What is financial accounting?

Financial accounting is a regular process of collecting and systematizing data on the financial condition and results of the company’s activities. The financial reporting system should include three main statements:

  • Cash Flow Statement – shows how much money a company has;
  • Profit and Loss Statement – will tell you how much the business earns;
  • The balance sheet is a statement of the wealth of the company, it will tell you what the company has now and with what funds it was acquired. 

That said, financial accounting is not equal to bookkeeping. Consumer of accounting – public authorities, e.g. tax inspectorate. In management end-user is the owner who sees the whole picture and makes management decisions based on the reports. 

What does financial accounting bring to a business?

Financial accounting performs several tasks. 

  • Analyzes finances. The main benefit is a sense of security. By security, I mean cash control – where the owner understands how much money the company owes to its suppliers or contractors and how much money is owed to it by other companies. Using a bank statement converter can streamline this process by automatically importing transaction data into your accounting system. A businessman is not only interested in knowing the result of the business in the form of profit or loss for a certain period, but also seeks to know what he owes (liabilities) to outsiders and what he owns (assets) as of a certain date.
  • Helps to plan costs. As long as the company doesn’t plan, it’s like an unguided ship at sea – it’s not clear where it will go, whether it will make a profit or a loss. The company wants to get from point A to point B, but doesn’t understand how to do it. 
  • If financial and management accounting is kept and, for example, one supplier has raised prices, it will not be possible to achieve the planned profitability. So, we’ll have to look for cheaper and negotiate with other suppliers. This is the only way to get to the point the company has set for itself. 
  • Finding points of growth. If an entrepreneur wants to grow, there will be no growth without financial accounting – there will be no understanding of which way to go and which management accounting tools to use. And if there is movement, it will be unclear why the company is stumbling and not meeting targets. 

What causes financial accounting problems?

The global reason is that entrepreneurs are idea generators and they think differently from CFOs. Owners often lack applied knowledge and do not engage in important routines. 

Many entrepreneurs believe that the money in the checking account that remains at the end of the month is profit. So it seems to them that they don’t need any record keeping. But that money could be an advance from clients to whom you need to fulfill obligations. 

For example, a company that manufactures equipment received an advance from a customer. She needs to buy some parts from the supplier, which means paying from the money the customer has already transferred. But if the company has not had time to pay for the parts in the current month, there is money left in the checking account. And it seems that this money belongs to the company, that the owner has made a profit and he can spend this money on himself. But in reality, the company has yet to actually fulfill its obligations – they are just advances. By the way, the customer may change their mind and ask for a refund of the money the owner has already spent. 

Another example. Staff salaries must rise – so costs must rise as well. But expenses must grow at a lower rate than revenue. For example, a normal growth ratio is when revenue grew by 30% during the year and expenses grew by 10%. 

If payroll has grown by 50% and revenue by only 20%, the owner will have to improve financial literacy and learn how to collect reports under the supervision of a CFO who will highlight important points in the imbalance of payroll and revenue growth.