Importance of Accounting in Business
The primary role of accountants in business is to provide information to connected and external stakeholders and, crucially, to management, who are the internal stakeholders.
The scope of this role depends very much on the size of the organisation and the complexity of its business.
For example, a small local store’s accounting requirements differ from that of an international oil company.
Examples of Accounting Activities
The accounting function performs several different roles in business.
Record the financial details of the organisation’s business transactions, and use these accounting records to prepare reports about financial performance.
Providing information to management so that managers can plan and control the business and make well-informed decisions about what the company should be doing.
Safeguard the financial assets of the business – its cash and bank deposits, for example.
Manage the business’s finances, raising money from investors or lenders when needed and ensuring that it is used efficiently.
Ensure the business operates as it should, reporting any problems or weaknesses.
In performing these roles, accountants deal with all the main business functions in the organisation, providing them with support and information.
Accountants are essential providers of business-related information within the organisation. In larger businesses, accountants are involved with the organisation’s central IT systems, which impact the accounting function.
Procurement
The procurement function is responsible for purchasing materials and supplies on behalf of the organisation.
Purchases need to be recorded, and suppliers must be paid what they are owed at the proper time. The organisation’s buyers should be expected to obtain the lowest purchase prices consistent with quality and the need for reliable delivery.
Accountants work with the purchasing department to record purchasing transactions, pay suppliers and plan and monitor the costs of purchased items.
Accounting Activities for Procurement
Buyers in the purchasing department should keep a record of the prices they expect to pay for each item.
They provide the accounting department with expected buying prices so the organisation can prepare its financial plans.
Purchasing managers need to ensure that their buying procedures are efficient and that prices paid for purchased items are reasonable and value for money.
The accounting function maintains records of actual and planned purchase costs, providing information that purchasing managers can use to monitor and control actual costs.
The accounting function is responsible for recording purchase transactions. Many purchases by businesses are on credit.
The supplier submits an invoice asking for payment for the goods they have supplied. The accounting department records the details of each invoice and arranges to pay the supplier at the required time.
The accounting department should work with the purchasing department to ensure that the organisation has sufficient funds to pay for purchases on the date buyers agree with their suppliers.
Inventory is a term for items held by the business for operations. It includes purchased items that have not yet been used in the organisation’s operations.
The accounting function should obtain and provide information about the quantities of purchased inventory in store, so that management can monitor whether it is excessive and control future purchases.
Production and Production Planning
Manufacturing companies need to control the costs of their products to sell them at a profit.
Production costs are a crucial aspect of production and production management. The accounting function records production expenses and then produces information about costs for management to use in planning and control of manufacturing operations.
Accounting Activities for Production
Accountants keep a record of production costs incurred. Production costs are often analysed into three elements.
One of these is the wages cost of the workers directly involved in the production work. This cost is known as direct labour cost.
Another cost element is the cost of the materials used in production, known as the direct materials cost.
Third, there are the costs of all the other expense items in production: the wages and salaries of people not directly involved in the production work, such as maintenance engineers and production managers.
Other costs, such as the cost of power and energy consumption, and machinery usage, may be recorded and classified as indirect production costs (production overheads).
Accountants analyse costs so that production managers know how much it costs to make products. Costs of direct labour, direct materials and production overheads are analysed into costs of products being manufactured.
Production costs are affected by efficiency in the use of materials and labour productivity.
There may be high levels of material wastage in the production process: accountants put a cost to this.
Labour costs depend on how much output workers can produce during work hours.
Accountants can also put a cost to labour inefficiency or a value to productivity improvements.
Another aspect of cost control is monitoring the prices paid for direct materials and direct labour wages and the spending on production overhead items.
Materials prices are the responsibility of the buying department; wages may be decided by human resources (HR) management, and overhead costs are the responsibility of various managers in different departments.
Examples of Accounting Involvement in Production
Accountants can assist production managers in other ways connected with planning or controlling production costs.
For example, they can help management to make decisions about the useful life of manufacturing machinery and equipment – such as deciding how often equipment should be replaced before it loses efficiency or before repair costs get too high.
Suppose a company designing shirts has determined the price the shirt can be sold at is $10. In that case, accounting can provide estimates of what the shirt will cost to produce to ensure that the organisation can sell each shirt for $10 profitably.
Suppose a company intends to re-organise its floor layout to speed up production. In that case, accounting can help work out the benefits of the proposed design, including how much additional output can be produced, how costs or profits would be affected, and what the saving in labour costs would be from improved efficiency.
Marketing
Commercial businesses need to sell their products or services at a profit.
The marketing department is responsible for marketing and selling products and services. Accountants provide valuable financial information to assist marketing managers with planning and controlling marketing activities and product profitability.
Accounting Activities for Marketing
The market may determine sales prices, but accountants can provide information about which products are more profitable than others.
In many cases, sales prices for products or services are decided by adding a profit markup to the cost, and accountants can provide the cost information to make this possible.
For example, in a technology company, an accountant may pass on information about how much a single computer costs to produce. This will help the company determine the price at which the computer should be sold to customers.
An accountant may also help marketing to understand trends by analysing market data.
In marketing, the product is not just the product itself but also features such as product guarantees, installation, and training to customers’ employees on how to use purchased equipment. Accountants can provide estimates of the costs for these ‘extras’.
For example, suppose a technology company sells a computer with a free one-year warranty that covers all repairs. In that case, accountants will estimate how much this warranty will cost the company. Accountants can also help marketing by being involved in preparing and collating market research questionnaires.
Accountants can provide information about the costs of each channel to market so that marketing managers can plan and control costs or consider alternative distribution channels.
For example, a technology company may use sales information from accountants to decide which stores should stock its computers.
Accountants can provide information about the efficiency of selling activities, such as the sales value achieved by sales teams or individual sales representatives. They also assist with planning the costs of promotion activities, such as advertising campaigns, and reporting actual costs.
For example, an accountant may advise on how much a technology company should spend on an internet advertising campaign for one of its new computers.
Profitability and Achieving Corporate Objectives
Improvements in IT systems over time have enabled accountants to improve the amount and quality of management information they can provide.
For example, they can provide marketing information about the profitability of different types of customers, as well as the profitability of individual products.
Profitability and achieving the organisation’s financial objectives depend crucially on sales. Sales estimates are the starting point for financial planning.
Accountants are involved in financial planning and put together the organisation’s budgets and long-term financial plans.
Accountants must understand marketing and work with marketing management to produce realistic plans for the organisation.
Effective Service Provision
There are many different types of service companies. Accountants can provide information to service company managers, but some of the features of service provision can make this difficult.
Challenges of Accounting in Service Provision
Many services lack standardisation.
Each customer is served differently. For example, in a queue at a customer information desk, customers have different questions to ask, and the time it takes to deal with each customer can vary substantially.
The quality of service provision may also vary.
For example, a cleaning services company can tell its cleaning staff tasks they should carry out when they clean a room or an office, but it isn’t easy to specify the quality of the cleaning work they do.
For many services, the customer decides what to buy and when to buy them.
This means that employees of a service provider may be idle for long periods when there are no customers – for example, sales assistants in a shop – and at other times, the service may be so busy that customers have to wait a long time for service, making it challenging to monitor service standards and costs.
Significant fixed costs
For many services, costs are a fixed amount every year or every month.
For example, the costs for a mobile phone company are mainly that of setting up the network infrastructure and won’t vary much with the number of customers using the network. So the additional cost of a marginal user is negligible.
Similarly, the costs of running a department store – such as staff costs and property rental – are mainly fixed and will not differ whether the store is full of customers or empty.
Accounting Activities for Effective Service Provision
The features of services make it difficult to plan the costs and profitability of service operations.
However, accountants can provide information to assist with the effectiveness of services.
An effective service provides customer satisfaction and enables the organisation to profit.
Customer satisfaction, expressed through word of mouth, review websites or social media, is likely to result in repeat orders. Customer satisfaction questionnaires can provide helpful feedback.
Customer satisfaction may depend on the organisation’s standards for service provision.
For example, an organisation may need to depend on the response times or waiting times for customers to receive service. The optimum wait times for pickup for a call centre can be estimated, which maximises benefits and minimises cost.
When people provide services, customer satisfaction will depend on the skills and ability of the person providing the service.
Skills can be improved through training staff, which costs money. Also, skilled workers may be more expensive to employ. However, a higher standard of service is likely to result in fewer complaints, which saves money.
The benefits of effective service can be higher sales and lower costs of handling complaints.
Against this, higher costs are associated with training staff and providing service to a higher standard.
Accountants can provide information about estimated costs and benefits that help management decide what service levels should be.
