as a loan. If your accounting information is poor, for example, if you have no money or collateral or already have debt built up, lenders can decide not to extend you a loan. Either way, they need your accounting information to make that decision.
The financial documents you’ll need for business loans include:
- Income statements
- Cash flow statements
- Business tax returns
- Balance sheets
- Business operations
Accounting helps you make better decisions about your general day-to-day operations. Assessing your accounting information gives you the chance to analyse how efficient and effective your current procedures are.
For example, you can compare your financial statements to industry standards to see if you’re keeping up. If not, you can make necessary changes to your operations to make them more efficient.
Your accounting information also indicates how profitable your business is, meaning how much you get back from the effort you put in (your return on investment). Just because you’re making a lot of sales, it doesn’t mean your business turns a profit. If you have a ton of debt to pay off, that might cancel out the money you make from sales (your revenue). Accounting helps you understand how well you’re utilising your assets (items of value to your business) to create your products or services. In other words, accounting allows you to compare your cost of sales to your company’s profit margin.
If you’re a limited company by shares, investors can buy shares of your company and get a share of your profits (known as dividends). Accounting helps potential investors make decisions about whether or not to invest in your company –– or how much to invest.
How do investors use your accounting information? They use it to determine your company’s value and perform a credit analysis to assess your ability to give them a fair return on investment. How accounting helps in decision-making for investors is by letting them see your company’s financial health.
For example, an investor might ask to see your income statement, which they’ll use to see where your income comes from and whether it’s consistent. If you show a steady income, the investor might decide to invest in your company. The role of accounting here is to show investors the potential profit and risk of investing in your business.
Budgeting is a crucial part of any business to stop you from overspending and wasting money on non-essential expenses. You can also use your budget to look at where you’ve spent money in the past and determine if those expenses were necessary to offer your products or services.
Accounting data gives you information that you can use to make well-informed decisions about where to spend your money. When you write your budget, make sure the financial information you use is accurate, complete and up to date. Accounting can help. You answer questions like:
- Did you make a profit or loss last year?
- Did the cost of sales go up or down?
- Do you have any items that don’t sell that you can remove from your offering?
- Can you replace items with anything that’ll be more profitable?
Documents you need for your budgeting include:
- Accounts receivable
- Accounts payable
- Beginning balances
- Balance sheet
- Profit and loss
Having these documents in front of you when writing your budget will help you with the decision-making process.
Every business needs to get the word out about its offering to attract more clients or customers. Marketing and advertising are both essential expenses to promote your business to potential customers.
Accounting shows you how much money you have to spend on marketing and advertising. The financial information also shows how much money you made off of those campaigns.
For example, if you pay a specific amount for a paid ads campaign but don’t see a significant increase in website traffic or sales, you might need to focus your efforts on something else. Alternatively, your campaign might have resulted in a big increase in sales, but the campaign itself ended up costing more than the increase in revenue.
How accounting helps in decision-making in business ultimately boils down to helping you define and manage your company’s financial health. You need accounting to make informed financial decisions about anything from marketing to business loans. It’s an important part to get right!
Make more informed decisions with a simple accounting app
Thousands of business owners are using the Countingup app to gain confidence in managing their business finances, save time on admin and focus on growing their business.
Countingup is the business current account and accounting software in one app. It automates time-consuming bookkeeping admin for self-employed people across the UK.
With automatic expense categorisation, receipt capture tools and cash flow insights, you can confidently keep on top of your business finances and save yourself hours of accounting admin, so you can focus on doing what you do best. Find out more here.