Introduction
A company must keep accurate financial records and recognize the numerous applications of financial information. To show financial health and to comply with legal and other standards, every business must satisfy internal and external reporting duties. The first purpose of keeping a financial record is to assess the company’s financial status. Every year, firms assess their financial situation to verify that they are utilizing resources effectively in order to generate the necessary financial return to earn a profit. Businesses can decide whether they have the ability to produce enough money to continue operating and paying dividends. This can be performed by calculating appropriate ratios, such as the acid test ratio, based on data from the profit/loss account and balance sheet.
The second purpose is to compare its current performance to prior years (Financial Support for CPD in Scotland, 2021). This may demonstrate firms’ potential and future forecast patterns to show whether the company is making a profit or a loss. Good records give financial information that allows the business to function more effectively, enhancing the company’s profitability. This is because accurate and full records will enable the accountant to determine the business’s assets, liabilities, income, and costs. It helps highlight the solid and weak stages of corporate operations throughout the time when compared to acceptable industry norms. Records may be compared by calculating gross profit and net profit margins for past years, which will disclose if the company’s earnings have increased or decreased over time. This will also indicate whether the company has underestimated or inflated its earnings over the years.
The third purpose is to raise funding; this may assist firms looking to raise funds by comparing finances and paying bills (Flannery & Öztekin, 2019). For a successful bank loan, one must amass the necessary cash to show the bank management. The Income Statement (Profit and Loss) and the Cash Flow Projection are examples of current financial accounting needing reliable data. These are necessary for the turn to keep good ties with the lender. Additionally, they will benefit by giving a thorough picture of the entire business activity.
Another purpose of financial record keeping is to enable detailed tracking. Running a small or large business will demand one to keep track of a lot of data, including clients, sales, and inventory. Without an adequate record-keeping system, one risks overlooking crucial company information, which might cause issues with customer service. The company might be unable to satisfy client requests if one does not know specifics about its consumers, such as who they are and what they want. A business runs the chance of losing a customer permanently by disappointing them. Keeping track of clients, their orders, and the inventory needed to fulfill their transactions might be challenging. Tracking crucial information about the company may be hard without an adequate record-keeping system.
Requirements for Keeping Financial Records
A company must guarantee that all records are accessible for at least five years, whether printed or electronic. They must be retained once made, modified, or entirely completed. They must also be in English or a clear enough form that the Taxation Office understands or can convert into English. If proper records are not kept, a company may face penalties. Businesses might hire a bookkeeper or handle their records in-house.
Describe the Eight-step Accounting Cycle
The first step of the accounting cycle is analyzing transactions by examining the source documents. Any written or printed proof of a commercial transaction that contains the main facts of that transaction is referred to as a source document (Nikbakht & Groppelli, 2018). Cash receipts paid or received, cheques made or received, invoices submitted to clients for services done or bills received from suppliers for things purchased, cash register tapes, sales tickets, and notes provided or received are examples of source documents.
The second step is to journalize the transaction in the journal. Journalizing is recording the outcomes of a transaction in a journal. The data is then transmitted to the appropriate accounts in the ledger. The next stage is to submit journal entries to the ledger accounts. The practice of registering the information contained in the journal in the ledger accounts is known as posting. Transfer funds from an account receivable account and deposit the NET amount into a revenue account, such as credit card fees.
The third step is to finish the worksheet and generate an account trial balance. A trial balance is a list of ledger accounts and their related debit or credit balances that are used to confirm that debits and credits match throughout the recording process. This is done to guarantee that their debits and credits are the same. Fourthly, prepare financial statements, including an income statement, a statement of retained profits, a balance sheet, or a statement of cash flows (Pacios & MartÃnez-Cardama, 2020). These figures indicate the cash flow into and out of the company.
The fifth step is to journalize and post adjusting entries. Adjusting entries are entries made after an accounting period or at any time. Financial statements must be prepared to ensure revenues and costs are appropriately matched. Every adjusting input has an effect on at least one income statement and one balance sheet account. The following step is to journalize and post-closing entries. After the accounting period, the adjusting entries in the worksheet are put in the journal and submitted to the ledger. This validates the ledger using data from the profit and loss account and balance sheet. Finally, do a post-closing trial balance to check that all temporary accounts have been properly closed and that the total debits and credits in the accounting system are equal after the closing entries have been made.
- The working capital ratio is calculated by dividing current assets by the current liabilities
- The collection Ratio is derived by dividing total receivables by average daily sales.
- The invention Turnover Ratio is an efficiency ratio that measures how frequently a firm sells and replaces inventory. Inventory turnover ratio = cost of goods sold multiplied by two and divided by (beginning inventory + ending inventory).
2021 2020
45000/500=90 45000/700=64.29
Recommendations on How the Business Can Improve Its Working Capital
In the past, working capital management techniques were mainly the responsibility of managers in the accounting and finance departments (Special Issue of Accounting Forum: ‘Accounting for the Circular Economy, 2020). However, in today’s market, where jobs are constantly changing, many managers not involved in this process are being asked to take more proactive actions to mitigate the risk associated with working capital. The first step in improving working capital management is to optimize the receivables process. The receivables duration must be reduced for the firm to have a solid collections system. One of the most crucial aspects of working capital is getting invoices out as quickly as possible. The organization should reassess invoicing operations to eliminate inefficiencies that create delays in delivering bills to debtors, such as manual processing, invoice loss, and the many invoices that must be managed. Professional services firms suggest electronic invoice delivery technology to speed up the billing and collection process and reduce the cash conversion cycle (CCC). This also ensures that all bills are correct before they are issued to debtors, potentially avoiding payment delays.
Components of working capital in inventory management are vital for many organizations looking to enhance their bottom line. The phrase inventory consists of finished commodities that a company sells and components like raw materials. Manufactured items are inputs of raw material that has been processed. In many contexts, things that are ready for sale are referred to as completed goods. The type of inventory and the number of components that will be stocked are directly controlled by the nature of the business.
Conclusion
To summarize, inventories are essential to a company’s current assets. As a result, stocks in a corporation must be managed efficiently and effectively. Investing an optimal amount of working capital in inventories is known as inventory management. This suggests that investment is neither too cheap nor too excessive. Inventory may stymie output with a small expenditure. Unnecessary investment in inventories will restrict finances. As a result, inventory investments should not be insufficient or excessive, implying that a company must select and maintain an optimal inventory quantity.
To enhance working capital management, a corporation must also guarantee that costs are examined. Because with a sufficient investigation, the company’s expenses and costs may be decreased or eliminated entirely in certain areas. Preliminary with fixed costs, monthly subscriptions of various items and services are being tested, with the possibility that certain fixed costs are not even being used. Regarding fixed bills like utilities and rent, bargaining for a better deal is advised. Early renewal of facility leases may result in cost savings. Spending money ahead of time for an early renewal will have an impact on capital, but the long-term benefits may be beneficial. Variable expenses are usually associated with the production of a product or service. It is necessary to negotiate better prices with vendors to lower these expenditures. A rate reduction may be qualified if the output has grown and more of a particular essential is used.
Another strategy for improving working capital management is effective debtor management. The most excellent way to guarantee enough working capital is to ensure that funds are received on schedule. Contracts and credit conditions with creditors must be evaluated to ensure that the company is not providing debtors with a large window to pay for goods and services since this would have a negative impact on the firm’s cash flow. The chief financial officer should consult with corporate management to verify that the credit extended to debtors is sufficient to fulfill the firm’s cash flow requirements. To decrease bad debts, the organization must do more extensive credit checks and ensure that adequate credit management methods for analyzing late-paying customers are in place.
References
Financial Support for CPDiIn Scotland. (2021), 188(1). Web.
Flannery, M., & Öztekin, Ö. (2019). Working capital and capital structure.SSRN Electronic Journal. Web.
Nikbakht, E. and Groppelli, A.A. (2018). Finance. Hauppauge, New York: Barron’s Educational Series, Inc.
Pacios, A., & MartÃnez-Cardama, S. (2020). Active disclosure of Spanish historic archives’ economic-financial information.Archives and Records, 42(2), 183-200. Web.
Special Issue of Accounting Forum: ‘Accounting for the circular economy. (2020). Accounting Forum, 44(3), 311–313. Web.