Financial accounting is the process of recording and reporting financial information for the primary use of external stakeholders. Internal stakeholders are also keen on using financial accounting, as it provides a look at the profitability of their company’s operations. Some of the best tips for using financial accounting include setting specific accounting periods, evaluating the information with specific metrics, creating a trend analysis and benchmarking the company’s performance with competitors. Accounting essentially reports the company’s ability to spend the least amount of money and generate the highest profit possible.
When using financial accounting to measure profitability, companies must select a proper accounting period. While national accounting standards or government agencies may provide insight on accounting periods, companies often have a choice of whether to operate on a calendar or fiscal year. Within the selected year, the company will then follow calendar months for reporting financial information. Owners and managers must also ensure that all financial transactions are recorded in the proper month. This helps the company meet the standards of national accounting guidelines and maintain accurate historical records for the financial information.
Financial accounting analysis also requires specific metrics for evaluation. Owners and managers using financial accounting information will often have a few specific metrics they use repeatedly to assess the effectiveness of operations. These include a side-by-side analysis with a previous month, financial ratios, or a line-by-line analysis. Evaluating financial statements will take place after staff accountants post all transactions, but prior to closing the books. Owners and managers should review the financial statements for accuracy and request changes if something is askew upon this final analysis.
Using financial accounting also allows for the creation of a trend analysis. Many accounting software packages include a tool for this analysis, although owners and managers can create their own using a basic spreadsheet. Trends can compare entire financial statements to several previous accounting periods or review only select information deemed most important. The trends report the major increases and decreases from operations. Having several months of analysis available allows owners and managers to determine if a one period drop in revenue, for example, is an anomaly or an ongoing issue.
Benchmarking is a specific process of comparing financial accounting information to another company. This allows owners and managers to compare operational performance to a competitor or the leading company in the industry. Benchmarking is best when used in conjunction with financial ratios, as the ratios will avoid dollar-to-dollar comparisons, which are not as accurate. Using financial accounting information for benchmarking purposes is not always done in companies, which can reduce the overall effectiveness of the information.