The Value of Accounting

Is the value of accounting just a measurement at tax season or is there something more to this financial language? If you believe that the only reason accounting exists is to file taxes, please keep reading.

Taxes are a part of life and, accounting for your business correctly, makes that process less scary. But accounting wasn't developed for taxes. Records of this financial language were found over 7,000 years ago among the ruins of Ancient Mesopotamia. At the time, people relied on accounting to keep a record of crop and herd growth.

Therefore, the main reason that accounting existed was to measure the performance of their businesses.

The same is true today. Accounting exists, and is valuable, only when used to measure the results of your business operations, by analyzing data between periods. This provides a "story" as to how well the management team is running the business. It also identifies outside factors that are affecting the business.

Regardless of the type of business, an effective accounting department can create value in a myriad of ways. Here are just a few examples;

*Inventory levels are an important part of the cash flow equation for a business. When businesses are not set up to account for their inventory correctly, money is wasted. If a business is not measuring how much inventory is available to sell, how does management know when to purchase more? Most times, businesses will over purchase and the net result is cash tied up in product when it doesn't need to be and could be used for more revenue or cost saving generation.

*Financial Variance Analysis is comparing periods of financial information to help understand where the business is performing. For example, using accounting data, we can view the difference between a current period's sales versus the prior year, same period. This gives the business a view of where the market is (outside factors), and how internal strategies performed over the course of the time measured. This same analysis can be used on all aspects of accounting (i.e. cash movement, expenses, liabilities, etc.).

*Obtaining financing and/or investment is another part of building a business. If a company does not have accurate financial statements, the chances of acquiring any type of funding to expand business efforts, is zero (unless borrowing from sharks).

If the business has a strong Controller or Chief Financial Officer (CFO), this person can take a combination of all of the accounting data and create a story that points to strategies that can be implemented to improve overall business. Point being, the value is huge because, without it, you are in the middle of the ocean without a paddle...lost.

If you are a business owner and currently do not have an accounting department in place but want what the value of accounting can bring to your business insight, take a look at how Fractional Accounting can serve your business.

Blue Collar CFO