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Need for Accounting in Business : An Analysis

By Alok Bajpai, EVP & CFO – Global, CSS Corp

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Alok Bajpai, EVP & CFO – Global, CSS Corp

Archaeological records demonstrate that as far back as 3500 BCE the ancient Sumerians had royal scribes who performed record-keeping duties not too dissimilar from the work of modern bookkeepers and accountants. Near home, Chanakya in 4 BCE recognized the importance of accounting methods for economic enterprises and specified broad scope for accounting and bookkeeping rules to record and classify economic data. So rather than trying to convince whether modern entrepreneurs need Accounting, this article delves more into how and what the accounting function should do for them.

One of the reasons many entrepreneurs and even professionals do not appreciate the true importance of the Accounting function stems from the fact that Accounting has traditionally been very narrowly defined or recognized as just ‘bookkeeping’. Modern accounting is a highly evolving field, which practically spans almost the full gamut of the business. Though there are many responsibilities that fall under this role, in practice it can broadly be divided into financial accounting and managerial (or business) accounting.

Financial accounting is primarily the bookkeeping function of recording and reporting the financial facts as they occur in a business. Such accounting records are also required by regulation or law and are to be maintained within a codified set of accounting standards and practices.

Business or managerial accounting is focused on the needs of the business rather than for meeting any external reporting requirements. This involves significant amount of projections and modelling activities to help management in decision-making. To be effective, they need to be analytical and should provide insights and guidance to the business.

A typical business, whether it’s a Fortune 500 or a start up, will need the following from an accounting function, though the scale and depth may vary depending upon various factors and the stage of evolution of the business.

• Accounting and Record keeping : Accounting and record-keeping are perhaps the most basic accounting disciplines. A good system allows businesses to evaluate their profitability at any given point in time encouraging them to modify prices or optimise cost accordingly if necessary. Basically in a nut shell, its akin to a report card for the operations of the business for the
past period.

• External reporting and Compliances : Every business operates within a regulatory framework. Whether it’s reporting to the tax authorities or to the other government bodies, the business has to share the report of its performance and also discharge its obligations that may be there under a particular regulation. Precise representation of facts and full disclosure is a must for such accounting records.

• Business Enabling (measuring performance): Using finance and accounting tools to monitor progress and, when necessary, making adjustments is crucial for every business. Measuring progress helps businesses become more productive by highlighting bottlenecks and problem areas. Measuring progress helps in spotting trends in revenues and costs early, so that the opportunities can be exploited and problems corrected before they pose a real threat to the business. By accurately measuring results that are tied to individual efforts, businesses can link performances to rewards to encourage meritocracy which eventually further helps them to perform better.

• Business Enabling (predicting future): In the early stages of a venture, projections can unite a team by making a fuzzy vision more concrete, measurable, and actionable. In the middle stages, these financial statements measure whether earlier predictions were accurate and what and where needs to be realigned.  In later stages of a business, if used correctly, financial statements can change complex reality into elegant simplicity and thereby, taking the business to a much higher trajectory. Entrepreneurs may also need to provide banks, lenders or investors a financial forecast relating to the business venture. This information is heavily relied upon by lenders or investors to ensure that the entrepreneur has an accurate and reliable picture of financial expectations and returns from the business.

• Internal Controls: Businesses handle a lot of data and money, which presents countless opportunities for errors, embezzlement and fraud. Through countless ages and generations, it has been proved time and again that humans are susceptible to these temptations. Accounting systems enable setting up regular checks and balances through a constant process of measuring, recording and reporting. A good accounting set up should necessarily have a built-in robust internal control framework.

It will not be out of context if we mention here the importance of automation and technology in modern day accounting. Automation refers to the use of computers and related software for executing all the above accounting functions. The business environment is becoming increasingly complex and so is the demand on the accounting function. Bringing in the right technology will help significantly in achieving higher efficiency, process compliance, accuracy, timeliness and tighter controls.

To sum it up, no other role within a business may have such a potential to pay off. Nowadays, accountants are more than just bean counters. A good accountant can be a company's financial partner for life--with intimate knowledge of everything from identifying which business unit is most profitable to advising on how to finance the next project or even to identify when to buy or sell a business.

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