Introduction
The need for financial information for decision-making necessitates the preparation of various financial statements to provide the business owners, potential investors, and other interested parties with information about the performance of the business (Cioca, 2020). To meet different decision makers’ diverse financial information needs, accountants prepare four basic financial statements that summarize the business’s overall performance. The four basic financial statements are a Statement of comprehensive income, a Statement of financial position, a Statement of change in equity, and a Statement of cash flow. In this regard, this paper discusses the importance of these financial statements in business decision-making. Besides, the paper evaluates the concepts of forecasting, budgeting, and strategic planning in supporting the organization’s success. More importantly, this report provides an in-depth analysis of various organization responsibility centers and the rights assigned to each responsibility center.
The Four Basic Financial Statements
Income Statement
An income statement is an essential financial statement that shows the revenue of the business and the expenditure incurred in earning the revenue. It is, therefore, a financial statement that shows the business’s profitability by comparing income against expenses. If the income is more than the expenses, the company has made a profit, but if the business expenses are more than the income, the business reports a loss (Warzocha,2018). As such, business owners prepare an income statement at the end of the operating period to assess the business’s profitability. If an income statement shows consistent losses, a company may face potential closure as no potential investor prefers to invest in a loss-making business organization.
The Statement of Financial Position
The management of the business prepares this financial Statement to determine the net worth or financial standing. The Statement of financial position clearly illustrates the basic accounting equation, which demands that total assets be equivalent to the total liabilities and capital. Therefore, the Statement of financial position lists all assets of the business as well as liabilities and capital. The information presented in this financial Statement can be used to evaluate the liquidity and solvency position of the company, thus forming a basis for decision-making and planning.
The Statement of Shareholders’ Equity
Companies issue this financial Statement as part of the balance sheet to illustrate the changes in the owners’ equity. The Statement of change in shareholders’ equity provides information about common stock, preferred stock, retained stock, and other forms of the owners’ equity. Therefore, by tracking the changes in the owners’ equity, the business managers can get insight into its capital structures and identify the areas that need improvement.
The Statement of cash flows
This financial Statement is critical in identifying the business’s cash flows. It is prepared on a cash basis and eliminates non-cash transactions to provide information about the company’s cash streams during an operating period. The cash flow statement is organized under three sub-headings illustrating the various sources of business income and major expenditures (Warzocha, 2018). For instance, cash flow from operating activities provides information about revenue-generating activities such as sales revenue. Cash flow from financing activities includes information about the issue and redemption of capital and debt capital. In contrast, cash flow from investing activities includes information about the business’s sale or disposal of fixed assets. Therefore, a cash flow statement is essential in business decision-making as it helps managers understand how the company generates and spends money.
Strategic Planning, Forecasting, and Budgeting
Strategic planning is the skill of developing detailed business plans, putting them into action, and assessing the outcomes in light of the organization’s long-term objectives and aspirations. It is a framework that incorporates different corporate divisions, such as human resources, finance procurement, accounting, and marketing, to achieve a firm’s strategic objectives (George et al.,2019). By serving as a blueprint for attaining long-term competitiveness and growth, strategic planning helps to enhance communication and coordination within the organization, thus accelerating the development of the business.
On the other hand, forecasting is another critical process in the organization that aids planning and decision. Forecasting uses financial tools and methodologies to predict organizational changes based on factors, including sales, expenses, earnings, and losses. Business forecasting aims to improve strategy based on accurate forecasts, preventing potential failure arising from business risks. Forecasting enables firms to create reasonable and quantifiable goals based on recent and past data. Reliable statistics and information make it easier for firms to estimate how much changes or growth will be considered successful.
Besides strategic planning and forecasting, the business prepares budgets to identify the income and expenditure needs of the company. By setting budgets, enterprises remain focused on core activities, thus reducing the waste of resources. Budgets identify the priority areas in the business and ensure that resources are appropriately assigned to achieve the organization’s objectives. Budgeting helps identify the business’s revenue sources and associated expenditures, thus serving as a benchmark for financial planning.
The three concepts of strategic planning, budgeting, and forecasting are closely interrelated, and more often, they blend into achieving organizational objectives. A business’s budgeting and forecasting model gives the fundamental inputs required for strategic planning (Singh, 2021). Strategic managers can use the forecasting data to base their strategies and develop more feasible and achievable objectives. Similarly, the success of strategic plans requires resources identified through a budgeting process. However, despite their interrelations, strategic planning often involves the organization’s long-term goals, while budgeting and forecasting are often short-term planning tools for the business.
Responsibility Centers in an Organization
Responsibility centers are functional divisions within a company with their objectives, targets, goals, staff, operating guidelines, and financial allocation. Responsibility centers assign clear management accountability for income produced, costs paid, and investments made. An organization’s three common responsibility centers include investment, price, and profit centers.
Cost centers are divisions within the organization that primarily deals with controlling costs within the organization. Managers of cost centers are only responsible for monitoring costs; thus, the responsibilities in cost centers are restricted to cost control (İbrahim et al., 2021). For instance, budgeting estimates are considered cost estimates for planning and cost control. The managers of profit centers are responsible for both costs and revenues. They must closely monitor and control costs to ensure that the business gets profits. Therefore profit center is a core business segment that helps organizations achieve their primary profit motives. An investment center is in charge of both revenues and investments. The investment center manager controls the center’s revenues, expenses, and investments. The managers of investment centers often develop credit terms, which directly impact receivables collection, and the inventories policies, which influence investment in inventories.
Managers of investment centers have more responsibilities and power than other centers. These managers are responsible for investments, revenue, and costs. The duties of purchasing, selling, and utilizing divisional assets are all handled by investment center managers.
Conclusion
Preparing financial statements is critical in business decision-making and strategic planning. Companies often prepare financial statements to evaluate the performance of the business and plan for growth. To ensures that the organization is effectively managed, business owners often assign responsibilities to various centers to ensure effective coordination.
References
Cioca, I. C. (2020). The Importance Of Financial Statements In The Decision-Making Process. Annales Universitatis Apulensis Series Oeconomica, 1(22), 73-83. https://www.zurnalai.vu.lt/ekonomika/article/view/12704
George, B., Walker, R. M., & Monster, J. (2019). Does strategic planning improve organizational performance? A meta‐analysis. Public Administration Review, 79(6), 810-819. https://onlinelibrary.wiley.com/doi/abs/10.1111/puar.13104
İbrahim, A. K. S. U., & Tursun, M. (2021). Analysis of Responsibility Centers Performance in Businesses By System Dynamics Method. Muhasebe ve Vergi Uygulamaları Dergisi, 14(3), 949-966. https://dergipark.org.tr/en/pub/muvu/article/901635
Singh, H. (2021). Budget and forecasting a comprehensive approach. https://www.researchgate.net/profile/Harshvardhan-Singh-24/publication/354637050_Budget_and_forecasting_a_comprehensive_approach/links/61437cb4f4a9f7651162d013/Budget-and-forecasting-a-comprehensive-approach.pdf
Warzocha, G. (2018). Annual financial statements, the importance of other comprehensive income. Financial Sciences. Nauki o Finansach, 23(2). https://wir.ue.wroc.pl/info/article/WUTbebd46d56cd94cc290249b98bbdb3fbb/Publication+%E2%80%93+Annual+financial+statements%2C+the+importance+of+other+comprehensive+income+%E2%80%93+Wroclaw+University+of+Economics+and+Business
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