Why Is Accounting Information Relevant to Business Decisions?
For better or for worse, businesses operate on money. They generate money through sales and they spend money on inventory, payroll and operating expenses. No business can survive for the long term without ultimately earning more than it spends. Accounting is the process of tracking and compiling information about the money flowing into and out of a business. Accounting is relevant to business decisions because it provides essential information that helps you determine whether a particular endeavor will help or hurt your bottom line.
Your business doesn't earn the same amount of money on every product or service you sell. Some products have lower profit margin but sufficient sales volume or customer appeal to justify this diminished margin. Product mix is the careful balance of offerings that make up what you offer to your clientele. Successful decisions about product mix depend on detailed accounting information about how much it costs to sell each product and how much revenue that item generates.
Payroll accounting is the aspect of bookkeeping that prepares employee paychecks and tracks how much your business spends on payroll. Detailed and accurate payroll information is relevant to staffing decisions because it tells you whether your company can afford to add more employees if you're feeling shorthanded. If your payroll accounting shows that your payroll costs make up an unsustainably high percentage of your sales revenue, then it makes more sense to introduce efficiencies and re-evaluate systems than to hire additional staff.
The amount of money your company has on hand on any given day does not strictly correlate with your daily sales and expenses. You may have sold inventory and not yet received payment, bought inventory that you have not yet paid for or borrowed money that you will have to pay back in the future. Cash flow is the process of managing the funds your business has available and allocating them to your advantage. Accounting is relevant to cash flow decisions because it tells you how much money you have at the moment and how much you likely will have in the near future.
Healthy businesses tend to grow, and business growth requires careful management with a close eye on the numbers. A detailed and accurate set of books will give you vital information about whether your business will be able to pay off money you borrow for expansion and how long it will take to do so. If your business seems ready to move to a larger facility or ramp up production, your accounting system will tell you whether you have sufficient sales volume to make this move and, if not, how much more you need in daily sales revenue.