One of the key functions a CFO provides according to Terry Weaver, CEO of Chief Executive Boards International (Read more on my blog post), was that a CFO:
Plans, considers and decides how financial transactions will be booked, consistent with the objectives and strategies of the business.
What does that really mean? It actually sounds very boring and of little importance.
Simply put, when any transaction occurs in the company, the CFO establishes controls and process to determine how it is recorded. This includes sales, capital purchases, research and development, cost of sales, and overhead.
Well, boring yes, but let’s discuss three reasons why it’s important: Principles, Presentation, Profitability.
Principles
General Accepted Accounting Principles (GAAP) is the US standard for which financial statements are prepared. These principles put boundaries and parameters around how information is recorded and reported.
Third party ‘readers’ of the reports can place more confidence in the report when transactions are handled with a set of principles.
Presentation
Consistent reporting allows the owner to look at information over different time periods and compare results. Trend analysis (gathering data and evaluating the pattern or trend to assist in determining future results) is able to be completed.
The way the accounting system is structured will create effective reports. It allows expenses to be broken down by departments or division or market segment or product type.
Profitability
When information is properly recorded, profitability is measured more easily.
Are the fixed costs reflected as such so an accurate break even can be calculated? Is the cost of sales understood so measure gross profit and margins can be measured? Are the costs understood to ensure the pricing strategy is actually creating profit?
Two of my clients understand the importance of knowing the information; they will walk away from projects if the profits aren’t there. Sounds basic, but companies are taking projects at a loss just to keep people busy…
Three simple reasons to make sure the information going ‘through’ the books of a company are handled properly.
Are your financial reports providing you with the right information? Call us at 561.347.8586 and we’ll help to make it so.
Live Passionately!
John
