A Straight Path from Simplified Accounting to Bankruptcy
The case study I decided to write about concerns a well-developing company in the online training industry for children and adolescents. Its successes led the management to invest heavily in a modern educational platform about two years ago, expected to generate substantial profits over the following years. They hired programmers to build the platform and educators to create the content.
The investment costs, in my story, turned out to be a true "Chekhov's gun." They "fired" at my client at the least expected moment, in the form of a significant loss reported in the financial statement submitted to the bank where they had an overdraft facility. It turned out that the company was using simplified accounting, which resulted in all investment costs being reflected in the profit and loss account without capitalizing them on the balance sheet. The bank, presented with such data, did not hesitate to terminate the agreement, which, coupled with the increased expenses related to the investment, caused my client to lose liquidity.
When in Distress, Turn to an Expert in Financial and Managerial Accounting
Lack of vigilance led to our client's situation. Until the company's dynamic growth, the use of accounting simplifications did not distort the financial picture and complied with legal requirements and accounting principles specified in the Accounting Act. However, as the company grew, so did the financial structure. Using inappropriate simplifications in accounting led to a lack of adequate financial data and key management information just when the bank demanded a report. The recorded business transactions were also not in line with fundamental accounting principles such as the principle of reflecting the economic substance of business events in the books or the matching principle of costs and revenues.
Fortunately, this story has a happy ending. The first action we took after speaking with the company's representative was a thorough analysis and appropriate corrections in the books, which were then submitted to the bank. We also designed and implemented an appropriate management reporting system for the client. This is not a temporary system but one that will stay in the company long-term, enabling ongoing profitability analysis of services and effective decision-making.
Where Do Misunderstandings Stem From and How to Handle Them
There are many stories like my client's. They originate from numerous factors that accumulate over time until they "surface" at the least expected moment. I have summarized them in the following graphic.
From experience, I know that companies often face a "wealth of riches." Owners and managers delay process creation as long as possible, devoting maximum effort to sales. However, when dynamic growth is not accompanied by the development of internal structure, a series of management problems can arise, even as extreme as in the example I mentioned.
My experience is not only theoretical. I mainly gather it through direct work with clients during audits conducted in their companies. Therefore, I do not hesitate to state that working on the efficiency of the areas I mentioned in the illustration is crucial for success in not only implementing an effective controlling and management accounting system but also for the safe development of the company.
Why Do Companies Need Processes?
I wrote about the differences between managerial accounting and traditional accounting in a previous article. The most significant difference is the timing of data delivery. Accuracy is always valuable, but even the most precise information loses its significance if delivered late when a quick response is needed. Therefore, efficient internal processes, regular verification, and modification to current needs are the foundation for building a management accounting system.
Examples?
If a company uses excessive simplifications in accounting and additionally has issues with document circulation, significant delays in providing management data can be expected, reducing their value in decision-making processes. The lack of documented employee responsibilities at various positions equates to a lack of accountability for assigned tasks. This leads to errors or oversights that negatively impact the completeness of the delivered data. Processes ensure that everyone knows what is expected of them and the expected outcomes. Unmanaged risks and opportunities remain unnoticed and unaddressed.
Let's Get to the Most Important Part: How to Implement a Good Management Accounting System in Your Company?
I will not give you a precisely calculated recipe because such a thing does not exist. No two companies are the same, so the management accounting and controlling system must be tailored to individual needs, structure, organizational culture, clients, and development stage. Its preparation is also a... process, which I have divided into nine stages visible in the graphic.
From Bankruptcy to Love, or the Art of Agile Adaptation in Company Management
"Mistakes are not there to regret but to ensure they are not repeated" – this sums up the story of my client, who, thanks to it, fell in love with management accounting, just like I did. The difficult situation benefited the company and will likely protect it from similar problems in the future.
For company owners and managers, the key takeaway should be realizing that sticking to established patterns and habits is not a good strategy for managing a business in a world where the only constant is change. A company that wants to grow must be ready for changes, anticipate threats, and quickly adapt accounting and management control systems to the current market situation. Only such an approach allows for effectively building a market advantage.
At this point, some of my readers will happily say, "I have time. I'm just starting my business." I'll surprise you: the beginning is the best time to think about the future. If you don't want to fight for survival every month, make sure your company already approaches building processes and their control wisely. Use all available data for strategic planning and making smart decisions.
As Napoleon Hill said, "Create a definite plan for carrying out your desire and begin at once, whether you are ready or not, to put this plan into action."
