THE ROLE OF FINANCIAL ACCOUNTING IN BUSINESS PERFORMANCE APPRAISAL AND FEEDBACK

Financial Accounting is a veritable tool that can help businesses in performance assessment. After all, business is all about numbers and getting the right numbers is all that matters. Financial Accounting involves collecting financial data that are captured during business transactions as input and are processed as output to make informed decision. 

Here are some ways its results can help businesses, irrespective of size, to assess their current performance in order to determine if the business adopted strategies are working or not.

1) Level of Turnover

Every business is into buying and selling something, tangible or intangible. And so, the level of turnover (sales) is one way to determine business sales performance. And this information can be obtained from financial accounting records. And since businesses favour higher sales, increase in sales in the current period over past periods is considered a success, and vice versa. However, where sales are low, factors such as natural disasters, economic recession, unfavourable policy implementation, political instability, etc. should also be factored in.

2) Maximum Profit

Profit is not enough; but maximum profit, which is profit above a set limit, is what businesses are aiming for. In other words, businesses favour extraordinary (maximum) and not ordinary profit. The bottom line is, the higher the profit earned in comparison to other periods, the more successful the business is and vice versa. And such information is easily revealed in financial accounting records. Note that high turnover may not necessarily translate to maximum profit because sales may be at an impacted price (one at par or below cost of sales). 

3) Level of Debt

How will a business know if it has exceeded its debt limit or it is giving away more cash by selling on credit? The answer lies in financial accounting records. The longer a debt stays, the likelihood of it being recovered becomes slim. And the higher the credit sales, the loss of cash on hand needed to engage in future financial transactions. This further leads to loss of cash discounts from suppliers as well as profit where debt becomes irrecoverable.

4) Stock Levels

How will a business know if its stock (the products it sells) is moving slow or fast, or are purchased in enough quantity to prevent a situation of stock out (which leads to lost sales and profit)? All these information are revealed in financial accounting stock data. This data is important for business managers to know what strategies to implement that would boost sales to prevent slow stock movement or prevent stock from becoming obsolete. In the general sense, the higher the stock turnover for a period over previous periods, the better.

5) Operating Expenses incurred

Is the current period operating expenses higher than the expenses of previous or other periods? If yes, why is the increase and will such high expenses bring about a higher profit in return? All these information can be deduced from financial accounting records. When expenses become higher than normal when compared with other periods for same product activities, it means business inefficiency and waste. Recall that high expenses eats away at business profits.

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