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Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited
Power of finance goes beyond counting cash
Power of finance goes beyond counting cash
Passage to India
The recent trend for major UK companies to relocate their call centers to India is the source of much current concern and debate. Commentators reflect gloomily on the fact that the service sector is no more impervious to harsh economic reality than manufacturing or heavy industry.
One lesson that companies have to address, more than ever, in today's unforgiving and highly competitive global business market is that there are only two ways to make money: to increase revenue or to decrease costs.
To meet those global challenges, companies have resorted to cost-cutting strategies which involve people. Downsizing and streamlining, or whatever euphemisms you prefer, have not always benefited organizations: for lean and mean, you can often read skinny and weak.
Firms are turning to India with the simple expedient of decreasing costs by employing people at a fraction of the incomes they would receive in the UK. It is one way companies will resort to cost strategies (examining processes is another example), while failing to address the co-ordination of planning, forecasting and budgeting.
In other words, finance and accounting processes are being severely undervalued. They are seen as a function of month-end closing and historical focus – something which has to be carried out as a matter of course in running a business – rather than a potential area for competitive advantage.
However, finance and accounting should be much more than this. They need to be recognized as value-adding processes in their own right. In that way, they can make their own contribution to the organization's bottom line.
Book balancing is not enough
As it stands, the problem lies with the way that the accounting information cycle works. Under generally accepted accounting principles, books are closed and balanced each month before management, cash and tax reports are issued. This all takes too long in today's business environment because information reaches management too late to support proactive decision-making.
Finance and accounting must therefore move from being part of a historical-information group to a dynamic-information group. They must be able to manage information relating to sources of revenue, the people working for the organization, and the acquisition of goods and services. Ultimately, this process can enable finance and accounting to have a direct effect on management decisions and therefore contribute significantly to the organization's success.
This process can be likened to a movie. The way things tend to work now is that the accounting process provides a succession of snapshots once a month or once a year, like a preview for a new film which is shown before the main feature. A good accounting process is like seeing the full picture. The process provides a full, uninterrupted view of the organization's changing circumstances. In other words, finance and accounting co-ordinate the information needed to reach this point, evaluate the situation and to see the effect of alternative goals and objectives.
Armed with the right information, management can concentrate resources on crucial areas, so that minor surgery can make the business a far healthier one.
To this end, planning, forecasting and budgeting are all vital. Finance and accountancy can play their part in the smooth running of all three. Both planning and forecasting are – or should be – dynamic processes which should be adjusted at a minimum on a rolling monthly basis.
Keeping Wall Street happy
The same principle applies to budgeting. Sophisticated finance and accountancy practices can enable management to be more far-sighted and to co-ordinate their budgeting with targets lined up through the planning process. On Wall Street, analysts examine performance and accuracy of forecasts. An organization's share price over the long term will be driven by cash return on invested capital, and the accuracy of the forecast on a 90-day horizon.
The costs and activities relating to the actual process of creating a service or product need to be in place. This can be achieved, therefore, by tying planning, forecasting and budgeting into the accountancy process in a way that makes transparent to management the organization's progress. Armed with this information, goals and objectives can be more readily identified and achieved.
For many organizations, the Internet is becoming part of their plans for planning, forecasting and budgeting. Typically, one repository will be maintained, so that all the data are contained in one central database where it can be consolidated and made available to the right people.
Planning functions are traditionally bottom-down affairs, but these new tools have made it possible to add a bottom-up element which is more inclusive: with more users in the organization involved, a greater number of talented people have an input.
Emerging technology is helping. Internet-enabled processes pave the way for data to be used in many ways, so that managers in the most remote sites of an organization can see income and expenditure at any given moment.
Quick access to data
There are other factors that make the Internet-based option attractive. Data input and output are simplified when information is held in a single repository. A total of 80 percent of the time taken to put together an annual budget is spent in collecting and assembling core data.
Developments such as relational database technology have simplified the process of keeping information current and accessible. Companies can transfer and share information easily when an authorized person wants it. Paper systems that run parallel to computer systems in most organizations will become a thing of the past. The upshot will be better information sharing and reduced costs.
Relational database technology brings with it other advantages. Collective key control is an information system based on the technology. It provides access to information going way beyond the balance of accounts, into such areas as forecasting and the tools for analysis of information.
The Internet can be a vital tool. More importantly, however, businesses will face even tougher challenges in the future. A more dynamic approach to finance and accounting might be a crucial factor in deciding whether that future is one that brings success, survival or failure.
Adapted from "Unleashing the power of finance", by B.J. Wright, Strategy and Leadership, Vol. 29 No. 5, pp. 16-20. This article makes some useful points about the way organizations' strategy for handling finance and accounting is wrongly focused. It would appear that, at best, opportunities are missed and, at worst, practices create real dilemmas. The value of the Internet is emphasized, though the lay reader might find the technical details a bit inhibiting.
ReferenceWright, B.J. (2001), "Unleashing the power of finance", Strategy and Leadership, Vol. 29 No. 5, pp. 16-20, ISSN: 1087-8572.