Knowing the Difference Between Accounting and Financial Management
By George Volsky, Instant Software - Director of Research
I was sitting in the office of a property manager who related this story. The manager and the company owner had met with their accountant, who—perhaps defending his turf--chided the manager, “You don’t need to be putting so much attention on the accounting.”
The problem here is that the accountant was wrong, for reasons I summarize below. He could have done some serious damage if the company owner had taken this seriously.
Accounting involves the recording and reporting of revenues and expenses. Its most visible role involves taxes. Accountants sort revenue and expenses into categories to create the tools you use to manage: Profit and Loss Statements, Balance Sheets, Cash Flow Statements, etc.
You’d think that it is a natural extension of an accountant’s job to give good advice on budgets, revenue prospects and expenses. But this is an unwarranted assumption.
Financial management is the use of accounting to set budgets and make business decisions essential to a company’s growth and profits. Managers use accountants’ reports to decide which expenses to cut, to set budgets, and to decide how to spend money.
The Problem. Unfortunately, most companies in our industry have not set up their books to meaningfully match expenses to revenues. Decision makers can’t accurately measure whether each expense is one that should continue or can be justified.
Our industry does not have a standard system of accounts. Two competing vacation rental managers almost never calculate costs and allocate revenues the same way., i.e.:
a. Housekeeping and maintenance costs may or may not include the wages of front office staff that take and enter work orders or track whether a home has been cleaned and inspected.
b. Two competitors’ are likely to calculate marketing costs differently. Some will include brochure expenses such as pre-press; printing; postage; staff-time related to unit descriptions; staff time expended with homeowners over unit descriptions; pro-rated administrative expenses (telephone; office space); staff time expended on taking or selecting photos; web site expenses such as give-backs and welcome baskets. Some will omit many of these expenses.
It is a general principle of good financial management that every revenue stream should be matched against its underlying expenses. But in many companies, the general ledger accounts were haphazardly pieced together when the owner or book keeper decided to put a particular expense in a particular category, with little thought to consistency or financial management. The accountant simply makes sure the company complies with tax and escrow rules.
In situations like this, the company decision makers are working blind, without the kind of financial analysis they need to make decisions. It doesn’t have to be that way. You don’t need a consultant to fix this.
Who is Monitoring the Bookkeeping? Generally, company decision makers understand that they should never delegate financial management to accountants. But they often don’t know when their accounting is not set up to help them make good business decisions. Example:
Add-on fees today often generate revenues that account for all profit and much expense. Yet our accounting often fails to allocate these fees to the services they subsidize.
Ask yourself, “Why is it that so many companies believe their maintenance department loses money, but never seem to fix the problem?” Are their managers inept? Or do their gut instincts tell them that the accounting doesn’t tell the whole story: when fees are considered, the rental manager is keeping a big enough share of the renter’s money to cover all expenses, plus earn a profit.
The Reality. In the case of my office visit, the manager who was criticized by the accountant had been reorganizing the company’s general ledger accounts to get a more accurate picture of the revenue and expenses associated with each of the company’s major services. The well intended, but incorrect admonition by the accountant arose when the manager and company owner consulted with him to make sure they were not violating generally accepted accounting principles.
His expertise is accounting. Theirs is the vacation rental business.
Now, my friends’ company accountant does the books for several rental managers. He knows how other companies in the area are categorizing revenues and expenses. He prides himself on his work, and does have a better-than-average grasp of business management.
But in this case, better-than-average is not good enough. This translates to the fact that none of the competing companies have a good handle on their finances.
I am not knocking accountants (though this one didn’t understand financial accounting). I’m pointing out that there is a difference between accounting (which accountants do well) finance, and business administration, which are AKK separate disciplines in all business schools.
As an attorney who has worked side-by-side with accountants, economists, and MBAs for years, I can tell you simply, “Managers should never, never leave business decisions to lawyers or accountants.” Neither group has the experience, industry expertise or skill set to foresee the changes your company must make to stay competitive.
What You Can Do. If you are a decision maker, reflect on the likelihood that your accountant is better at identifying an expense for tax reporting purposes than he is at organizing your general ledger in a way that will help you make important business decisions.
Casually browse through your general ledger accounts. If this reveals several instances where department costs appear misplaced, do what my friends did: spend a few days (or a week) to come up with your thoughts for changing the accounts to give you a better view of each department’s revenue and matching expenses. Then ask your accountant for input, with his job being to tell you whether you’ve missed something, or whether your reorganization would contravene sound accounting practices.
In this changing market, the competitors who can best use their accounting to make business decisions will have an advantage.
