Category: 10 Key Explains

10 Key Explains!

  • Why Financial Planning is Essential for the Success of any Business Enterprise?

    Why Financial Planning is Essential for the Success of any Business Enterprise?

    10 Key Importance of Financial Planning is very helpful to get you Success in the Business Enterprise. Why Financial Planning is very helpful? Because Financial Planning helps in diminishing the vulnerabilities which can be a deterrent to the development of the organization. Guarantees providers of funds to effortlessly put resources into organizations which provokes financial planning. Financial Planning supports development and expansion programs that support the long-run sustenance of the organization. So, the question discussed is – Why Financial Planning is Essential for the Success of any Business Enterprise?

    The Concept of Financial Management is explaining the Importance of Financial Planning with Tops 10 Key.

    Financial planning the plan need for estimating the fund requirements of a business and determining the sources for the same. It essentially includes generating a financial blueprint for the company’s future activities. No matter how accurately you keep track of your income and expense, failing to plan your business’s finances can lead to unnecessary interest payments, lack of capital during critical periods, and eventual legal problems. Using a few basic budgeting, forecasting, and tracking techniques, you can maximize your profit potential. A financial advisor can help you understand how your current decisions will affect the options and choices available during your Business Enterprise to create perfect Financial Planning.

    Importance of Financial Planning:

    The following 10 Key Importance of Financial Planning here below are; Why Financial Planning is Essential for the Success of any Business Enterprise? Its need is felt because of the following reasons:

    It Facilitates the Collection of Optimum Funds:

    Financial planning estimates the precise requirement of funds which means avoiding wastage and over-capitalization situations.

    Helps to Face the Eventualities:

    It tries to forecast various business situations. On this basis, alternative financial plans prepare. By doing so, it helps to face the eventual situation in a better way.

    It Helps in Fixing the Most Appropriate Capital Structure:

    Funds can arrange from various sources and use for the long-term, medium-term, and short-term. Financial planning is necessary for tapping appropriate sources at an appropriate time as long-term funds generally contribute by shareholders and debenture holders, medium-term by financial institutions, and short-term by commercial banks.

    Helps in Investing Finance in Right Projects:

    The financial plan suggests how the funds are to allocate for various purposes by comparing various investment proposals.

    Helps in Operational Activities:

    The success or failure of the production and distribution function of a business depends upon the financial decisions as the right decision ensures a smooth flow of finance and smooth operation of production and distribution.

    There are several platforms that help businesses make the right financial decision and simplify operational activities. You can read more about such service providers and get a quote to help your business progress with expert guidance.

    The base for Financial Control:

    Financial control may construe as the analysis of a company’s actual results, approached from different perspectives at different times, compared to its short, medium, and long-term objectives and business plans. All financial activities keep under complete control with the help of financial planning. Under it, standards of financial performance are set.

    Actual performance compared with the standards so set. Deviations and their causes trace and corrective measures are taken. Financial planning acts as the basis for checking financial activities by comparing the actual revenue with estimated revenue and the actual cost with an estimated cost.

    Helps in Proper Utilization of Finance:

    Finance is the lifeblood of business. So financial planning is an integral part of the corporate planning of the business. All business plans depend upon the soundness of financial planning. In equipment and tool rental companies, utilization is the primary method by which asset performance measures and business success determine. In basic terms, it is a measure of the actual revenue earned by assets against the potential revenue they could have earned.

    Helps in Avoiding Business Shocks and Surprises:

    By anticipating the financial requirements financial planning helps to avoid shock or surprises which otherwise firms have to face in uncertain situations. The proper provision regarding shortage or surplus of funds is made by anticipating future receipts and payments. Hence, it helps in avoiding business shocks and surprises.

    Financial planning helps in deciding the debt/equity ratio and deciding where to invest this fund. It creates a link between both decisions. The separation of financing and investing decisions is one such important concept. It is important because we have to make a very important adjustment based on this principle. That adjustment is the fact that we do not subtract interest costs while calculating the cash flows that a project will generate.

    This is different from accounting where we stood used to subtract the interest costs to calculate our income. So here we must remember that we have to exclude interest costs from our calculation. It helps in deciding where to invest and from where the required funds will make available. Under it, the mix of share capital and debt capital make in such a manner that the cost of capital reduces to a minimum.

    Helps in Coordination:

    In the organization, there are many individuals, groups, and departments. They perform many different activities. Coordination means integrating these activities for achieving the objectives of the organization. Coordination is done to achieve the objectives of the organization, Coordination is a process.

    It helps in coordinating various business functions such as production, sales function, etc. The organization of the different elements of a complex body or activity enables them to work together effectively. It helps in coordinating various business activities, such as sales, purchase, production, finance, etc.

    Financial planning relates present financial requirements with the future requirement by anticipating the sales and growth plans of the company. Also, it makes effort to link the present with the future. Doing so helps to minimize the risk of future uncertainties.

    Helps in Avoiding Wastage of Finance:

    In the absence of financial planning, wastage of financial resources may take place. This arises due to the complex nature of business operations, such as excessively over-or underestimation of finance for a particular business operation. Such a type of wastage can be avoided through financial planning.

    Why Financial Planning is Essential for the Success of any Business Enterprise
    Why Financial Planning is Essential for the Success of any Business Enterprise? Image credit from #Pixabay.
  • 10 Key Financial Accounting Limitations help for Better Solution

    10 Key Financial Accounting Limitations help for Better Solution

    Financial Accounting Limitations: The financial statements reflect a combination of recorded facts, accounting conventions, and personal judgments of the preparers. Definition of Financial Accounting concerns with providing information to external users. It refers to the preparation of general-purpose reports for use by persons outside a Business Enterprise, such as Shareholders (existing and potential), Creditors, Financial analysts, Labor unions, Government authorities, and the like. So, what we were discussing: 10 Key Financial Accounting Limitations help for Better Solution.

    The Concept of Financial Accounting explains their Limitations are very helpful for Better Solution.

    Financial accounting is oriented towards the preparation of financial statements which summarise the results of operations for selected periods of time and show the financial position of the business at particular dates.

    Simple limitations also helpful:

    Financial accounting suffers from the following limitations which have been responsible for the emergence of cost and management accounting:

    • Does not provide detailed cost information for different departments, processes, products, jobs in the production divisions. Similarly, separate cost data are not available for different services and functions in the administration division. Management may need information about different products, sales territories, and sales activities which are also not available in financial accounting.
    • Recording and accounting for wages and labor does not carry out for different jobs, processes, products, departments. This creates problems in analyzing the cost associated with different activities. This also does not provide a basis for rewarding workers and employees for above-average performance.
    • Does not set up a proper system of controlling materials and supplies. Undoubtedly, if material and supplies are not controlled in a manufacturing concern, they will lead to losses on account of misappropriation, misutilization, scrap, defectives, etc. They may, in turn, influence the reported net income of a business enterprise.
    • It is difficult to know the behavior of costs in financial accounting as expenses do not assign to the product at each stage of production. Expenses are not classified into direct and indirect, and therefore, cannot classify as controllable and uncontrollable. Control of cost which is the most important objective of all business enterprises cannot achieve with the aid of financial accounting alone.
    Other limitations:
    • Does not possess an adequate system of standards to evaluate the performance of departments and employees working in the departments. Standardization now applies to all elements of the business. Standards need to develop for materials, labor, and overheads so that a firm can compare the work of laborers, workers, supervisors, and executives with what should have been done in an allotted period of time.
    • Does not provide information to analyze the losses due to various factors, such as idle plant and equipment, seasonal fluctuations in the volume of business, etc. It does not help management in taking important decisions about the expansion of business, dropping a product line, starting with a new product, alternative methods of production, improvement in product, etc. Managerial decisions about these business matters have now become vital for the survival and growth of business enterprises.
    • Contains historical cost information which accumulates at the end of the accounting period. This accounting does not provide day-to-day information about costs and expenses. This is the reason why much dissatisfaction has been shown with external financial reporting. Historical cost is not a reliable basis for predicting future earnings, solvency, or overall managerial effectiveness. Historical cost information is relevant but not adequate for all purposes. It is now rightly contended that current cost information should report along with historical cost information.

    Ten Key Financial Accounting Limitations:

    The following points highlight the ten limitations of financial accounting.

    They are: 

    Controlling Cost Impossible:

    In financial accounting control of cost is not possible since the costs are known at the end of the financial year or a specified period of time whether the expense or cost has already been incurred, i.e., nothing can be done to control either the account of expense or the cost. In other words, if it even finds that a particular cost is more, it is not possible to control it. But the same is possible only when the cost accounting system introduces.

    Recording Actual Cost:

    The financial accounting records the actual cost only, the historical cost of the assets. The value of assets may change, but record only the cost of acquisitions of such assets. In other words, financial accounting does not record the price fluctuations or changes in the price level. As a result, it does not present the correct information.

    Difficulty in Price Fixation:

    We know that the total cost of a product can obtain only when all expenses relating to a product have been incurred. That is why it is not possible to ascertain the price of the product in advance for the estimated selling price. As total cost (i.e., fixed, variable, direct, and indirect cost of a product) depends on many factors, all such factors cannot supplies by financial accounting.

    Unanimity about:

    Although there is IASC (International Accounting Standard Committee), the accountants differ in their opinion on the application of accounting principles in the same matter. For example, some accountants prefer to use the FIFO method for valuing inventory whereas others prefer to use LIFO or some other method; or, some accountants prefer to use the Straight-line Method of depreciation but others prefer to use Diminishing Balance Method, etc.

    Technical Subject:

    Since financial accounting is a technical subject, a common man can’t understand it. Without the proper knowledge of principles and conventions of accounting, it is not possible to analyze the financial data to make any financial decision. Naturally, it has got little value to a person who is not conversant with the subject.

    Impossible to Evaluate:

    Whether the existing accounting principle is sound/correct or not, that cannot be evaluated, i.e., actual performance cannot compare with the budget figure as we can do in the case of Standard Costing/Budgetary Control. In other words, the actual result cannot compare with the budget. Financial accounting presents only the result of the business through profit and financial positions, i.e., the rate of profitability. But the profit may affect by many outside factors that not record by financial accounting.

    Maybe Manipulated:

    Financial accounting may manipulate, i.e., it may present as per the desire of the management. For example, profit sometimes may reduce to evade tax and to avoid bonuses to the employees. On the contrary, more profit may show to raise fresh equity shares or to pay more dividends to attract shareholders and others.

    Supply Quantitative Information:

    Financial accounting supplies quantitative information only through absolute figures which do not present always the required information although they are needful to the users. But relative financial information is more important and informative.

    Supplies Insufficient Information:

    Financial accounting provides information about the financial activities as a whole and not individual-wise, i.e., it does not record information relating to product-wise, department-wise, etc.

    Historic in Nature:

    Since the financial accounting records all transactions relating to a particular period, it is rather historic in nature. In short, present financial information relating to a past period and not for the future although all financial decisions take base on past financial data.

    Summary:

    10 Key Financial Accounting Limitations help for Better Solution.

    • Controlling Cost Impossible.
    • Recording Actual Cost.
    • Difficulty in Price Fixation.
    • Unanimity about.
    • Technical Subject.
    • Impossible to Evaluate.
    • Maybe Manipulated.
    • Supply Quantitative Information.
    • Supplies Insufficient Information, and.
    • Historic in Nature.

    10 Key Financial Accounting Limitations help for Better Solution
    10 Key Financial Accounting Limitations help for Better Solution. Image Credit from #Pixabay.