Magazine article CMA - the Management Accounting Magazine

Making the Accounting System All That It Can Be

Magazine article CMA - the Management Accounting Magazine

Making the Accounting System All That It Can Be

Article excerpt

The accounting system for a small business should be much more than a bookkeeping system that arbitrarily summarizes and reports the economic activities of the business on an annual basis. Rather, the accounting system should be an important component of the firm's management information system that delivers relevant and timely financial information upon which decisions can be made.

Over the last few weeks I have had the opportunity to gain some personal insight into the accounting systems of six local small businesses. While this is by no means a statistical sample upon which to make conclusions, what I discovered is consistent with my many years of previous experience dealing with small businesses. In all cases, I feel it is safe to say, the accounting activity is seen as a paperwork burden.

It is often delegated to the firm's external accountant, and it is designed primarily to meet government reporting and taxation requirements. Accounting activity is simply not viewed as a source of information that can improve the effectiveness of the owner-manager. Indeed, given the current output of the accounting systems I reviewed, this is perfectly understandable.

In view of the present void of financial data upon which to base operating decisions, how are things being done? For the most part, owner-managers use the cash balance in the current account to estimate their financial strength and performance. They often do not see an income statement or balance sheet until well after the year end, and even then, it is questionable whether or not the statements provide the kind of information that is really required. The information that an accrual-based accounting system could provide, on a regular basis, is totally ignored. As a result, future problem situations are often not detected, until it is too late.

The reason that inadequate accounting systems are in place often relates to a lack of communication between the professional accountant and the owner-manager. Both need to develop and consciously maintain strong communication skills -- particularly listening skills. Moreover, the owner-manager needs to place greater importance upon the development of the firm's accounting system and he or she needs to get personally involved in the process.

Here's my suggestion for addressing the problem. First, the professional accountant and owner-manager should meet and discuss the nature and scope of both regular and special decisions that the owner-manager must make, on a daily, weekly, monthly, quarterly, and on an annual basis. …

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