How Accounting Helps You With Business Decisions | Best CPA Baton Rouge

Accounting and financial reports might seem complicated and time-consuming, but they are crucial to the success of your business. When it’s time to make big decisions, accounting data helps you choose the option that’ll help guide your business.

The following are five ways accounting helps you make decisions in your business. 

Loans for small businesses

Businesses, both new and established, may need to consider a business loan. A startup or an expansion of an existing business might require financial backing. So, how do you know if you need a business loan? It’s all about accounting.

Using accounting information, you can determine whether your company has enough money to fund its venture or if you need financing to do so. Lenders need your accounting information to determine whether you’re a good candidate for a loan. They need to know you can pay back what they lent you, plus interest. 

Your financial data enables creditors to make informed decisions about the amount of money you can borrow. A lender may refuse to extend you a loan if your accounting information is poor, if you lack money or collateral, or if you have already accumulated debt. Regardless, they need to look at your accounting records. 

For business loans, you’ll need the following documents:

• Income statements
• Statements of cash flow
• Business tax returns
• Balance sheets

Operating a business

By using accounting, you can make better decisions about your general day-to-day operations. Taking a look at your accounting information allows you to determine how efficient and effective your current procedures are. 

To check whether your financial statements are up-to-date, you can compare them with industry standards. If not, you can make the necessary changes to make your operations more efficient.

Your accounting information also shows how profitable your business is, meaning how much you make from the effort you put in (your return on investment). Having a lot of sales doesn’t mean your business makes a profit. When you have a ton of debt to pay off, it might cancel out the money you make from sales (your revenue). Accounting lets you know how well you’re using your assets (items of value to your business) to create your products or services. Accounting allows you to compare your cost of sales to your profit margin. 

Capital investments

In a limited company by shares, investors can buy shares of the company and receive a share of its profits (known as dividends). Potential investors use accounting to decide whether or not to invest in your company—or how much to invest. 

What are the ways investors use your accounting information? The purpose of this is to determine your company’s value and to perform a credit analysis to assess your ability to provide a fair return on investment. Accounting assists investors in making decisions by showing them your company’s financial health. 

As an example, an investor might ask to see your income statement to determine where your income comes from and if it’s consistent. Investors may invest in your company if you show a steady income. Accounting serves to show investors the potential profit and risk of investing in your business.

Creating a budget

Any business needs a budget to prevent overspending and wasting money on non-essential expenses. Additionally, you can use your budget to see where you have spent money in the past and determine if those expenses were necessary to provide your products and services.

Accounting data helps you make well-informed decisions about how to spend your money. When writing your budget, you should use accurate, complete, and current financial information. A CPA can assist you and answer questions like these.

What was your profit or loss last year?

Has the cost of sales gone up or down?

Are there any items on your website that don’t sell that you can remove?

Is it possible to replace items with anything that will be more profitable?

Among the documents you need for budgeting are:

• Accounts receivable
• Accounts payable
• Beginning balances
• Balance sheet
• Profit and loss statements

Having these documents available will facilitate the decision-making process when writing your budget.

Marketing

To attract more clients or customers, businesses need to spread the word about what they offer. Both marketing and advertising are essential expenses for marketing your business. 

Accounting shows you how much you need to spend on marketing and advertising. It also shows you how much money you made from those campaigns. 

If you spend a certain amount on a paid ad campaign but don’t see a noticeable increase in traffic or sales, you might need to shift your focus. Alternatively, your campaign might have resulted in a big increase in sales, but the campaign cost more than the revenue increase. 

Accounting plays a critical role in helping businesses define and manage their financial health. Accounting is essential to making informed financial decisions about everything from marketing to business loans. Getting it right is essential! We are here to help you. Contact our accounting firm today to learn more.