Financial accounting in business organizations, also known to be the ‘language of business,’ records financial transactions in books of accounts with the objective of identifying, measuring, and communicating economic information. It’s a means of an organization in communicating financial information onto several different users for crucial decision-making processes. Its key roles or functions in businesses in UAE are as follows:
- Liquidity – A common reason why small businesses fail is due to mismanagement of cash. Financial accounting is important in determining an organization’s liquidity, which refers to cash and all other liquid resources which are at its disposal in paying off financial commitments. Information on a company’s books of accounts reduce the risk of it for filing bankruptcy through the early detection of bottlenecks.
- Financing – Financial accounting helps a business owner prepare historic records of company finances and financial projections that are used in applying for loans or securing investment.
- Control – By placing several different checks across a business, financial accounting helps it avoid losses that are often due to fraud, damage, errors, mismanagement, obsolescence., and theft. The internal controls will be able to safeguard assets of the business and avoid any long-term loss.
- Regulatory compliance – The UAE legislation requires all businesses to maintain accurate financial records for transactions and share reports to company shareholders, regulators, and local tax authorities. Financial information and statements are also needed in direct and indirect tax filing purposes, including VAT return filing in UAE.
- Recording of transactions – One of the key functions of financial accounting is maintaining an accurate, complete, and systematic record of business transactions. Records are considered as the backbone of any accounting system. A business owner must be able to review its transactions and books of accounts whenever required.
- Planning and budgeting – A business needs to plan exactly how it can allocate its limited resources, which include machinery, labor, cash, and equipment towards accomplishing its goals and objectives. An important component to business management, planning and budgeting enables businesses in planning ahead as it anticipates its needs and resources, ultimately helping in coordinating different departments or segments of the organization.
- Decision making – Financial accounting conducted by a reputable team of experts on accounting and bookkeeping in UAE assists in various decision-making processes. It helps business owners develop policies which can increase business operations’ efficiency. A few examples of the decisions that are based on the information from financial accounting include the price which should be charged for goods and services, resources required in making goods and services, as well as business and financing opportunities.
- Business performance – utilizing accounting reports, a business owner can determine how good the business is performing for a certain period. Financial reports are reliable sources for measuring key performance indicators that aid business owners in comparing themselves against past performance and against the competition.
- Financial position – financial statements that are generated by the end of an accounting cycle will reflect a business’ financial condition at that time. They show how much capital was invested, funds the business used, profit and loss, as well as its assets and liabilities.
Will financial accounting be beneficial for small businesses in UAE?
Poor financial management practices are among the primary reasons why small businesses in UAE fail, most especially during the very first year of doing business. Because small businesses have limited resources, financial accounting plays a very crucial role in giving information which helps in their growth and development.
For small businesses, financial accounting in UAE is not only beneficial but also necessary for the following reasons:
- Keep track of cash flow. In order to prevent cash flow of the business from running dry, it should implement policies that allows for sound financial strategy and efficient record-keeping.
- In order to understand variable costs, fixed costs, as well as how you can accurately cost projects, a small business owner should rely on financial accounting. In this way, the business does not end up losing a large sum of money on certain projects that are thought to be big earners.
- Financial accounting provides a better grasp for a business’ well-being. This can be done by learning to analyze income statements, cash flow statements, and balance sheets.
- Help in detecting and avoiding fraud and theft which may be perpetuated by suppliers, employees or customers.
- If a business owner understands the business dealings and finances, it will be better equipped when faced with dreaded audits.
- A banking institution is more confident when it is dealing with a business owner who is able to handle business finances and understand financial implications.
Whether you’re running a small or large business in UAE, growing it further will entail regular analysis of financial statements and establishing a detailed budget which can allow it to discover any operational inefficiency. If you want to talk to an accounting firm in UAE about financial accounting, contact a reputable one like Farahat & Co today!