How to: Build Your Business on Accurate Financials

"Accurate accounting and FP&A go hand-in-hand to inform your broader business strategy. It’s imperative to get it right from the ground up."

Accounting is more than data entry, and finance is more than managing money. The role of accounting and FP&A in business strategy is evolving. And along with it, there is a greater emphasis on the accuracy of downstream financial data as it plays a larger role in key decision-making across an organization.

Gartner recently predicted that by 2025, 50% of FP&A leaders will have enterprise-wide data strategy as a key responsibility. Here’s an in-depth look at how accurate accounting and financial reporting can impact your business.

Redefining The Role of Accounting & FP&A in Data-Driven Business

Big data is making businesses faster, more competitive, and more profitable than ever before. But there’s still a lot of variance in how well companies adapt to using data. Behind the jargon, there is an entire ecosystem of systems, policies, and activities aimed at ensuring the quality and integrity of data as it goes in.

In finance, the process begins in accounting. If the data is missing, inaccurate, or incomplete when it’s entered, every forecast, model, and decision that comes after will be flawed.

Accounting

Accounting activities involve recording and coding transactions. It’s the first step in a pipeline that feeds important financial data to the executive suite. It’s also where fundamental procedures and policies begin.

For example, it’s common to create a separation of duties where different individuals are assigned data entry and validation tasks. This ensures that errors are caught and corrected before the data shows up on financial reports.

As another example, accounting works directly with revenue recognition policy which determines how or when a company records revenue earned. Will the entity recognize revenue when it is earned–or when an invoice is paid? Depending on the billing cycle, there may be 30 days or more between the two dates.

How revenue is recorded can have a significant impact on the value of the company at sale. If a company has a long-standing practice of collecting deposits 90 days in advance of fulfilling orders–this looks very different on a quality of earnings than a company that struggles to collect payment within 90 days of invoicing its customers post-delivery.

Financial Planning & Analysis

Financial planning and analysis, or FP&A, deals with using a company’s financial data compiled in accounting to inform strategic decision making. It involves budgeting, forecasting, and long-term planning using predictive models based on historical numbers.

Common FP&A activities for growing businesses include:

• 13-Week Cash Projection–to manage cash and test decision impacts
• Budget to Actual Analysis–to explain differences between actual and planned financials
• Flux Analysis–examining monthly variances in accounts to surface issues
• Sensitivity Analysis–to identify critical forecasting assumptions
• Scenario Analysis–to quantify the impact of changes in forecasting assumptions
• Ad Hoc Analyses Based on Business Needs

In all cases, the historical data comes from accounting. The accuracy, completeness and timeliness of data entered into the accounting system will impact the predictive power, value of insight, and timeliness of Financial Planning & Analysis activities.

So, a wrong number–or a delay in the books at the bottom impacts decisions made at the top.

How to Set Your Business Up for Financial Success

Poor financial management hurts businesses. Upwards of 82% of small businesses fail due to cash flow management problems, ineffective pricing strategies, and inadequate capital. The common denominator across the most common causes is financial management–which starts with accurate accounting.

Pillars of Accurate Financial Reporting

As you begin designing the systems that will frame your finance department, focus on the four pillars of accurate financial reporting:

• Consistency
• Reproducibility
• Relevance
• Timeliness

The tricky thing about data is that, when taken out of context, it can show whatever you want. It’s important to focus on unambiguous presentation and full disclosure. Keep your accounting policies and practices consistent across periods. When you do need to make a functional change, make sure that it’s clearly documented. Additionally, it’s imperative to create clear documentation and accessible audit trails that show where data comes from and every change made to it.

Next, adopt uniform accounting practices to make performance comparable against outside other entities. Finally, make sure that your systems are designed to provide timely and relevant information by using cloud-based accounting software with real-time capabilities when possible.

Translating Financial Reporting & Analysis to Business Strategy

Getting the right data in by creating standardized systems with appropriate checks and balances can make a world of difference for businesses of all sizes. Here’s a look at how kept.pro has helped our clients solve for consistency and accuracy in their books.

Identify Trends

Poor accounting can mask bigger problems, like operational inefficiency and shrinking profit margins.

A multi-site consumer services provider was struggling to achieve and maintain profitability. Based on their data, they couldn’t understand the problem. After a review of their systems, we found that their true cost of sales was being understated. The margins that they were basing pricing decisions on were fundamentally flawed.

A few missteps in configuring the integration between their point of sale system and their accounting system were costing them profitability. Bigger operational issues impacting efficiency were masked by poor accounting and had gone unaddressed.

Once the problem was identified, the system was corrected, and the client was able to build a new dashboard to visualize accurate accounting data and quickly identify negative site trends in a matter of days.

Manage Liabilities

Poor accounting can hide big liabilities, leaving you vulnerable to increased risk.

A California-based marketing agency wasn’t properly recording paid time off (PTO) benefits as a liability on their balance sheet. In California, PTO is a wage and is payable to the employee upon separation. Additionally, this firm had an extremely generous PTO policy and lax controls in place for accountability.

Their PTO benefit was a massive liability, but it wasn’t factored into any financial decisions. This put the company at financial risk. When we properly accounted for the PTO, the firm was able to make appropriate policy decisions. Within two years, they reduced this dangerous balance sheet liability by 85%.

Make Decisions

Poor accounting can keep your business from making good decisions.

A construction firm was using cash-based accounting with an individual bookkeeper. As a result, they didn’t have a realistic view of which jobs were profitable and why. We recommended switching to an accrual-based accounting system which gave the firm insights into their pricing strengths and weaknesses. It also provided data for previously unavailable KPIs.

The firm immediately began managing pricing, projects, and the overall business with better visibility, growing both sales and profits over the next three years.

Take the First Step Today–Transform Your Business with Accurate, Complete and Timely Financials

Partner with a provider that can help you strengthen your systems, procedures, and policies to set your business up for success.

Read more to learn how to choose the right financial and accounting outsourcing provider.