Accounting may not be a popular subject with non financial managers and leaders but it is a must for any organisation; be it in the manufacturing or service sector, whatever its size, whichever country it is based in and whether or not its aim is to maximise profits. Without accounting, resources cannot be managed effectively.
Introduction
Accounting as stated by Silbiger (2005) “is the language of business” (p. 71). Furthermore, accounting as described by MyNewCompany.com (2006) is a method used to “track the money coming into your business and the money going out” (ibid). Although the aforementioned statement is simple and true, the function of accounting incorporates additional attributes such as those described by Atrill et al (2004). This extended view of accounting can be described as the “collecting, analysing and communicating financial information” (Atrill et al: 2) about the daily operations and the wealth of an organisation; allowing stakeholders such as managers to make informed decisions. Atrill et al (ibid) goes on to say that this financial information will aid and assist decision makers in identifying and assessing the “financial consequences” (ibid) of decisions made by those who are responsible for those leading today’s organisations. As globalisation increases, a competitive advantage that is hard to replicate is crucial for organisations whose objective is to stay profitable. Accurate knowledge of how an organisation is performing can give any organisation the advantage by helping managers make decisions such as developing new technologies or increasing or decreasing prices and quantities (Atrill et al 2006) or products and services. On the other hand, non-profit organisations such as religious groups and relief agencies need to be assured that spending of funds is consistent with the objectives of the organisation (Atrill et al 2006: 5). Furthermore, to stay in line with other professions and to provide a method for better control, legislations have also been introduced to govern against potential misconduct in practise of accounting (Hayward 2006). These practises will also help protect an organisation and its stakeholders.
Financial Statements
As pointed out by Silbiger (2005) those in leadership roles must be able to “interpret the information that accountants generate” (p. 81) effectively so that informed decisions can be made. Whether the organisation is a profit or non-profit entity, the ability to view the day to day activities and “knowing the sources and uses of cash” (Silbiger 2005: 95) will help companies avoid the pitfalls of being “confronted with cash shortages” (ibid). However, additional information such as the “profit-making ability of the business” (Silbiger 2005: 62) produced in an income statement must also be used when making such decisions. Furthermore, the balance statement allows an organisation to view the “wealth of the business” (Atrill et al: 29) sometimes referred to as a “snapshot of the business at a particular time” (Atrill et al 2006: 45). Using these statements as a combined resource, this information can provide a more complete picture of what is happening to the organisation.
What type of decision can be made?
As the old saying goes, ‘if you don’t have a plan, then you plan to fail’. With this in mind Atrill et al (2006) insists that organisations must “have a plan and know how to get there” (p. 11). Having formulated such a plan, controls must be exercised to ensure the desired objectives are achieved. Atrill et al (2006) defines seven processes to control the plan as follows.
As one can clearly observe, having these control measures in place allows any organisation to be both proactive and reactive to any challenges presented.
Financial and Managerial Accounting
As described by Hayward (2006) “financial accounting” (ibid) and “management accounting” (ibid), allow an organisation to “record what has happened in the recent past, or to forecast what might happen in the future” (ibid). By using the information provided by financial accounting, an organisation can use historical data to evaluate and determine factors such as:
These sorts of questions can be answered by analysing the numbers and working out the cost of providing a service as opposed to the revenue it had generated. Using this information, prices can either be increased or decreased or service discontinued. Without this information inaccurate decisions will be made.
Conclusion
Making informed decisions must be based more on facts rather than instinct. Too often decisions are made based on a higher degree of instinct rather than fact. Fortunately, the trend as noticed by the writer of the industry now suggests that decisions are based more on facts while retaining instinctive decision making. Using accounting to analyse historical data allows leaders in organisations to make decisions based more around actual results rather than guestimates. Financial statements such as the cash flow, income statements (P&L) and the balance sheet give leaders a clearer picture of what is happening within their organisations. Decisions based on these results now allow organisations to formulate well thought out plans to achieve business objectives (Atrill et al 2006).
References
Atrill, P. and McLaney, E. (2006) Accounting and Finance for Non-Specialists, 5th Edition, FT Prentice Hall
MyNewCompany.com, Inc. (2006). Manager your business >> Accounting [Online] Available from http://www.mynewcompany.com/accounting.htm (Accessed: 27th July 2006)
Silbiger, S. (2005) 10 Day MBA: A Step-by-Step Guide to Mastering the Skills Taught in Top Business Schools. 2nd ed. London: Paitkus Books Ltd
Hayward, R. Managing Resources, Lecture 1A: Background and overview of accounting
Introduction
“Cash is King. Without it a business cannot function” (Silbiger 2005: 95). Leff (2003) states that, “cash flow is essential to a business’ health and is often a reliable indicator of the business’ income opportunities”; a view that McClearn (2006) concurs with. Flanagan (2005) is also of the same opinion when describing the importance of cash flow within an organisation. Flanagan (2005) describes cash flow as the “business’ life blood and every manager’s primary task is to help keep it flowing” (ibid) as well as using it to generate profit (ibid). The role of accounting and the accountant ensures that cash flow statements are both generated and reported on accurately. By ensuring that the cash flow is monitored, an organisation can keep a closer eye on other aspects of their financial statements to ensure their working capital is performing and generating profit.
Cash Flow Statement
With the information generated by the cash flow statement, managers are then able to look at the details and help put the balance sheet into perspective (Silbiger 2005). For one to understand how the cash flow statement works, Silbiger (2005: 97) suggest that one must first understand the following mathematical equation; “Cash = CL + NCL + OE – AR – INV – NCA” (ibid). He goes on to explain that any increase in Current Liability (CL) located on the right of the equals sign, will increase cash (ibid). Meaning that by purchasing stock or equipment on credit, cash is available for other uses (ibid). Furthermore, if the organisation purchases stock with cash, it will decrease the amount of cash in the business (ibid). Therefore, purchasing stock on credit may be an alternative to up front cash payments. However, care must be taken to ensure that inventories, debtors, creditors and cash are balanced and used wisely. A company that is rich is cash, has the luxury of making demands on banks, partners and creditors.
Cash Management
Good cash flow also allows banks, the public and employees to view an organisation’s financial strengths and stability (Leff 2003 and McClearn 2006). In addition “cash flow can be significantly enhanced if the amounts owing to a business are collected faster” (Flanagan 2006). Most business insist that banks and finance companies conduct credit checks on businesses prior to any dealings. A healthy cash flow statement will ensure that favourable results are presented in the findings. When the business is healthy, its reputation is also increased allowing them to borrow larger amounts from banks and creditors. It also allows the day to day operations of a business to function more effectively.
However, if cash flow isn’t properly managed, issues will arise. For example, as cash was low and financial resources were overstretched (Flanagan 2005) in a company one had previously worked for, spending on vital items such as pens and paper could only be compared to (without insulting the tax man); filing a tax return. Not only was morale low, ineffective and questionable working practises was the consequence. On the other hand, companies such as those researched in the United Kingdom by REL Consultancy Group and cited by Atrill et al (2005: 371), do not utilise their working capital to its full potential (ibid), and therefore lose out on possible profit gains (ibid).
Managing Working Capital
Effectively managing working capital ensures that potential shortfalls are avoided. It also allows businesses to manage debtors and creditors which will have a positive affect on the amount of inventory on the books. The goal for any organisation is to firstly collect cash from creditors more quickly, secondly delay the payment of creditors without incurring interest and subsequently reducing the amount of inventory held (Flanagan 2005). Control measures can then be defined such as invoicing companies and insist that payments are settled within thirty days, suspending future purchases on credit if accounts are not settled. By implementing controls such as these, a company arms itself with the correct tool set that will allow them to identify potential bad investments and bad partners. On the other hand, it will also allow them to identify company’s that will contribute to the profitability of the organisation, ensuring that they are well looked after. When these processes are effectively carried out, an increase in potential profit may be achieved as pointed out by REL Consultancy as cited by Atrill et al (2006).
Conclusion
Effectively managing an organisation’s working capital increases the likelihood for the business to be successful and profitable. True profitability is an organisations ability to generate “cash” more effectively. Flanagan (2005) summarises this very well; “Time is money” (ibid). The cash flow statement allows this movement of cash to be highlighted. Without cold hard cash, survival is unlikely.
References
Atrill, P. and McLaney, E. (2006) Accounting and Finance for Non-Specialists, 5th Edition, FT Prentice Hall
Flanagan, B. (2005) ‘Managing Working Capital’. Business Credit, 107 (8), pp.26-30 [Online] Available from: http://proquest.umi.com/pqdweb?did=897512921&Fmt=4&clientId=52650&RQT=30... (Accessed: 3 August 2006)
Leff, L. (2003) ‘Cash Flow: The artistry of accounting’. The CPA Journal, 73 (9), pp.16 [Online] Available from: http://proquest.umi.com/pqdweb?did=423246881&Fmt=4&clientId=52650&RQT=30... (Accessed: 3 August 2006)
McClearn, M. (2006) ‘Best Cash Flow’. Canadian Business, 79 (10), pp.145 [Online] Available from: http://proquest.umi.com/pqdweb?did=423246881&Fmt=4&clientId=52650&RQT=30... (Accessed: 3 August 2006)
Silbiger, S. (2005) 10 Day MBA: A Step-by-Step Guide to Mastering the Skills Taught in Top Business Schools. 2nd ed. London: Paitkus Books Ltd