The Four Expectations of The Accounting and Finance Department
The Accounting/Finance Department is an integral part of an organization’s Management Group. As such, it is a contributing member that helps management identify objectives and develop strategies to achieve those Objectives.
Let’s look at how they do that.
I. Financial Statements and Accounting Records
The Accounting and Finance Team is responsible for providing timely reports that are correct in all material respects. We need to get them as correct as possible and delivered on a timely basis.
To document the validity of the financial statements, set up a balance sheet system of documentation. Each section of the balance sheet is to have supporting schedules and workpapers explaining the transactions that took place in each account.
The reason for the concentration on the balance sheet is because the audit practices of Certified Public Accounting firms concentrate their review based on the theory that if the beginning balance sheet is correct and the ending balance sheet is correct, then the results of the activity (The income statement) will be correct. I place an emphasis on the “Results.” After analyzing the Income Statement, there may be reclassifications and corrections that will need to be made, but those will also be reflected in the ending balance sheet.
Included in the responsibilities for the Financial Statements there are items that influence the reliability of the Financial Statements. For example:
Compliance and Preservation
Two other items that need to be addressed at this time are compliance and preservation of the accounting records. I put these two together because they are both incorporated both during and after the preparation of the financial statements.
As the financial statements are prepared, the preparer needs to be knowledgeable of Generally Accepted Accounting Principles, legal requirements, financing covenants, internal reporting requirements and any other reporting requirements for customers, vendors, management, and shareholders. Compliance must be incorporated into the preparation process.
Preservation of the accounting records is especially important and separation from the “Cloud” environment is extremely critical.
As mentioned above, there should be documentation of each account’s activity each month. The copy of the final general ledger for the month plus all other supporting activity should be retained outside of the accounting system. By having the information backed up, the Company is protected.
II. Analytics (Key Performance Indicators)
Now that the financial statements are completed, the art of accounting kicks in. Now that we have the data, what do we do with it?
While there are many uniform ratios and analytics that are used throughout the financial side, not all of them are useful in every organization.
For instance, the analysis of EBITDA is probably useful in every organization that requires outside financing. Inventory turns are important in a manufacturing environment, but not in a marketing company. Return on equity is important to a company with multiple shareholders, but not a closely held company. The finance team, working with management, needs to review the data and determine what analytics are pertinent to the organization. What are the important measurements? What are the warning signals? What does the information tell you about all the activities?
III. Objectives
Now that we have prepared the financials, performed our analytics, Finance should suggest objectives and consult with the other disciplines within the organization to set objectives and policies for the organization.
For instance, if capital acquisitions are challenging cash flow how do we fix that? If there are income tax considerations, how do we approach the solution? What is best for the shareholders of the organization? How do we approach inventory control? What keeps us in compliance?
IV. Strategies
What should we do?
Once the Objectives are established, how do we achieve them?
Strategies are all activities determined by management to achieve the objectives agreed to by management based on the financial results and determined analytics.
WE can get more precise, but for now this is a good place to pause.