Management Financial Accounting. Growth Through an Accurate Business Picture

Management financial accounting

Last time we touched on the fact that in any company, even a very small one, it is necessary to record your actions (management financial accounting).

Usually, people who understand what financial accounting is don’t need an explanation of why. But what about those who have never done this systematically?

Feasibility

First, you need to correlate goals, means, and cost — which is not necessarily directly about money.

If the owner is alone, then some details of accounting can be neglected. In this case, the owner understands that the picture is not 100% accurate, but understands the scale of impact of neglected data on this picture. This makes sense if the impact is not proportional to the time/money costs of accounting.

If there are several owners, then the question of accounting completeness is no longer relevant, because even a 100 hryvnia discrepancy between owners can lead to million-dollar distrust of each other, and most likely, over time, will destroy the business.

Methodology

Next, you need to decide on methodology. The word may seem scary to some, but the main point is that we must record the same events the same way every time. For example, if today you attribute the same expense to the cost of goods, tomorrow to operating expenses, and the day after to administrative expenses, then data quality will significantly decrease and decisions based on this data will be distorted by incorrect accounting. In fact, there are accounting standards, both general and specific for different industries, but to start, the main thing is to determine what, how, and when we record. We can call this an accounting policy.

Transparency

The next step is to determine by what, at least technical, characteristics we can understand that our accounting is meaningful and free of errors. Otherwise, our efforts will be in vain because we cannot rely on any obtained figures. Obvious indicators would be the match of actual cash to calculated values, inventory, reconciliation acts with counterparties, etc., as well as more complex entities based on double-entry such as the correspondence of financial results to changes in the balance sheet or the correspondence of individual controls from the chart of accounts level to corresponding values from the document level. Again, at first glance, it may seem complicated to some, but in reality most of the work is done by accounting systems, and you just need to carefully record events and monitor the correspondence of key indicators. To start, a few will suffice. Over time, as needed, there can be dozens and even more.

The essence is that in addition to the accounting process itself, you must be confident in the integrity and correspondence of its data to the actual indicators of your business. And that without constant monitoring of reference points, you can drift from reality into a meaningless process.