Accounting plays a crucial role in taking business decision-making. A person named Arjun, who is a tiny retailer in Bangalore, plans to expand his shop one day. He considered taking a loan in Bangalore. He did accounting and concluded that his business position would enable him to raise ₹8,00,000. The numerical input enabled him to make a rational choice of scaling up operations without overstretching his finances.
Why Accounting Matters for Business Growth
Neha runs a small manufacturing unit. In 2023, she made an annual turnover of ₹50,00,000. But, operational costs were ₹35,00,000. She pocketed ₹15,00,000 as profits. If she went into the details of the accounting system of the expenditure accounts, she would identify that 30% of the costs spent in raw materials, with which she has negotiated better deals from suppliers, thus saving her ₹3,00,000 in a year. Without accounting, she won’t even see this and has a chance to expand her business.
Cash Flow Management for Stability
Rahul was a successful tech entrepreneur who had started a business. Still, cash flow problems were causing delays in paying for various components of his business, though he was doing Rs 1,20,00,000in annual revenues. Further accounting analysis helped him determine the periods when his business had low liquidity, mainly inthe second quarter. Equipped with this information, Rahul ensured he would get a short-term loan of Rs 5,00,000 so that he could meet his expenses during cash flow crunches.This helped him keep his business stable without any payroll or vendore payment defaults.
Risk Management through Financial Analysis
Priya, an owner of a logistics firm, decides whether to expand her fleet or not. She works out the accounting data, which throws up her company’s debt-to-equity ratio to be 1.5:1. Which simply puts it: the business is moderately risky. The expansion will push the ratio up to 2:1, making her debt liabilities more formidable. Working with these data points, she chose a phased expansion plan, lest she risk everything. Accounting gave her a clear view to act on such decisions with optimum caution.
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Budgeting for Future Planning
Vikram is the owner of cafe chain. Vikram used accounting to prepare budgets i the future. In 2022, his operating budget went up to Rs 40,00,000; however, due to some supply chain issues that he could not avoid, it shot up 20%. Accounting helped adjust future budgets with a contingency fund of 10% or Rs 4,00,000 for unforeseen expenses. This helped Vikram’s financial planning to make it a more effective tool that ensured survival in business in such scenarios.
Advantages and Disadvantages of Using Accounting for Business Decisions
| Advantages | Disadvantages |
| Provides accurate financial insights | Required significant time and resouces |
| Helps in strategic decision making | Potential for errors if data is mismanaged |
| Improves cash flow management | May reqirehiring professionals adding cost |
| Reduces risk detailed analysis | Complex for non-finance backgrounds |
Conclusion
In a nutshell, accounting is the major requirement in achieving shrewd business decisions. It helps business owners such as Arjun, Neha, Rahul, Priya, and Vikram manage growth, maintain cash flow, mitigate risks, and plan.
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Frequently Asked Question
Q. Why is accounting important for business decision-making?
Providing financial clarity helps to make informed and strategic decisions.
Q. How does accounting help with cash flow management?
It tracks revenue and expenses, helping identify and manage liquidity issues.
Q. Can accounting reduce business risks?
Yes, through analysis of financial ratios and data, informs risk assessment.
Q. What are the disadvantages of relying on accounting?
It can be time-consuming and may require hiring experts, adding to costs.
