THE BASICS OF ACCOUNTING
The accounting records all the quantitative information flows concerning the activity of the company. Most of the operations carried out by the company result in cash receipts (eg sales …) or disbursements (examples: purchases, personnel costs …). However, certain transactions do not have an impact on cash, such as depreciation and amortization, which are calculated (and therefore not disbursed).
Accounting records are based on the double-entry principle. That is to say, each event is translated by two streams (a flow entering the company and an outflow), of equal intensities but of opposite meaning. The incoming flow is called flow, the outflow credit. The equality of flows translates into accrual accounting = credit
- Example 1 : Purchase of raw materials (inward flows: throughput / charges), settled in cash (outflow of cash from the cash / balance sheet assets: credit).
- Example 2 : sale of goods (outflows: credit / products), 30-day settlement (incoming flow, customer / asset receivable of the balance sheet: debit).
- Example 3 : Purchase on credit of a piece of land (it is an investment, an inflow: the debit / asset of the balance sheet), settlement on credit (outflows: debts to suppliers / balance sheet liabilities)
As for each event we have the equality debit = credit, for all the events globally this equality is checked. Sum of debits = Sum of credits.
Other transactions do not directly affect income but affect the company’s assets. The assets, rights and obligations are summarized in the balance sheet account. This patrimony is translated into property rights on fixed assets (land, buildings, equipment, etc.) or on stocks, debt claims (on customers, etc.) or on cash in the bank or in the fund. In accounting, it is the assets of the balance sheet. But this heritage can be burdened by debts (capital, borrowing, debts to suppliers …). In law these are obligations, in accounting, it is the liabilities of the balance sheet. (See Example 3 above).
The balance sheet provides an instantaneous picture of the company’s financial position when it is established at the end of the accounting period. The profit and loss account determines the company’s income from all income and expense flows for the year just ended (income = income – expense, if revenue exceeds expenses, if the expense is higher than the income, it is a loss).
This result is a balance sheet value, the use of which will be decided by the Board of Directors (distribution of all or part of it in the form of dividends, the undistributed portion constituting reserves used, for example, .
ACCOUNTING AN IMPERFECT AND INSUFFICIENT MANAGEMENT TOOL
It allows us to know whether the company is winning or losing money (profitability), the analysis of accounts over several years allows us to appreciate how sales and profitability evolve, for example. Other information useful for management can also be appreciated from accounting, this is not the purpose of this article. The management of the company also involves taking into account information that is not provided by accounting.
Example : turnover drops for three years, why?
- the product is no longer suited to the market: lack of innovation …
- the price is too high compared to the prices charged by the competition: our production system is obsolete and costly ….
- the sellers are not performing: lack of training, sales tools …
- advertising communication is inadequate or poorly adapted to the intended target ….
- the distribution is poorly adapted: we are not in the points of sale where customers go …
- etc ….
This very schematic example shows that in order to correct the situation, it is necessary to make a diagnosis of the company which will not only focus on the financial situation, but also a diagnosis (strengths and weaknesses) of the marketing policy, research policy development, human resources policy, production policy … But it is also sometimes necessary to take into account events outside the company linked to its economic environment (eg unemployment, decline or increase the purchasing power of the customers, the rise or fall in the price of raw materials, etc.), its socio-economic environment (favorable or unfavorable changes in consumers’ purchasing behavior) or its politico-legal environment (more favorable or less favorable legislation ….). That is to say a set of threats and opportunities that can be detected in this environment. By building on these strengths and / or reducing its weaknesses, the company can develop a global strategy enabling it to seize market opportunities .
BY WAY OF CONCLUSION, A NECESSARY GLOBAL APPROACH TO THE COMPANY BY A MULTI-FUNCTION SPECIALIST.
Only a global approach of the company, using strategic diagnostic tools adapted to sift through the various functions of the company (marketing, production, human resources, finances, etc.), makes it possible to move towards the right solutions to ensure the development of ‘business. It is obvious that in an SME the manager can not “afford” internally all these skills.
Certainly he himself or his main collaborator undoubtedly mastered some but the ones that are lacking are perhaps essential to understand the situation of the company and to bring the adapted solutions.