Tag Archives: iceberg

The Purpose of Accounting

One of the things that I find intriguing about business is this misconception of the role and purpose of accounting.  It’s been coming up lately in conversations with several of my clients. I have a different take on it.

Having spent much of my life working on the money side of businesses I often refer to myself as a “recovering accountant”.  I worked my way up in the profession from a clerk to a CFO.  I know the “game” and I know the process, and in my opinion, many people have missed a crucial piece of the purpose of accounting.

Here’s a standard definition:

“The purpose of accounting is to provide the information that is needed for sound economic decision making. The main purpose of financial accounting is to prepare financial reports that provide information about a firm’s performance to external parties such as investors, creditors, and tax authorities.”

I worked in many a company that played by that definition and many companies still do.  It’s only half of the job.  What my dad taught me years ago, and what I held as the standard for the accounting departments I ran, was: Tell management what is going on in a timely enough manner that they can “turn the boat”.great-ships-the-titanic

Sure, it’s important to have accurate end of the period reports for taxes and investors.  It’s good to get it all done, balanced and pretty.  And often by then it’s too late to avoid the iceberg.  It’s even more important for the people inside the company to have the numbers, than for those outside to see what’s going on.

The purpose of accounting is to give management the information they need expediently.  You can’t wait until it’s all done for that.  You have to do estimates and even projections.  By the time the Titanic saw the iceberg it was way too late.

It’s very likely that most of you reading this don’t have a big company.  You may not even have a company at all, it may be just you.  And yet the numbers are still there to tell you how you are doing, to help you know when to turn the boat.

How often do you look?  Do you wait until your tax return to see how it’s going?  Do you look and see where your money comes from? Who your clients really are?  How much it costs you to make a sale?

Do you look?

It doesn’t have to be accurate to the penny to be valuable information.  It doesn’t have to be perfect.  What’s the trend?  Are you looking for clients in the wrong places?  Are spending money on things that aren’t effective?  What’s going on?

If you want to know, it’s right there in the numbers.  Not just the shiny, neat ones at the end of the period but the down and dirty guesses in the midst.  Take a look.  See what it’s telling you and act on it.  After all, you are spending time and money on the process of accounting so why not have it serve its purpose: providing you with timely information?

Want to explore some more innovative money ideas for your business? Give me a call at 503-258-1630 or check out my website at www.shelltain.com


Shell Tain, The Untangler