Why Should Investors Understand Accounting?
Why should investors understand accounting when all they have to do is just invest their money? As an investor, knowledge and skills in accounting are needed so that you do not easily experience losses. Investor calculations with a correct understanding of accounting are definitely much better, so consider the following reasons.
5 Reasons Why Should Investors Understand Accounting!
- To Compare Companies
Investors should understand accounting so that the investment process is much smoother and more profitable for themselves and the company. An understanding of accounting helps investors compare the financial performance of several companies in the same industry. The main goal is for investors to be able to determine the best investment and prevent the risk of loss.
- To Assess Companies’ Financial Health
By understanding accounting, investors find it easier to assess a company’s financial health. This is because learning accounting is the same as understanding cash flow, profit and loss, and balance sheets. Whether a company’s financial condition is good or not can be detected immediately in order to ease the decision-making.
- To Avoid Fraud and Financial Report Manipulation
Investors who understand accounting will not only be able to avoid the risk of loss when investing. Various signs of financial statement manipulation or fraud can also be easily detected before you go too far. You will not be easily fooled by suspicious accounting practices because you can immediately uncover them.
- To Measure Risk and Profitability
Why do investors need accounting information when they can only work on investment rather than the accounting itself? This aims to enable investors to measure how high the risk and profit are. Running a company doesn’t only focus on investments making the company more profitable; there are also risks to be detected.
The problem is, there will always be risks such as inconsistent profits, raising doubts about whether the company can survive. Accounting helps the process of analyzing financial ratios and knowing the size of profits and losses. Therefore, investors need to understand the debt ratio, profit margin, and return on equity to lower risks and increase profits.
- To Make Better Investment Decisions
Not only do accountants need to master accounting, but investors also need to understand this field to make investments easier. This will be useful in making investment decisions so that they are more rational and not just based on emotion. Correct investment with accounting calculations is based on data and not just according to speculation and market trends.
The Role of Accounting in Assessing Financial Risk
- Tracking Cash Flow
How do investors use accounting information to assess financial risk in their companies properly? Through accounting investors can track cash flow; it indicates irregularities if it’s found to be negative. This problem is usually found from the main activities as a money maker, so the cause must be immediately identified.
- Assessing Quality of Companies’ Earnings and Profits
Investors can use their accounting knowledge to analyze the company’s profit value more deeply. From this assessment activity, investors can find out whether the company’s profits come from asset sales or one-time transactions. Or, the company has actually been getting profits from main operational activities that are sustainable and safer.
- Analyzing Financial Ratio
Investors can even calculate and analyze various ratios for risk assessment in addition to assessing profit quality. Understanding accounting makes it easier to analyze the debt to equity ratio as well as current ratio and quick ratio. From this analysis, investors will also know whether profit is enough to pay interest on loans.
- Detecting if the Company Depends on Debt
Why should investors understand accounting and finance because they can detect whether a company is dependent on debt or not. Some companies continue to operate but must rely on debt financing, which also increases financial risk. If interest rates rise, this can eventually harm companies whose finances are unstable.
- Providing Transparent Financial Data
Investors can also assess the transparency of financial data and the actual condition of the company from this data. The assessment will be based on assets and liabilities (how much debt the company has) and working capital. There is a liquidity risk if short-term debt is greater than cash and current receivables.
Why should investors understand accounting when running their companies? The various reasons above are the answer to why investors need to study accounting for the safety of the company. When the company’s finances are smooth, this will facilitate investment and make its profits better.
