Managing Resources - How can accounting help the decision making of leaders and managers?

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.

1. Identify the objectives of the organisation (p. 12)Consider all options to achieve the objective (ibid)
2. Formulate a long-term plan based on the “most appropriate option available” (ibid)
3. Formulate short term plans based on the long-term (ibid)
4.  Control performance such as comparing actual to budget (ibid)
5. Respond to any deviations from planned budget (ibid)
6. Revise plans which will require repeating the process (ibid)

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:

1. Was too much stock purchased?
2. Were too many creditors owing money?
3. Was cash fully utilised?
4. Does the cost of providing a service outweigh the benefits?

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