More than numbers and spreadsheets

SUCCESSFUL STRATEGIES: Bhaskar Ranjan Das discusses why and how financial and management accounting form the strong pillars of accounting in business

Accounting proves to be one of the core strengths of a successful business enterprise with significant elements such as measuring and summarising business activities, interpreting financial information, and communicating the results to management and other decision makers. It is considered as a guardian function which communicates information required by owners, managers and investors in order to evaluate a company’s financial performance.

The concept of accounting originated back in the ancient days of civilisation. Its requirement in the day-to-day life of business management became stronger over the years with the growth of credit and taxes. Such demands made it mandatory for companies to provide financial reports to outside entities and keep an updated log of financial transactions.

The role of accountants around the world has changed drastically over the past decades. Accounting professionals today are gradually learning to embrace the increased responsibilities and competition that their career demands. The top management is demanding more deliverables, as businesses around the world are becoming more volatile.

These professionals are now expecting their chief financial officers, finance directors and their teams to be more than just regular accountants, by being guides on the best business strategy.

Developing and producing up-to-date financial statements is one of the key roles for running a successful business today. However, it has become even more critical to also generate value from these financial statements. Here arrives the need for financial accountants as well as management accountants, who are the key driving forces in the current business scenario.

Key roles

Both financial accounting and management accounting form an integral part of accounting, each used in different settings, providing their recipients with benefits that are unique to each format. Financial accountants create a base of the financial implications made over a set period — mostly a financial year, consisting of a balance sheet, income statement and cash flow statement.

Management accountants utilise the same to make decisions that would create value to help other parts of the businesses. They extract the relevant and material information from financial and cost accounting to assist the management in budgeting, goal setting, decision making etc.

Core expertise

In case of financial accountants, their important area of functioning majorly focuses on immediate financial issues and management.

Management accountants are qualified to work across businesses. They advise the senior management on the financial implications of big decisions, formulating business strategy and risk management and forecast, which is much more than just crunching numbers.

Relevant target audience

Outside parties such as creditors, shareholders, investors etc are the key stakeholders for any business. Hence, it becomes imperative to update them with accurate financial status of the organisation. Financial accounting serves this purpose by providing a true and fair view of the financial position of the company. It includes preparation of financial statements, capturing appropriate records and reports of financial data in order to provide relevant and material information to its users.

Management accounting shares a roadmap with the business drivers of the organisation such as senior management, by providing them with industry insights and guidance for formulating policies, planning and controlling. This form of accounting includes important factors to enable a holistic view of the functioning of the organisation. It is all about looking beyond numbers and spreadsheets to add real value to the success of a company. These reports break down numbers and projections related to departments, products, employees and customers and how they affect the company.

Presentation rules & guidelines

Financial accounting is done in the pre-set format. They must abide by the generally accepted accounting principles (GAAP). This means that reports must be delivered as per the set ground rules ensuring consistent and concrete data every time. The reports generated are mandatory for every company and are published and audited by statutory auditors.

Management accounting is voluntary and hence, has no format to follow. The management accounting is usually done as per the needs of the management — on weekly, monthly or quarterly basis. The reports generated are only for internal reference.

The report reflects a mix of accounting, finance and management combined with the business skills and techniques needed to add real value to any organisation. Although not mandatory, management accounting is deeply adopted by various organisations as it plays a vital role in driving the success of any business.

Furthermore, management accounting acts as a central nervous system with the globalisation of large corporations which have a highly complex and multifaceted operations in various countries around the globe. It has become one such language which is common and essential to drive the growth of an organisation with accurate decisions and growth strategies while keeping in mind the goals and objectives of such organisations.

Financial accounting is helpful for ensuring proper records of multiple transactions which are created, maintained and shared on a timely basis with key stakeholders. On the other hand, management accounting plays an important role in the company’s performance analysis, strategy creation, decision-making and preparation of policies for the future. Hence, both these forms of accounting serve very important roles in forming a strong foundation for businesses, today.

(The author is head of South Asia, Chartered Institute of Management Accountants)