Accounting is an important part associated with finance. In accounting, you will be collecting as well as analyzing different kinds of financial information. Through this, records of all kinds of transactions are captured; these records can have myriad number of consequences when it comes to running a business.
Different business strategies associated with mergers and acquisitions as well as costs incurred in formation of new ventures, get calculated with the help of accounting.
All these information is really useful for higher management levels, which make plans regarding businesses. The very control of a business lies within its finance department.
Important implications
After finding out about conditions associated with finances of a company, its owners take a decision whether to develop a new product or not. At a given time, a company has many products or services available in the market. Prices of such products or services, whether they should increase or decrease is decided by analysis of finances of a company. If more products are required to be manufactured, then operation capacity associated with that business is increased.
Methods associated with production as well as distribution are also varied to a certain extent here. If finances are not in a good state, then a company may require borrowing some amount of money to make that business better.
Work associated with data
Accounting in finance, require reporting of different financial data from time to time. Different business houses, keep a detailed record of different business transactions including a journal for sales, different cash receipts etc. A ledger, would be showing information about accounts of owners as well as equity.
All debits and credits are mentioned within it. There exists a general ledger too, that keeps a record of items that do not get featured in daily journals. Information here, speaks of bad debts as well as taxes that have got accumulated over time. Different accounts of revenues are often brought to a state of zero balance prior to beginning of another financial cycle. Students of finance need to know about preparation of financial statements. These statements or reports provide a summary regarding financial activities within that company.
Provide information for making decisions
Financial management exists in markets to facilitate decision makers within companies. It is completely associated with ways by which funds are raised for various businesses. A business exists in the market to raise certain amounts of money from investors and then make use of those to strengthen that business. Funds are required to be raised in such a way, that it covers all needs present within a particular business.
Benefit of understanding finance
When you have understood finance, you will come to know about all kids of finances available for a company. Different costs, risks and benefits associated with a particular finance will also be known by you. Financial markets play a certain role in providing finance to various companies. This role will be completely within your grasp by studying finance. Once you have raised different funds, they are required to be utilized and invested in a way that ensures healthy returns.
It is of course a little difficult to differentiate accounting from finance. Both are intricately linked with decision making. Different accounting reports provide with a lot of information regarding decisions associated with investment.
Management of cash
Cash Management is a really important function associated with finances. With help of cash management, people are able to file receipts and make payments in a really organized fashion. Different strategies and techniques are used collecting cash, keeping a track of it and eventually investing it. Lots of activities are a part of cash management and it helps in maintaining inflow as well as out flow of cash. Cash is actually diverted from one place to another, depending on needs. Different short term investments are also taken care of in this manner.
Why it is required?
Companies are able to use as well as process all their money in such a manner, that they have always had adequate amounts of cash covering regular costs. Companies therefore have some money ready for unforeseen circumstances. An example related to this would be a sudden increase in cost of raw materials. It is also overseen that funds get utilized for intended purposes.
Thus there are no losses incurred while making payments. Loss associated with capital is therefore prevented at all costs. Businesses are also therefore always ready with funds at the right time.
Managing capital
Different companies are heavily dependent on availability of cash for managing capitals required for buying raw material or purchasing new inventory. These activities require you to have a clear idea about the amount of cash needed. This is very much facilitated by cash management.
Cash Management requirement practically
When cash is managed in a successful manner, you will not only avoid bankruptcy but also get increased collections. The cash in hand will also allow you to make proper short term investments. Profits incurred by a company, in association with its finances, will improve to a great extent. Businesses will gain a power of planning future strategies as well as managing overall flow of cash.
Different parts of cash management
Account reconciliation refers to managing of cheese, clearing them when required and keeping a complete track of estimating balances. By use of cash concentration, funds are moved from different accounts of a company, to a single account, where monitoring can be done 24×7. This procedure helps businesses to obtain maximum benefit of using cash and get optimized returns. With use of financial risk management, risks are managed, in association with change in rate of interest as well as prices of stocks and commodities. Cash requirements of a particular business are really important for managing flow of cash, taking short term loans etc. If there is no control over flow of cash, then it can become harmful for businesses.
Different financial statements
By reading or analyzing different financial statements, one can get a really good idea about the state of that company. A balance sheet, gives a summary of what things that company owns and also what it owes to markets. Through profit-loss account reports, one gets to know how much a firm has earned within a particular period, therefore this I also called the income statement. Cash flow statements, tells all about in flow and out flow of cash from a particular firm.
Analysis of financial statements
In financial statement analysis, financial data is selected, evaluated as well as interpreted, along with all other information. A formulation is made of present day financial condition of a company. Through this process, risks as well as profitability associated with a company are analyzed and get interpreted. Many different tools as well as techniques associated with accounting are used here. This is a complete evaluation method where past, present performances pf a company comes under the scanner and a projected performance graph is predicted.
Tools for analysis
Through comparative statements, financial position of a business is known by making a comparative study of different items. Business activity gets measured with help of these statements. In common size statements, present in vertical form, different items of financial statements get reduced to a common base. Trend analysis too is a statement in vertical form; here the earliest year gets recognition of base year. Value of different items in financial statements, will be related to this base year in form of a percentage. Balance sheet ratios are also calculated and compared to those of earlier years.
In proportion analysis, many ratios are available for distinguishing relationships between various accounts of different sizes, present within financial statements. Comparison can take place within a firm, or an industry average can be taken as a whole.
Advantages associated with analysis of financial statements
It provides a distinct idea to investors about whether they wish to invest funds in a particular company. By taking a look at financial statements, different regulatory authorities can ensure that these companies are following standards of accounting.
Government agencies can also find out very easily about taxations associated with those firms. A company will also definitely be able to analyze its own performance over the years with help of these statements.
Terms to know about risk management
Investments are essentially assets held by a particular company by which they can earn money. The money is earned in form of dividends as well as interests, rentals etc. There are many other benefits associated with investments that a company can enjoy. There is no fixed definition for risks. In terms of finance, students will observe that a risk is essentially a probability that return on an investment is lower than expected return.
You might end up losing a part or your entire investment here. You need to realize that investments and risks always go hand in hand. Whenever an investment is made, there exists a risk of getting lower returns, depreciation of capital etc.
Why takes risks?
People often wonder why they should take any risk of losing their money. There are people who do not wish to put any of their money under any sort of risk. A lot of dividends and interests are earned by taking these risks. You may make certain purchases, which value gets increased after certain duration of time, but was not worth much, earlier. This is where you gained something by taking a risk. If you do not take risk, then you can of course earn some money by investing in government securities. This is good only when interest rate is high. However, if inflation occurs, it will not be able to cope with it.
Different ways of risks
All investors do not invest in a uniform fashion. There are certain individuals who wish to associate themselves with lesser risks, while others take risks worth higher mounts. Building a much diversified portfolio, is one way of managing risks. This portfolio would be holding many types of investments.
If you are taking this approach, then it is expected that at least some of these investments will come good and increase in value over a given duration of time. If return on one of your investments is poor, still there might be a chance of getting an overall positive result.
Risk management
By risk management, a certain investment making decision is identified, analyzed and then it is either accepted or rejected. Whenever a risk manager would be looking into losses of a company, and take appropriate actions, risk management is said to occur. Risk management is seen to occur everywhere in world of finance. This risk management is seen to occur when a risk manager is seen investing in government bonds with lower risks. Even when a bank performs background check on an individual before issuing a loan, risk management is seen to occur.
More information about working capital
Working capital is said to be that money required for funding day to day operations in a business. This capital ensures that at the end of the day you have enough cash to pay off debts as well as other expenses. The amount of liquid assets owned by a company, and is available for investing in its business is also known here. Working capital can be termed as the difference between current assets and current liabilities possessed by a company.
What working capital shows?
Working capital provides a measure of overall health of a company, its efficiency at handling operations etc. inside it, you will find information of inventories, accounts payable as well as due debts of one-year duration. Different analysts usually point out that timing associated with cash flow of a company determine whether it will be able to pay off liabilities within due date.
Author Bio:
Nancy L Beckkett from the University of Pennsylvania is a rather popular figures among her many students. She has a Master of Finance degree and sufficient amount of teaching and working experience of 6 years in the finance sector to be hailed as a role model. She illustrates different topics in finance very easily.