Why your Accountant matters?
Updated: May 24, 2019
Consider this situation:
Mr. Manmarzi has now decided to go on a high growth path with ambition to double the turnover to INR 30 crore within 2 years. This requires enhancing the scale of operations and entering new markets. To do so, he has to set up one more production line and hire sales executives to help him with business development. He will also need to hire 2-3 additional team members to operate the new production line. While setting up the new line, he also decides to replace some old machines with new automated ones. The new machines and the new production line costs him Rs. 5 crores in capital investment. 5 sales executives and 2 production managers are hired, with salaries in the range of Rs. 5-9 Lakhs per annum. The expansion plan is put into action. The five new sales executives and Mr. Manmarzi travel regularly to newer territories cities to promote their product and sign on new distributors. At the end of the sixth month, Mr. Trivedi (Tastiee Snacks’ finance & accounts manager) informs him that the company does not have sufficient funds to process payment of all the regular dues of the company. Further, he adds that the projected inflows for the next two months are less than the outflows. His shop floor manager informs him that inventory has piled up in the warehouse. They may soon face a space crunch and may need to dump products at distress prices. He further discovers that sales managers have been giving 6 months credit (instead of the usual 3 months) to new distributors, in order to win new territories. This has resulted in sales growth (at a lower than hoped rate though…) but there is no way to get early payments. Clearly, Mr. Manmarzi finds himself in a bad situation, where his firm will now need to get emergency funds (likely at higher interest rates) or risk ruining its reputation in the market. What is worse, the chaos in financial management threatens to disrupt even the otherwise smoothly running parts of the business.
What went wrong here?
Unplanned expansion and neglecting the financials of the company. Mr. Manmarzi took on additional liabilities without proper planning and analysis. He did not fully consider how the expansion would (adversely) impact the business cash flows. He underestimated the time and the cost involved inacquiring distributors in new markets. While Mr. Manmarzi strengthened the sales team and production capacity in order to expand his business, he did not actively involve his finance team in the business expansion plans. While this may seem like an extreme scenario, it isn’t unheard of. Most businesses can avoid such scenarios with better planning.
Could the crisis have been prevented?
Yes. If Mr. Manmarzi would have discussed the business plan with Mr. Trivedi before implementing it. The situation could also have been avoided if his finance team was empowered and encouraged to proactively raise concerns and suggest solutions. Possibly, Mr. Trivedi could have advised a calibrated approach to investments. He could have anticipated the cash flow deficits better and arranged for necessary funding proactively.
The accountant is your conscience keeper…
As the above case illustrates, every businessperson needs an advisor who understands the business. An advisor who is familiar with revenue and cost drivers, an advisor who can raise a red flag when necessary. And the finance & accounts manager is ideally placed to play this role. You could call this role ‘conscience keeper’ or even the ‘devil’s advocate’ - the one who asks you tough questions (in your interest obviously!). So, in case, you have an accounts team only for book-keeping and regulatory reporting, it may be time to give them a larger responsibility. Your accountant’s knowledge and insight can help you in:
Analysing your business plans and validating them from financial perspective
Ensuring your firm’s working capital cycle works smoothly, and arranging funds as necessary
Conducting regular risk assessment for the firm and highlighting possible issues or concerns
Identifying opportunities to reduce operating cost
Monitoring the short-term and the long-term goals and KPIs of the business. Presenting regular reports and highlighting the deviations
Ensuring that your firm is in compliance with relevant reporting and regulatory requirements
As the above example shows, your accountant’s involvement can be the crucial difference between success and failure. Yes, your accountant matters!