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Financial decisions are one of the crucial decisions taken by the management for the growth and development of the companies. A finance manager has to take certain precautions while making the investment and budget decisions, as the entire working and performance is based on the availability of required funds within the organization.
Importance of accounting and finance
Accounting is the process of computation of the monetary value of all the assets and liabilities that are occupied by the business in the financial accounting period. It can be said that accounting is a major tool often termed the language of the small business. As opined by Brigham and Daves (2018), businesses often attract investors and significant shareholders by showing the fair and true position of the business.
Advantages of Accounting and finances
Keeping financial records in one place
Small businesses have limited resources and fewer opportunities as compared to large scale businesses accounting is the single tool and technique by which they can ensure that the entire process of the finances is in one place. As stated by Martin et al. (2020), investors often are interested in investing in those SMEs which perform financially well. It becomes of utmost importance for companies especially for Small businesses to include the accounting with proper accounting policies and standards as prescribed in one place. It enables the companies as well as other stakeholders to access the required documents in the hour of need.
Reduction of the legal consequences
Accounting and financial decisions include the process of auditing, tax management and complying with the fillings of the annual report and financial statements. The companies which do not follow the compliances regarding the tax payments, audited financial statements filing requirements as well as foiling of the annual reports with the majority faced serious punitive actions. As the result, the profitability, as well as financial performance, are affected adversely.
Preparation of the budget
The budget gives an overview of financial development and assists in fulfilling the long term organizational objectives. Budgets are often an important part that is used as a major strategy to teach the performance of the organization. As stated by Bozdogan and Odabas (2020), the small business budget highlights the activities of the business and is majorly focused on the financial budget. Furthermore, the budget also provides a suitable source to compare with the actual performance as well as the planned performance of the company during a certain period.
Long term impact on the business
The decisions taken by the finance manager are crucial as it is based on the assets of fixed assets and the probability considering the whole year's activities of the business. As opined by Krištofík and Novotná (2018), a decision regarding further investments, the issue of finance can impact the business process in the long term period. Thus it becomes very important for finance managers to attempt an in-depth analysis of the market condition before making any financial decisions.
Risk involvement
The decision regarding capital budgeting includes various risks such as pri9ce depreciation, obsolete technology and otters. The gap of several years in the investment decision often leads to certain uncertainties for the business. Considering all the risk involved before making any financial strategy is wise and recommended.
Large funds involved
The involvement of large portions of the funds is one of the stages that are taken by the finance management within the organization. SMEs have limited resources and one wrong decision regarding the capitalization of assets may lead to the disruption of the availability of finances and may lead to huge financial losses.
Accounting and finances play an essential role in the growth of the business and help in achieving organizational goals. Controlling a business is highly dependent on the flow of money within the organization. If the management is not able to cope with the variations in the outflow as well as inflow of the monetary value in the organization, it becomes impossible to manage the finances of the business effectively and efficiently.
Accounting plays the following significant role in managing the business of SMEs
Complying with the regulations
Accounting encourages the business to be within the boundary of the legal requirements and complete all the legal obligations. It gives the added advantage to the business which allows the process of legal requirements as they are prevented by any undesirable actions by the authorities.
Creation of the financial records
Financial records are reliable documents for assessing the financial condition of the business. It assists in the preparation of the financial records with the availability of all the standards and accounting practices. Any interested party can demand estimating the monetary value of the business with the help of financial records available in the business.
Systemic tracking and monitoring of the finances
Preparation of the finance assists in the development of a well-framed comparison between the financial statements of different accounting periods. A business can get crucial information about its financial performance. As opined by Raveend et al. (2018), with the help of results derived from the comparison, the business can monitor the variation and strategies required to be implemented. Monitoring helps the business to ensure that it is effectively utilizing its resources and fulfilling the requirements of the organization. The variations derived in the comparison of the financial budgets are the basis of the monitoring and timely tracking of the information available on the business in monetary terms.
Conclusion
Accounting helps in getting the relevant information on the assets and liabilities of the company. It is significant for the investors and other stakeholders associated with them to make informed decisions making. The study strived to consider the aspects of accounting and represent the importance of financial management for the growth of an organization.
1.2 various sources of finance for expansion: SME
Small businesses can utilize the following sources for raising the finances for attempting expansion in the domestic as well as international market.
Personal savings: Small businesses are often started with savings and it can be understood as the easiest way to arrange the finances. An entrepreneur can arrange the finances by considering personal assets. Personal savings are also in the form of jewellery, mutual funds, bank savings and others.
Small business loans: Preparation of the crucial strategy for raising the source of finances makes it easier for the business to get the current information and make strategies based on the financial capability of the business. Governments often formulate easy regulations for providing gain to small businesses. In addition, they get additional benefits for the running of the business. Institutes provide additional benefits by providing loans and short term borrowings to the small business.
Figure 1: sources of finance
(Source: created by author)
Trade credit: some small businesses avail the facilities of the credit on raw materials. It provided the benefit of short term m finances to the customers and helped in gaining financial assistance. These small-term credits often are considered between 3 to 6 months. It helps the small business in managing the short term finances as well as working capital required for the business.
Venture capital firms: Venture capital firms are private companies that are interested in investing in small businesses. They invest in early-stage companies which have high potential to make significant contributions to the market share of the company. It also provides small businesses with competitive advantages.
Small businesses are required to comprehend suitable strategies for raising finances that can be understood with the following points.
Strategy development
A better practice followed in accounting and financial management often leads to the development of better strategies. As opined by Kirui et al. (2018), these are the foundation for making an effective strategy for overcoming the challenges that take place in dynamic business environments. Small businesses often require b strategies that impact the business choices for the selected market for expansion on the organizational performance.
Strategies for expansion
Accounting such as preparing financial statements, making cash flow, and operating the balance sheet provide a brief overview of the financial condition of the company. As stated by Ganyam and Ivungu (2019), the statements are often compared with the previous period's financial statements to get a crucial indication related to the performance of the company. Based on the results of the performances companies can take decisions regarding the expansion in the market.
Introduction
The decisions regarding the finances are significant as it directly impacts the long term business practices and impacts the financial performances of the companies. The cash flow prepared by Panini Ltd as a financial statement helps the organization formulate the accounting statement for the income as well as expenditures. The current part of the study focuses on the financial performance of Panini ltd.
A brief comparison of the financial statements assists in getting pivotal information on whether the company's financial conditions are suitable and it is available to fulfil its long term obligations or the company cannot fulfil its payments obligations. As stated by Tseng et al. (2018), it helps the organization in accumulating the required finances as well as keeping an eye on the income and expenditure of the company in the financial year. Finance is the extended version of accounting and is broader as compared to the accounting process.
Gross profit margins are the important financial accounting of Panini ltd in getting the relevant information on the margin between the cost of sales and sales by the businesses in the years 2018 and 2019. As per the income statement of the SMEs, it can be said that the company's financial performance has been downgraded. The GP has reduced to 28 % in the year 2019 from 35 % in 2018. Companies are required to prepare important financial statement periodically that is based on quarter, month and financial year. It helps in understanding the financial performance for raising additional finances.
Operating profit provides for the profit calculated after subtracting all the expenses from the gross profit. It highlights if the company has positive operating profit and it can manage its operating expenses effectively. As opined by Valaskova et al. (2019), the balance sheet, as well as the income statement of the business, highlights the major factors that state the financial condition of the business. Similar to the GP, the operating profit of the business has also decreased to 20 % from 27.65 in 2018. It shows that the company has higher operating expenses in the year 2019 as compared to 2018.
Comparison of the return of the assets is the crucial strategy for raising the source of finances as it makes it easier for the business to get the current information and make strategies based on the financial capability of the business. As opined by Thorpe (2020), ROCe helps in getting the relevant information on the company's ability to get the financial benefit from its assets. In the current year i.e. 2019, the company's ROCE has decreased by 9 % as compared to 2018. It shows that the company is not able to utilize its assets effectively.
Current assets are an important portion of the balance sheet of the company as it shows the working capital within the current year. As per the balance sheet of the Company, the current ratio highlights that the company has a higher CR in the year 2019 which is approx 4. It has crossed the requirements of the ideal CR which is 2:1. The company has idle current assets that it is not able to utilize effectively in the current year.
The quick ratio is more liquid value as compared to the current assets as it excludes the value of inventories. It shows the ratio that highlights how effectively a comedy can liquidate its current assets. The quick ratio has also increased in the year 2019, as compared to 0.21 in 2018. Even after excluding the inventories, the higher quick ratio shows that the company need to amend its strategies regarding the current as well as quick assets.
ITD highlights the period which is considered for understanding the company's ability to sell off its stock in the financial year (Supriyanto and Darmawan 2018). The movement of the inventories can be understood by analysing the ratio analysis or inventory turnover days. Panini ltd has higher inventory days which is 29.87 increased by 10 days as compared to the period in 2018. The company is not able to sell off its inventories and it has been accumulating in the warehouses of company.
The receivables collection period is the period in which a company can liquidate its debtors. Debtors are the part of the current asset that follows the sales on credit approach. The companies need to maintain the period for collecting the receivables. The company has approx 43 days the collection of the receivables. It has increased by more than 15 days. It means the company is getting cash for delays in liquidating its debtors.
Payable payment periods are crucial for the company to manage a smooth financial relationship with its suppliers. As opined by Su et al. (2022), it estimates the total period in which a company is expected to repay its suppliers. As per the balance sheet analysis of the company, it can be said that the company can repay its creditors on time. The period has reduced to approx. 23 days in 2019 from 51 days in 2018.
Finance includes the various aspects of accounting; it includes the decision regarding blueprints and strategies for the finances available within the organization. In addition, finance also provided a basis for raising additional finances; at the same time it assisted the management to invest the finances in securities and other stocks for investing the profitability of the company through better financial decisions.
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