The Vital Role of the Business Accountant

Jan 9, 2020

Are you a VITAL member of your business team?

 

Unless you can answer that question with a very positive yes, then you might be out of a job in the very near future.

There is a big threat to the accounting profession on the horizon. Automation. To overcome this threat, the 21st century business accountant must learn to be vital.

So, will you be automated out of a job or do you have the resilience and skills to survive?

Let me explain

Much of what you, the business accountant, do is functional. Functional can be automated. We’ve seen automation for a while, and up till recently its helped you hugely. It’s been a key enabler in many things that you do. But add AI into the mix, it becomes a different matter. Ultimately all the functional things you do will disappear. Take away the functional and we will need far fewer accountants and even fewer clerical assistants. Nobody will be needed to crunch the numbers. There will be no need to reconcile things. All the basic controls, and many of the more complex ones, will just happen. No humans needed.

Will you be automated out of a job?

In 2020 the car that can park itself is already becoming common. We’ve had trains without drivers for some time. They run very successfully on the Docklands Light Railway in London. In business lots of repetitive sales and marketing tasks have been automated. Business systems have become more and more interconnected. Even in a small business the accounting system isn’t stand alone any more, it integrates with all the other systems in the business, information just appears almost seamlessly without you, the accountant needing to do anything. The basic role of the accountant as chief bean counter is dead.

Wait, there is some good news. Machines can’t do everything. As yet a machine can’t take key business decisions. Humans will be doing that for a long time to come. You have a vital role in the decision making process. You may need to do things a little differently, but you need to grab that role with both hands. Giving that vital business advice will be the only role you have left.

So what does being vital really mean?

Let’s start with what vital isn’t. Vital isn’t you sitting in the back office crunching numbers. Vital isn’t you presenting the monthly p&l account. Wading through cost centre reports with your colleagues isn’t vital either. Those are all functional tasks. You might get pulled in to implementing new IT that integrates and automates business reporting. While IT needs you, and you are temporarily vital to its successful implementation, while you do that you sacrifice being vital to your business team.

To be vital you need to be at the beating heart of the business. You are uniquely placed to understand the economic engine of your business. You are the person who should know in great detail what drives cost, and in turn what produces profit. That in turn means you should know what levers the business needs to pull to succeed. Your job as a vital member of the business team is to spread that financial know how and understanding to your colleagues to help them succeed.

VITAL is a great acronym. Lets look at what the 5 letters stand for.

 

V – Vision and strategy.

This is all about you, the accountant, being involved in the strategy and business plans of your business. There are many tools and techniques you can use to help the business develop strategy. But, at the heart of every good strategy there should be some solid financial analysis that supports and underpins it.

You need a good, widely understood, business plan as the foundation for much of what you do with the business. Your role is to report against the business plan, to help set budgets that achieve the plan.

I – Insight

Insight around the financial numbers. The accounts rarely give sufficient insight, but your understanding of the economic model (product profitability, customer profitability, understanding the cost drivers) will. Just crunching numbers is insufficient. Interpretation is everything. Its your job to know what the numbers really mean. Your job is to show your business team what needs to happen next.

T – Team.

Do you understand what the rest of your business team needs of you? What particular insight are they needing from you as the accountant? What problems do they need your help to solve? Supply them with what they truly need, don’t just go through the motions of monthly reporting. Do you have the right people skills to work with your management team?

A – Agility and change.

Your role is to be right in the middle of business change. Change is about doing more of some things and stopping others; Change is about culture and attitude so, within the numbers, there’s actually a lot to learn about your people and their behaviour.

L – Learning for your future

The things you learned to pass your exams were great technical skills. The sorts of skills that make you functional and not vital. Do you know the practical steps to build a strategy? What about implementing a reporting system to help you deliver that strategy? Do you know how to model the economics of the business? There will always be lots to learn to become and then remain a vital member of your business team.

Delving deeper into VITAL

Are you interested in finding out more? If so there’s a series of videos on 21st Century Business Accountant youtube channel. In the first 6 videos we explore VITAL. Here’s the first video, which explores the acronym further.

 

While the youtube channel covers a lot of the basics, you can also come along for some in depth training. Why not join me in the classroom? I’m running courses regularly in partnership with IASeminars that are fully CPD accredited and will help you get to grips with all the skills you need to be vital. The courses are structured in one or two day modules and often you can combine modules together to make up a full week’s training event. We can customise any of the modules to provide bespoke training just for your organisation. I recently ran an event for a whole business team about to undertake a ZBB exercise. We combined team building with learning new skills and starting to plan the ZBB project.

Does your business have a clear strategy?

I’ve seen lots of businesses spend time developing a mission and a vision. Lots of energy gets expended as you construct mission and vision statements. But what do these statements really mean? They rarely get extended into anything that gives a clear action plan for the teams and individuals that make up the business. Have you ever noticed that everybody in the business has a subtly different interpretation of what the mission and vision actually mean? No wonder there often isn’t a clear shared business plan where everyone is pulling in the same direction.

So, what you really need is a business plan. Your business plan needs to do a few things:

  • Be clear on the goals of the business
  • Identify the opportunities the business is pursuing
  • Identify the key issues and how these will be addressed
  • Be clearly understood by everyone in the business
  • Be unambiguous about business priorities

If you have a business plan already, does it address the real issues? Is your business plan sufficient to tell your business managers what the priorities are? Will the plan inform them what should and should not be in their budgets?

Is your business plan sufficient to tell you what success looks like and to set KPIs for the business to measure achievements. Can you set targets for the business? for departments and teams? and for individuals?

Most business plans aren’t fit for purpose

My own experience working with a large number of businesses is that good business plans are rare. Even when the business thinks it has a clear strategy or plan it often hasn’t. I’ve worked on more than one balanced scorecard project where we have attempted to convert the strategic objectives into business drivers and then KPIs and found that the objectives and what the business actually needs to do are two completely different things. The strategic objectives are either wrong, or set at too high a level to be any practical use. On more than one occasion I’ve paused scorecard development and taken the business team through an exercise to refresh the strategy.

I’ve worked with businesses to help streamline costs too. One of the first things I’ll do is review all the initiatives that are going on in the business. I’ve often found that some of the projects that are going on directly contradict the supposed strategy, and that scarce business resources are being used to pull the business in all sorts of different directions at the same time.

In nearly every case there was a strategy, but it wasn’t shared and communicated. Communication is a two way process, and while objectives weren’t cascaded down properly neither were the key business issues cascaded upward. Strategy and reality can easily become two very different things.

 

How to help your business clarify priorities

You may have an excellent business plan. Most businesses don’t. The plan looks good on paper but doesn’t stand the test of having a budgeting exercise based on it. This need not be a big problem. The first thing I’d suggest doing if your business is embarking on any sort of planning, budgeting or objective setting is do an exercise to clarify priorities.

You need to keep the exercise short, and make it as simple as possible. SWOT analysis is an ideal tool for you to use. You can identify strengths, weaknesses, opportunities and threats quickly and come to a consensus about what matters and what doesn’t. The important thing is to get every member of the management team to give their own view, then discuss as a collective and prioritise.

I find asking each member of the management team to complete their own SWAT prior to meeting works best. In the team meeting I usually use 4 flip charts (one for each aspect of SWAT) and invite each member of the team to place “Post It” notes based on their homework. We then review as a team, grouping like things together. Themes quickly start to emerge.

You need to look for opportunities that align with your strengths. Equally, you need to beware of threats that align with your weaknesses. Both will give you high priorities for action. These actions will form the core of your business plan.

Why accounting information doesn’t help business decisions

Business accounts aren’t great at showing you the true economics of the business. In fact the accounts are a pretty poor management tool. The thing is accounts have evolved to serve many users. They form the basis of reporting to shareholders and investors and they are a key part of the business submission to tax authorities. There are lots of rules about how accounts are put together, You learned all these to pass your accountancy exams. Those rules are mostly for the benefit of the people outside the business, meaning certain things are in specific places and everyone calculates their profit the same way.

The tax man wants to know what you spent your money on. Is it deductible from taxes or not? Knowing what you spent on travel, on entertaining, on telephones and on IT doesn’t tell you why you spent it. Even when those general ledger items get split out by cost centre it only tells you who spent it. Management need the why?

The investor wants to know whether the profit you report has taken everything into account, and is prudent. This means writing off costs that might relate to future business against revenues from todays business. Mixing together the costs of developing future business with the costs of delivering todays business and offsetting both against todays revenue doesn’t form the basis for solid decision making.

Understanding the economic engine of your business

Your business team don’t need accounting information. They need to know the economics. How profitable are individual customers? Individual products? They want to know how to optimise profitability. You need to understand the numbers and understand what drives cost. Once you properly align cost to customers; products; and services then you can make good decisions.

These decisions might include pricing. Our natural instinct is to over cost the simple and under cost the complex, The result is we get pricing decisions wrong. Sales teams will push the high end complex products. The sales mix changes. Unexpectedly profits fall. If costing is done properly then prices can better reflect the real cost.

Its generally a rule that 80% of profit comes from 20% of customers. Its also true that your worst 20% of customers drive a disproportionately high % of cost. But does the business team properly understand this? Which customers should they be treasuring? which ones should they walk away from?

Activity based costing is at the heart of the economic model. Activity drives cost. Making product and servicing customers drives activity. You need to model it properly to understand your business.

 

The economic model informs business decisions

Your understanding of the economic model is at the heart of you being vital. The economic model underpins strategy, and the direction the business is heading. The economic model gives you the insights into the business. Its likely it also gives the members of your team information that is more use to them than the monthly business results. Good information leads to good decisions and decisions lead to business changes. The decision to do something different is only one part of optimising profits.

Once your team recognises the need to increase some areas of business and actively move away for others then the hard work starts. You know what to do, button necessarily how to do it. You can support them. “What If” analysis offers a way of looking at the options available to you. There will be lots of choices to make, here are just a few:

  • How to market?
  • Which distribution channels to use?
  • Online or offline?
  • What’s the impact on production?
  • Make or buy?
  • And what about support services?

You can help your team answer these questions

Your role is to work through these questions, and others, with the rest of your business team. Its likely there will be a specialist in each of these ares on the team, but none of them have your finance skill. You are uniquely place to tie all these areas together into a coherent whole.

The “what if” model soon turns into a model of the preferred way forward. Each member of your business team should be clear about their part of the change.

 

You are a vital part of business change

Business change in its simplest form is doing more of some things and less of others. At its heart though, change involves people. People don’t like changing. Even when your team are all in favour of change, actually making the change happen is still hard. Doing things differently is unfamiliar and uncomfortable. That discomfort will usually promote an urge to return to old familiar ways.

The new business plan needs to be embedded into budgets so that resources are available to support the activities your team members undertake. But it will be hard for them to step away from the things they are used to spend money on. Being in favour of change and personally changing behaviour are two completely different things.

Zero Based Budgeting helps you embed the change

Zero Based Budgeting is your great friend here. It provides the tool to go back to basics and look at every line of expenditure. You can work with each of your budget holders to make sure they focus on the right priorities. Sounds simple? Well it isn’t. Running a ZBB exercise can take lots of effort. Your budget holders will all have their pet projects and the things they love spending money on. There will be huge reluctance to abandon some of these. You will have constant pressure to make exceptions.

Even when cost items have been taken out of the budget you still have a vital role to play. Just taking the budget away doesn’t guarantee that the actions to remove the costs have actually taken place. Your jib is to police the change and make sure it happens. Be equally wary of the budget that goes underspent. Have the right things happened to move the new business plan forward taken place? Is there reluctance to take action?

 

Its vital you report the right information

We’ve already talked about the limitations of accounting information. Theres one other problem, accounts are historic. The accounts you produce tell your team what’s happened in the past. Plus you usually give them this information when its too late to do anything about it.

You have a business plan and some goals that your business striving to achieve. The business team need to know how they are doing on the journey. Are they on track? Is any corrective action needed?

The management information you need to give them must to be forward looking. You need to provide a mix of financial and non financial information that indicates what happens. The financial information is nearly always lagging, so you must supplement this with leading indicators.

You spend lots of time analysing last month’s result, and its variance from budget. Instead the lions share of your effort should be going into projecting next month’s or next quarter’s result and communicating what needs to happen to achieve it.

Rolling Forecasts instead of budgets?

In the same way that accounting information is of limited use, so too is the annual budget. It gets set before the start of the year, and by the time you are half way through the year it has generally been overtaken by events. Some organisations go through lengthy reforesting exercises once or twice a year in order to update the targets they report against. But is this the right way?

If the usefulness of the annual budget is limited then you need some different tools. The rolling forecast gives you an interesting alternative. We’ve already said that the lions share of your time should be spent looking forward and not backward. Why not dispense with the budget? Re-forecast every month, or maybe every quarter. Report against that forecast. Always forecast at least a year ahead. So when each quarter ends add a new quarter to the end of your forecast. Business activity is ongoing and year end is a completely artificial target. Year end is something imposed on you by tax men and investors but its almost meaningless when it comes to managing the business.

While your rolling forecast might be top down and based on the key business drivers, your cost centre budgets will almost certainly be bottom up. Built using ZBB, and only changing when there is good reason.

Warning: Implementing systems stops you being vital

You will find more and more automation comes along. Your accounting systems become more intelligent. You find there are more and more things to integrate together. Your attention gets dragged towards implementing new IT. Its the right thing to do. But, is it the right thing for YOU to do?

The thing is there are only so many hours in the day. IT projects have a lovely habit of consuming every bit of resource given to them, and then some more, You are really busy, you are moving the accounting systems forward. You are adding to the future capability to gather data. But your focus is away from your business team. While you concentrate on future business systems they still need your help managing todays business.

I learned to be vital the hard way!

I remember one annual appraisal early in my own career. At the time I was a business accountant in ICI plc. My responsibility was for the whole European plastics business.  I thought I’d had a fantastic year, the highlight of which was our new corporate business accounting system. I’d played a big part as a key user helping specify requirements, and then testing it out. We developed some fantastic costing tools that would be really useful in the future too.

The appraisal was the worst I’d ever had, with my business manager and production manager feeding back on how little support they had felt they received on the issues that mattered to them. They didn’t care about the new systems or the new costing tools. That was because these tools weren’t solving their immediate problems. Yes, my business had a costing problem, but the other business managers hadn’t realised that. They only valued the new solution sometime later when they realised they weren’t making any money and we had to solve the problem pretty fast!

Don’t ignore your day job. You must make sure your business team get the support they need to solve today’s problems. Your involvement in Implementing new back office systems doesn’t make you a vital part of the business team, no matter how vital that new system might be to the business at some time in the future.

You didn’t learn about all this to pass your exams?

More than likely that’s true. You learned a lot about accountancy to qualify. There shouldn’t be anything new about the concepts of Activity Based Costing or Zero based Budgeting. But you didn’t necessarily find out how to implement them in the business. You need to learn these skills.

Once you start using ABC or ZBB you discover quickly the areas where change is needed in your business. Chances are nobody told you very much about the practical skills you need to manage change in your business.

You probably learned even less about how to extend your performance reporting beyond financials. Did anyone ever teach you how to set up a balanced scorecard or a dashboard? What makes a good performance measure? What do you put on the dashboard? Equally important, in a world of too much information, what do you leave off?

Being vital isn’t just head knowledge to pass exams. Being vital is having the practical skills to implement and the skills to bring the rest of your business team on the journey. Ask yourself again, do you have all the skills you need to be a truly vital member of your business team?

Learning didn’t stop with your exams. You need to carry on. Your professional body has its requirements for CPD, but its up to you to determine how you will satisfy the rules. You will need to develop a growth mindset that will enable you to think differently and become a ‘complete professional’.

 

How do you find out more about being vital?

You can find much more on the 21st Century Business Accountant youtube channel. I release new videos regularly. Why don’t you subscribe so you never miss an episode?

You can also come along for some in depth training. Join me in the classroom for a day, or maybe a whole week. I’m running courses regularly in partnership with IASeminars that are fully CPD accredited and will help you get to grips with all the skills you need to be vital. The topics we cover include:

  • Being an effective 21st Century Business Partner
  • Business Strategy and Scorecard Reporting
  • Zero Based Budgeting and Cost Control
  • Activity Based Costing
  • Profit Optimisation
  • Business Case Development

Perhaps you have some specific issues you need help with in your business? Why don’t you get in touch and we can talk about some solutions?