The secret to success in managing a business is understanding the numbers – which means you should learn some accounting and finance functions.
Called the Language of Business, accounting is the systematic recording and analysis of a company’s financial transactions and business activities. It tracks the business’ income and expenditure and ensures compliance with regulations.
The Impact of Accounting & Finance on Business Management
So, what is it about the documentation, monitoring, and analysis of financial activities that create such an impact on business management?
Accounting provides the essential, quantitative financial information that helps business owners assess the company’s financial health and make smart, strategic decisions for the business. Understanding your financial status and keeping track of incoming and outgoing cash flow gives business owners better navigation to steer a company into success.
The smarter the strategies and decisions you make, the better you will manage your business. Dive into the specifics of how the Cost of Goods Sold (COGS) works in accounting and finance to make the entire company mechanism work smoothly.
Builds a financial blueprint
We have established that one of the roles of accounting is to record business financial activities. Keeping an accurate and up-to-date record of finances can help business owners in managing their financial future.
With these records, you understand your company’s cash flow and can create a financial blueprint for profit and stability. In the long run, this can build a stronger foundation for success.
Helps in budgeting and forecasting
Well-structured accounting practices pave the way for budgeting and forecasts. The records you keep are the basis for business trends and future projects and equip you to strategize and create a budget that can keep your operations profitable and your business afloat.
Helps evaluate financial performance
One habit of successful business owners is consistently checking in and evaluating how their business is doing.
By reviewing financial records, you can understand your company’s current financial position and performance. These records reflect the results of your day-to-day and long-term operations, and they show you your company’s current liabilities and assets. Knowing your financial performance may also help you identify potential areas of growth for your business.
Analyzes business costs through Cost of Goods Sold (COGS)
In order to create an accurate picture of your financial situation, you’ll need to understand the concept of COGS.
Cost of goods sold (COGS) is the direct costs of the production of goods sold or services rendered by a particular company. COGS includes, but is not limited to, the materials and labor for creating the goods, as well as indirect costs which may be incurred through distribution and sales.
The value of your COGS is deducted from your total number of sales (revenue). The resulting numbers refer to your gross profit and gross margin. The higher the COGS result, the lower your margin is.
Formula and Calculation for COGS
COGS = Beginning Inventory + Purchases during Period − Ending Inventory
Ideally, a company’s calculation of COGS should include the cost of all inventory that was sold during a particular accounting period. However, in a more realistic setting, companies don’t exactly know which units of the inventory were sold. Thus, they rely on inventory methods such as “First In, First Out” (FIFO) and “Last In, First Out (LIFO)” to come up with an estimate of the inventory that was actually sold. If the value is high, then this places pressure on the company’s gross profit.
Thus, companies choose various accounting methods to lower their COGS and boost their reported profitability.
Keeps your business compliant
Different countries and states have varying business and safety regulations in place, but if you have proper accounting systems, your company won’t have a problem following these laws. Tax management is one of the many legal problems that threaten businesses with poor financial records and accounting processes.
Final Thoughts on the Role of Accounting & Finance in Managing a Business
Accounting is more than just recording and analyzing financial transactions; it can make or break a business. Many new small business owners tend to overlook its importance, which often leads to substantial challenges in growing the business and even failure.
A well-structured, proper accounting system provides accurate historical financial records that serve as a reliable basis for strategic decisions, budgeting, forecasts, and your company’s current financial standing.