Accounting for Business
Accounting emanates from the simple equation of Assets (What the business owns) equals the sum of Liabilities (What the business owes) and Shareholders equity (What is owed to investors). The Liabilities and equity represents how the business is financed. A further breakdown of the liabilities shows whether the business is predominantly financed in the short-term or for the long-term. Short-term finance is scary because any interim problem with the finances of the business can cause its collapse. This is one of the reasons why 60% of businesses that fail in the US are profitable. As a business if most of your finances are short-term then you have to be in control of payments from customers.
Making Important Decisions with Management Accounting
Management accounting is aimed at helping business owners make well informed decisions. It encompasses internal information like, which of the customers bought more products when the price was £20 and at what time of the year did they buy. Management Accounting shows that business accounting is not just for filing annual tax returns but it is meant to monitor the financial health of the business on an ongoing basis. One of the important basics of management accounting is to know how what price to charge for your services or products, in order to make a profit. At the very top of the profit scale is Gross profit – the difference between your sale price and the cost of the goods or services. Once you know the gross profit you can work out the gross margin which is your gross profit (C) divided by your sales (A). Warren Buffet the wealth billionaire is noted for saying that he prefers to invest in businesses with profit margins of 40% and above. When your profit margin is low it gives you little to play around at the bottom.
Other Decisions that affect the Bottom Line
After you have worked out your Gross Profit comes your overheads (Salaries, utilities, rent, etc) if there is not enough money left you will be left with little or nothing on your bottom line. Managerial accounting can be modified to meet the needs of business owners, like monitoring the salaries of part-time staff over a period of time. This offers information that is beneficial to management’s specific needs, helping them make informed decisions.