When I saw Accounting for Strategic Decision Making on my Spring 2021 course list, I was initially underwhelmed by the subject. Still, I was excited about the possibility of it being an easy class for me. I got an A+ in high school and a 104% in undergrad business accounting, so I was anticipating this class to be an opportunity for a small break, giving my brain a seven-week hiatus. Much to my surprise, that is not how this course played out at all, and instead, I was introduced to a whole new level of accounting - it was exciting, fed my investigative nature, and quite frankly, changed my view of accounting within any organization from here on out.
I also discovered the importance of having accounting knowledge for those of us in leadership positions. It provides an entirely new set of tools that can be used for far more than making sure the organization is profitable and that there is enough cash to pay the bills. What’s unique about these tools is that a leader doesn’t have to be a “master accountant” to use them. So, I want to share my newfound excitement about accounting with you and enlighten you about this world I have gotten to know more about in the last two months. I encourage you as leaders to utilize the tools to better your organizations. I also feel it’s necessary to caution you about the darker side of accounting that can exist if the tools aren’t used properly.
Power in the Numbers
The number one thing I came out of this course realizing is, there is an enormous amount of power in the numbers that are reported from a business’ accounting system. The numbers, metrics, percentages, and dollar amounts aren’t simply associated with a line item on a balance sheet, P&L statement, or cash flow statement. With proper investigation and analysis, these numbers have a way of coming alive to tell a story. They can uncover a lot about a company’s operations, financial decisions, and areas of strength and weakness. Therefore, it’s important to make sure the accounting departments in your organization aren’t operating within a silo. Leaders should be transparent and share these numbers, within reason, throughout the organization. By doing this, all departments and employees will be on the same page and you will ultimately build trust and allow for the best ideas to keep things on track.
Measuring the Health of your Business
The power in numbers is important to understand, so let's get into how leaders can use accounting information to better their employees and their organization. First, leaders can use the data to check up on the organization's overall health several times within the fiscal year. After goals and objectives are initially set, usually on an annual basis, leaders often determine metrics and key performance indicators (KPI’s), measurable values that demonstrate how effectively a company is achieving and staying aligned with key business objectives. Although these don’t have to be strictly financial measurements, they often are centered around the company's finances to determine whether the company and/or department is on track. After all, one major goal of companies is often to create a profit, which is a financial goal. Accounting gives leaders access to various reports that can reveal areas that need improvement, as well as, areas that appear to be doing very well or are on par. The last thing any leader would want is to find out at the end of their fiscal year that they wildly undershot their goals. By using the information periodically throughout the year, often monthly or quarterly, leadership has the ability to determine if anything needs to be changed in their strategy to better position them to reach their goals.
Valuing your Employees
Leadership can also use this information to actively engage and show their employees how their individual performance and work behavior impact the company’s results and profitability. The information can be used to empower employees within their departments to set their own personal goals. If employees are aware of their impact on the bigger picture, they will have a tendency to feel more valuable within their organization and will become more dedicated to the success of the organization. Their overall efforts will likely increase as well.
In addition to personal goals, leaders can also use the accounting information to set up incentive programs based on company-wide and departmental goals. Leadership can check the status of the goals through accounting reports at various times and if desired outcomes are met, they can give the incentives in various forms such as a bonus, lunch voucher, company picnic, or additional paid time off. From my experience, some of the smaller rewards are the ones that have the most impact on the employee – it doesn't need to be big, in fact, sometimes big rewards tied to goals can create an issue to which I’ll speak of below.
Transparency Leads to Trust
Lastly, sharing the accounting numbers within the organization goes well beyond performance and success. It creates a culture of transparency that employees often seek out and respect. It shows employees that nothing is kept secret and encourages them to function as part of the team. Building a culture around transparency exhibits to employees that it's okay to be open with the information and ideas they may have and, therefore, brings out more creativity and collaboration amongst the entire operation.
Up until this point, accounting sounds like it is nothing but a wonderful tool, right? Well, I agree, it is wonderful, and I don't want to take away from the positive aspects of it, but I think it's necessary to share some of the darker sides to accounting that you should be aware of as well. In a perfect world, accounting information would be shared throughout an organization, but in reality, it is all too often only shared with upper management and C-suite employees. This lack of transparency occurs for several reasons. There could be a lack of trust or a fear of competitors gaining access to the data. There could also be the feeling of control that’s given by having the power of the information. As leaders, we must be aware that having this information can be very powerful, but we have to remind ourselves that this power should not be taken for granted and used negatively. Instead, the information should be used in ways that will benefit the entire organization and not just our own selfish desires. Again, having the willingness to share with various employee groups shows leaders' honesty and transparency and makes people less doubtful of you as a leader.
Metrics Have Limits
Another thing to be aware of is that becoming too focused on a metric or KPI can have negative consequences. Although it’s healthy to set metrics, knowing that it can cause employees to take drastic measures to meet them needs to be on a leader's radar. As I mentioned, tying lofty incentives to metrics can create problems. Specifically, dishonestly and manipulation of data come to mind. Leaders need to be on the lookout for this occurring and make sure their employees know that although the desire is to meet a specific metric, it must be done honestly.
Lastly, speaking of manipulation, within accounting, individuals can easily manipulate the numbers to report what they may or may not want the output to show. As leaders, we have to be aware of this by not only being careful not to engage in this unscrupulous behavior, but we also need to make sure we don’t get the wool pulled over our own eyes by others as well. Be aware that manipulation can occur, and take the time to ask questions and allow yourself the time to investigate and analyze the data, especially as it relates to any decisions that must be made.
To conclude, I hope that I enlightened you to this wonderful world of accounting and made you aware of the impact and power this information can have. I also hope that I made you more aware of the negative side of accounting that can potentially exist, not in hopes to scare you further away from it, but simply to put it on your radar and prepare you better in your leadership walk. Just remember, you don’t need to be an expert to use the accounting tools I’ve mentioned. Just knowing what can be done with the information and realizing that there's more behind the surface will prepare you to ask the questions true leaders should ask and investigate to find ways your company can improve. Now, get out there and dig into a balance sheet, income statement, or P&L statement – I promise it will be fun!