Why Accounting Makes the World Go Round
The movement of money globally has grown significantly in recent years. The integration of banking services to the business operations and digitization of the financial world means that money floating around today is both tangible and intangible.
Businesses take on financial investments in different currencies from different economies to add to their capital and to the revenue. This reliance on money to create more money creates a chain that is best defined by the statement that “money makes the world go round”.
However, we put the question forward what good is money that is not accounted for. Money moving in economies, businesses, or even in a household is usually recorded in a robust accounting system that monitors its movement. A person unaware of financial ambiguities might question the worth of recording transactions, when in reality, the movement of money from one source to another is essential to understand.
The mind does not take into consideration the value of money or cash management, and the significance of integrating the knowledge to crucial business decisions. Sage payments and banking technology helps a lot of businesses in getting paid and make payments while managing the flow of cash.
Given the confusion regarding the topic we will discuss why it is accounting rather than simply money that makes the world go round.
1. What is Money
To get the basic sense of what we are dealing with, it is imperative to understand the basic functions of money. According to the traditional definitions of money is a simple instrument of exchange that is used for buying and selling.
While there are other equally important functions of money too, we will focus on just this one function to avoid complications. In the modern world the medium of exchange is expressed in terms of different currencies. These different currencies can be transmitted over a sales counter or with the help of electronic banking systems available today.
Since the value of currency depends on the intricate development of an economy, each currency has a different value from the other. The difference in the value of exchange is why we use numerical shorthand to represent the terms of exchange of a currency.
Even with the money that we use to buy a good or a service, we are not aware of the hours that go into manufacturing the final product. A laptop or computer requires human capital and machine learning to make the final product; a service needs to provide training to its employees to ensure good service.
We as consumers are consciously aware that the higher the skill in the manufacture of these products the greater the price. Similarly most of what we buy today is not for immediate consumption, which is why the concept of goodwill of the vendor comes into play. The value of goodwill is the price of quality and effort that the producer charges for a product. The goodwill is also a warranty of the final product and is a proof that the product is better than the competitors.
This use of intellectual capital is recorded in the accounting books; companies are willing to attach goodwill to the final price at the cost of extra effort and expenses. Goodwill is an example of factors that are not directly involved in the money making processes that are recorded in the accounting entries.
2. The Benefits of Money Management
As discussed earlier the accounting practices of today take into consideration various factors that don’t have a direct role in the money multiplier concept. This is part of money management, which requires a business to observe the flow of money and to attach a value to the financial transactions.
Businesses today lose a significant amount of their time looking after administrative tasks such as accounting. The task involves monotonous yet essential tasks such as generating and processing invoices that a business receives each year. Accrual or Cash accounting are the two main methods that companies use to record transactions or money management.
While larger organizations tend to use the accrual accounting, small and medium-scale businesses use cash accounting to manage their money. These concepts are essential for understanding the what’s and the when’s of recording financial transactions. For instance by understanding these principles you will know what to do when an expense is charged against your budget or when you receive credit for a sale.
These financial concepts are essential for managing the different facets of a business. A business will not always deal in cash, as discussed before the digitization of the monetary chain means that money that the physical form of money has changed today.
3. Financial Statements
Another important aspect of recording accounting data is observing financial statements. The financial statements are indicators of your financial performance. If a company ignores the financial statement when making an important decision it can run the risk of bankruptcy. The effects of bankruptcy to a leading corporation in a country are colossal. Bankruptcy of leading financial hubs was one of the main reasons for the 2008 financial crisis.
Every manager in the business unit of a department must have the acumen to create and observe financial statements. The financial statements are an official record of the resources a company has to achieve its objectives for the coming year. The process of budget preparation is an opportunity for you to observe and analyze the management of resources.
Financial statements are reports that indicate the efficiency with which the business has used its resources. For all keen observers of financial statements the Pro Tip is to ensure that the spending is in line with the strategic objectives and action plans of your company. It is imperative for an organization to ensure that the goals align with the strategic plans of the business.
While money is necessary to carry out the day to day functions of a business, it is essential to ensure that the money is divided into different tasks and operations. No company or country survives when it focuses all its financial resources on just one sector of production. To ensure stability and efficient functioning, it is imperative to divide the resources of the business.
A business unit for departmental budget is something that every company needs to ensure the efficient distribution of resources. The objective of these units is to ensure that the division of resources is in line with the strategic goals of the business. The budgeting of the processes is an official record of the finances you require to achieve the long-term goals of your business.
The process of budget preparation provides the user with an opportunity to analyze the spending patterns of the resources. The analysis of the spending patterns provides you with an insight into how efficiently resources were handled previously. As a financial observer you must ensure that the objectives of your business unit and action plans are well knit together with the spending.
The significance of budgeting is huge for a business, as mentioned earlier efficient budgeting helps a business in achieving its goals. All major companies ensure that their spending is in sync with their broader objectives; this streamlines their patterns of spending. Collectively the global spending trends of major businesses have the potential of sparking a revival of a resource or spending pattern.
In the past we have witnessed major companies around the world causing major financial upsets globally. This financial routine is an indicator of the significance of budgeting to the overall money floating around in the global economy.
5. Use of Cash
Another important aspect that drives the supply of money around the world is the use of cash. The strategy to use cash influences the patterns of spending of a business. The effective use of cash can help a business in building estates, facilities or research labs to facilitate the research and development of prototypes for the business.
Another strategy that businesses use is more investment driven as they rely on treasury market fund and periods of stability in the market to multiply their investments. Most of these companies use risk-averse smaller balanced accounts for the purpose of avoiding any principal loss.
Businesses also invest in government funds and other stock market shares to increase their portfolio of expected returns. The purpose of these investments is to fuel further larger investments; this cycle of methodical investments helps a company in accumulating wealth.
The use of cash is an undermined aspect of a business. Small businesses are often guilty of not paying much attention to the creation of new wealth and to the strategy of using cash. The decision to use cash often involves the elements of risk as well. Some risky decisions end up paying high dividends for a business, while others can lead to failure.
It is up to business managers and entrepreneurs to decide which investment and decisions is worth all the money.
In accounting, cash is the king of all transactions, especially for a smaller business. The more cash a business has means the better availability of working capital.
6. Variance Analysis
Analysis of business performance is another reason that signifies the importance of recording accounting data. Every manager has to analyze the variances in the income and expenditure against their budgets and forecast.
A business needs to have the ability to relate the variances with what happened in the business unit during the accounting period the owner is reviewing. These analyses provide you with the reasons for the variations in the forecast and the actual performance. Understanding these reasons and working to improve them can improve the performance of your business in the coming years.
If you cannot explain the variances based on your own limited knowledge, you can always contact the individuals in your finance team. Given the significance of these analyses it is essential for the owners to interpret the reports and work on them accordingly.
7. Cash Out
One of the major administrative tasks that businesses around the world have to deal with is the accepting and paying out of invoices. This is particularly challenging for small businesses, as they often delay payments to the suppliers.
Accounting makes the process of recording all the money going out from the business much easier. The automation of business transactions means that much of your receipts and payments are adjusted by the software. However, it is the collaboration of tangible cash with the digital operations that is challenging for small businesses.
Given the significance of accounting for reasons mentioned above, it is imperative to record all accounting transactions in a single unified folder. To tackle the problem businesses today are opting for software that provide them with the option of integrating payments and receipts.
The digitized integration will reduce the massive administration burden a business carries. With such a system at your disposal you will not have to worry about account balances as they will always be up to date. The automation will also provide you with a consistent view of when deposits become available for the user.
Automating the process of payments and receipts saves time for the owners as they can focus on other crucial aspects of the business such as product development. Such innovation also provides you with more time to promote innovative thinking in your small business leading to better profits and an improved economy.
These are some of the benefits of managing the flow of cash in your accounting system. At the end of the day, given the significance of accounting, it is safe to say that accounting makes the world go round.