Essay on "How Will Accounting Help Me Run My Business?"

Essay 5 pages (1515 words) Sources: 1 Style: APA

[EXCERPT] . . . .

Accounting is the basic function of tracking inflows and outflows of good and capital. There are two main types of accounting - financial and managerial. Both are critical to the success of any business. For the purposes of this project, we shall analyze the benefits of accounting in the context of a small apiary that has been set up as a sole proprietorship. The principle operates the apiary from their acreage. The finished goods - honey, beeswax candles and other bee products are marketed at local craft fairs and through a nearby natural foods store.

Financial accounting generally refers to accounting methods that result in the creation of financial statements. The preparation of these statements is governed by accounting standards. While a sole proprietorship does not need to produce and publish these statements, they still hold significant value to the principle. The most important ramification is that the principle uses the profit figures in their own personal tax preparation statements. This is because there is no separation for tax purposes between the sole proprietorship and the principle's personal taxes.

The separation of the business and other personal activities is also aided by the preparation of financial statements. The principle in the apiary may do other work. For example, they may have other agricultural businesses on their property. It is important to be able to break down the contribution that the apiary makes to their income, versus the contribution made by the other businesses.

This can also be applied to the balance sheet. It is important to separate the assets and liabilities of the business from personal assets and liabilities. One reason is that it helps to measure the effectiveness of the apiary business in particular. The principle may have other assets and debts pertaining to their house, car or other businesses that they operate.

Therefore, making a clear separation of those assets and liabilities from those of the apiary business is critical. In this way, the true profitability of the business is known as is its true worth.

The other major type of accounting is managerial accounting. This is not governed by accounting principles and is thus primarily used for the purposes of internal financial management. Managerial accounting is therefore concerned with the use of economic and financial information to plan and control many activities and to support the management decision-making process (Marshall et al., 2008). There are several important ways in which managerial accounting can help a sole proprietor to run his or her business.

The first way is through cost accounting. Cost accounting keeps track of the various costs and margins associated with the conduct of the business. Each of the different input costs is broken down into one of two categories - fixed or variable. The fixed costs are the costs that do not change with the rate of production. In this case, the costs of maintaining the bees - the hive, the physical facilities, etc. - are all fixed costs. Variable costs would be the jars in which the honey is sold, the wicks for the wax candles and the labor involved in processing the honeycombs into finished goods.

The difference between the price of the product and the variable costs is known as the contribution. The contribution is the amount of money that is left over after the variable costs to go towards covering the fixed costs. The fixed costs are divided by the contribution margin to determine the break-even point. By determining the break-even point, the principle can determine whether or not they are able to sell enough product to make a profit.

Cost accounting not only allows the owner to make decisions about the viability of the business. It can also help the owner to find ways to reduce costs. If the owner knows that he/she can sell $20,000 worth of honey and $10,000 worth of candles, but that the cost of the hive is $25,000, it is clear that the fixed costs are likely too high for a profit to be made. But if those fixed costs can be cut in half, the business can be profitable because the variable costs are low. This provides insight for the owner as to where costs need to be reduced in order to be profitable. This focuses the owner's efforts into the areas where such cost reductions will make the greatest difference.

Indeed, resource allocation is one of the most important ways in which a strong managerial accounting system can impact a sole proprietorship. A sole proprietorship typically is run by just one key person, and often on a fairly limited budget. Time and money are both highly limited resources. One of the greatest attributes of managerial accounting is that it provides the tools needed for sole proprietors to make the most of their scarce time and money. It allows the owner to identify which activities are the most profitable.

For example, it may be that honey is easier and cheaper to produce than the candles, but can be sold at a higher markup. This means that the owner can survive by producing only honey, he/she should. if, however, he/she is unable to sell that much honey, managerial accounting will help there as well. The owner can simply determine the maximum amount of honey that can be sold, and then only devote enough time towards candle production as is left over when the honey production is complete. In this way, profit can be maximized by achieving optimal allocation of the owner's limited human resource capacity.

One of the key issues any sole proprietor can face is the decision to expand the company. Moving from a one-staff model to a multi-staff model is a major decision. Without proper accounting, this decision can be made poorly, with disastrous results. The owner needs to be able to analyze the decision on the basis of not only the potential business, but the costs associated with attracting that business.

The resulting information compiled during the accounting process will not only allow the owner to better assess the viability of expansion but also provide insight into the best way to achieve it. In many cases, expansion of a sole proprietorship involves the use of debt, for example. Managerial accounting allows the owner to better evaluate the impact that debt will have on their expanded operations.

Moreover, proper accounting practices will help during the expansion phase because they will help secure additional financing. Banks are unlikely to lend to a sole proprietor who has not taken care to track their costs and revenues. Well-organized financial statements are one of the tools which sole proprietors use to gain the trust of lending institutions, thus enabling them to secure expansion financing.

This also reflects the future orientation of management accounting. Financial accounting is focused on tabulating past information. Management accounting can be focused on the past, but can just as easily be focused on the present or the future. In this way, it brings significant benefit to the sole proprietor because it allows them to not only see where they have been, but to make the best decisions regarding where they want to go.

Managerial accounting is often used as part of the control process. Control is an integral part of strategic management, a concept which even entrepreneurs cannot ignore. Control is the process by which organizational outputs are measured against expectations, then activities are corrected to bring those outputs more in line should they have deviated. Control can be done with financial statements, but those are often so heavily aggregated that the information they contain is not practical for control purposes. Managerial accounting is more specific, which renders it more useful for control. In turn, this makes it a powerful tool for decision-making.

Sole proprietors may sometimes underestimate the value of accounting. They… READ MORE

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