Until recently, the dominant idea among men dedicated to business was that basic business knowledge or the production processes to which they would be devoted were sufficient to "do business" and that the most important aspects profound in relation to financial matters would be assimilated with practice.
This belief may have been true in other times, but today, that the methods have been perfected, that business has multiplied and that trade constitutes the main activity of all the countries of the world, the old system of "learning about March ”, has been left behind.
The organization, development and administration of businesses, as well as other important aspects, such as advertising, accounting, purchasing operations, the direction and organization of offices, the treatment, training, and programs of personnel development and some others require much more general and specialized knowledge than can be gained by simple observation and experience.
Every day, the number of managers who run their business is based on intuition, without taking into account the trends shown by the figures in their accounting records and the reports of their Accountant.
To achieve the basic and general objectives of the company, the Manager or Administrator needs:
- Have an overview of the company; A perception of the goals of the organization as a whole; Have a plan for achieving the established objectives; Execute the plan and continue it, estimating how well its performance works according to the plan. Based on the results, formulate new plans based on your experience and under new conditions. (one)
The organization and administration of companies require the development of vast and complicated operations that require broad general knowledge and mastery of many others with considerable length and depth.
The main objective of management should be to achieve economic achievements
favorable. It can only justify its existence and its authority through the economic results it produces. Other non-economic results, product of its management, such as: the happiness of the members of the company, the contribution to the well-being and culture of the community, etc., will have a relative importance. If it does not achieve economic results, management fails.
Management fails:
- If it does not provide the goods and services that the consumer wants at the prices that the consumer is willing to pay, if it does not improve or at least maintains the ability to produce wealth from the economic resources entrusted to it. (two)
Expenses and profit planning:
Cost control and profit planning require a clear understanding of financial management principles and sufficient skill for making timely and sound decisions. In this sense, an adequate accounting system that records the activities in a detailed and reliable way is the main means to facilitate and achieve the planning and control management process.
CAUSES OF A DEFICIENT ADMINISTRATION
The most frequent causes of poor administration are:
- Arrears in accounting records Absence of reports Lack of statistics Gradual capitalization
Overdue records:
The information provided by accounting for administrative decisions and for achieving a "total order" in the development of any company, regardless of its size, requires that accounting records be kept up-to-date, that is, without undue delay., and in this sense, the basic objective of accounting is to provide useful and timely information for economic decision-making.
The adequate and timely record of the company's operations, through its accounting, will allow it to make informed decisions about real events. Neglect of this activity will surely bring with it problems. On the other hand, there are those who may consider this activity as unimportant and believe that it is only necessary for tax purposes.
Absence of reports:
When management has not defined the reports that are necessary to carry out its management, these will surely not be delivered to it in due course. On the other hand, there are those who receive them, but ignore the meaning, obviously avoiding their interpretation.
There are two basic tools and from which all the studies and analyzes that management deems appropriate to follow are derived: The Balance Sheet and the Statement of Income or Profit and Loss, and they must be present within their working documents.
It is important then, to emphasize its timely performance by the accountant. The information that is processed with delays, can give rise to difficult situations to solve, in relation to the elapsed time.
Lack of statistics:
As we know, statistics is the system used in the collection, organization, analysis and numerical interpretation of information, to base decisions and predict phenomena that can be expressed quantitatively.
The entrepreneur needs to carry a series of data related to their sales, purchases, price movements, or carry out studies on the market of their products and their basic tool in this regard, will be the information they have, statistical information, such as, the frequency tables and their graphic representation.
In business, all the information you can count on is important. We must give priority to that which we consider useful and representative of the economic movement of the company, primarily those related to sources of income generation.
Parallel to this information, transcendental in the management of business, it is important to know the behavior of the portfolio, the movement of inventories, the situation of our commitments to suppliers, etc.
Gradual decapitalization:
When we decide to use business funds for expenses or investments that are unnecessary or that may await for a better time, we neglect the basis of our business, compliance with payment to suppliers and other important commitments that will ultimately cause us "financial problems".
The "apparent solvency" at any given time can lead us to make investment "decisions" or to unnecessary expenses. If in the company we do not rely on another fundamental tool for the administration, such as Budgets in general and primarily the one that determines the cash needs, known as Cash Flow or Cash Budget, whose mission is to project our needs for money over time, to pay our future obligations and cover investment needs.
Only if we know the real functioning of the company and its possibilities and economic capabilities in the present and projected into the future, can we make the right decisions that do not compromise the financial situation.
HOW TO CONTROL THE BUSINESS AND EVALUATE ITS PERFORMANCE:
Adequate records:
The fundamental thing is to realize that the money we pay to have timely and reliable accounting records constitutes an administration cost and not an expense as it is generally considered and as such cannot be dismissed within the total costs of operating the business. Therefore, it should be given the same treatment as other management areas, carefully examining the performance of those responsible for this task and determining the quantity and quality of personnel and resources necessary for its proper functioning.
Accurate and timely information:
This can only be achieved after discussing with your collaborators what is the flow of information that is convenient for your company and what are the procedures that can guarantee the timely presentation of basic reports for business management.
A good starting point may be to agree on the delivery date of monthly Proof Balances and some Annexes: that of Debtors, Creditors, Analysis of age of Balances, Goods without movement in the month, etc.
Internal control:
Security over the accuracy and reliability of accounting information is obtained in large part by establishing a robust internal control system.
An internal control system consists of all the measures that an organization takes in order to:
- Protect your resources against waste, fraud or inefficiency; Ensure the accuracy and reliability of accounting and operational data; Ensure strict compliance with the policies outlined by the company; Evaluate the level of performance in the different departments. (3)
It is important to know the main causes of variation in profits, what were the net increases in the main lines of sales, etc.
Basic statistics:
In addition to interpreting and analyzing the situation shown in the Balance Sheet figures, the manager is interested in learning about some statistical data such as: Average number of orders per seller, average value of each seller's orders, percentage of corresponding sales volume to each product or group of products, profitability or percentage of profit corresponding to each warehouse or product line, comparison of the actual production figures with the installed capacity, to determine the percentage of use and detect causes of inefficiency, etc.
Decapitalization:
In the businesses of one or a few owners, acts of unpredictability for money withdrawals frequently occur, producing a progressive decapitalization, which means that sometimes, discounts for prompt payment cannot be taken advantage of, and payment is even incurred high interest, due to late payment of obligations.
A healthy measure is to make an effort to maintain a dividing line between personal expenses and the money required to run the business. With a little discipline you could estimate the monthly amount the owner needs and try to adjust to it.
WHY DO MANAGERS NEED TO HAVE ACCOUNTING AND FINANCE KNOWLEDGE?
Accounting is the language of business, and the financial history of business is reflected in your accounting books.
"Even if the accounting books are kept according to the best methods of accounting orthodoxy, it is not possible to obtain from them, by means of their mere reading, a complete idea of the conditions in which businesses are developed and if they keep a prosperous or adverse life, and much less if all the operations are carried out in the best conditions of prosperity and success ». (4)
Every company, no matter its size, has financial objectives and each manager can better fulfill his functions, if he understands the accounting language and his objectives.
Today, accounting and financial principles play increasingly important roles in control operations and in the decisions that are made.
Accounting and financial concepts can be applied to everyday decisions. They help managers make better plans, better budgets, and get better results measurements.
If you can understand and evaluate the financial position of your company, you will be able to contribute more effectively to its growth and prosperity; and it will do so by seeking meaningful links between events and financial results; studying the effect of the different alternatives and investigating the significant trends that may shed some light on what may happen in the future.
Therefore, it is important that you know the basic accounting principles on which the main Financial Statements are based: the Balance Sheet, the Statement of Profit Loss, the Statement of Changes in the financial situation and the Budget of an administrative report.
"Accounting is, in principle, a method of representing the economic events that occur in the company, and since the only viable way to analyze economic events seems to be to group together those that are homogeneous, numerical representation is the that best serves this purpose of grouping similar economic facts. "(5)
ACCOUNTING AS THE BASIS FOR MANAGEMENT DECISIONS:
It will be our accounting records that give us a clear signal, if the company is making profits or losses in its operations and based on this information, management will make timely decisions that lead to immediate corrections, to channel it towards productive and solvent achievements.
At each step in this process, the manager is faced with alternatives and each decision to do something, or not to do it, represents a choice.
In most cases, the possibility of making the right decision depends on the amount and validity of the information available regarding the alternatives and their consequences, and in this sense, the information that flows from the accounting records or that which compiled by special analysis of accounting data, they form the basis on which a wide variety of business decisions must be based.
PURPOSE AND SCOPE OF ACCOUNTING:
The fundamental principle of accounting is to provide financial information about the economic activities of the company, based on a systematic record of daily activity, in terms of money, that allow the preparation of basic financial statements. (Balance Sheet and Statement of Profit and Loss).
The purpose of Accounting is to reflect the correct course of life of every business company by arranging the accounts that are kept in it.
Accounting must bring the company to its economic stability; to allow accurate measures and policies in this field, and the achievement of more advanced goals in the financial field.
Only Accounting will clearly indicate the current state of the company's business at any time of the accounting year and this final objective, we will achieve if we know how to use the information provided, through its analysis and interpretation.
OBJECTIVES AND QUALITIES OF THE ACCOUNTING INFORMATION (Decree 2649/93):
Art. 3o. Basic Objectives: The accounting information must serve mainly to:
- Know and demonstrate the resources controlled by an economic entity, the obligations it has to transfer resources to other entities, the changes that such resources would have undergone and the result obtained in the period. Predict cash flows. Support managers in planning, business organization and management Make investment and credit decisions Evaluate the management of the economic entity administrators Exercise control over the economic entity's operations Support the determination of tax burdens, prices and tariffs Help the establishment of national statistical information. Contribute to the evaluation of the benefit or social impact that the economic activity of an entity represents for the community ».
"Art. 4th. Qualities of accounting information: In order to adequately satisfy your objectives, accounting information must be understandable and useful. In certain cases it is also required that the information is comparable.
Information is understandable when it is clear and easy to understand.
The information is useful when it is relevant and reliable.
The information is pertinent when it has feedback value, prediction value and is timely.
Information is reliable when it is neutral, verifiable and to the extent that it faithfully represents economic facts.
The information is comparable when it has been prepared on a uniform basis.
ACCOUNTING AS A FINANCIAL AND ADMINISTRATIVE SUPPORT:
It is impossible to have financial and administrative information on business if we do not have adequate accounting records.
In this sense, we can point out the objectives in which the importance of
Accounting:
- Registration of all operational transactions of the company. Control of the assets and resources and obligations of the company. Serve as support, for the presentation of the Financial Statements. (Balance Sheet and Profit and Loss Statement).Determine the profits or losses obtained in each period. Based on the Financial Statements, establish the proportions of analysis necessary to properly guide the management of the company.
WHY IS IT NECESSARY TO KNOW HOW TO INTERPRET THE FINANCIAL STATEMENTS?
For most, developing a simple household budget is somewhat complex. In general, we are not even prepared to prepare a statement of our personal stockholders' equity when, for example, we want to apply for a bank loan. Even the reconciliation of our checkbook can be a monumental challenge.
By knowing and interpreting the financial statements, you can exercise greater control over the future of your business.
WHAT IS THE FINANCIAL ANALYSIS FOR?
The greatest use of financial analysis is manifested in that said analysis serves as a basis for business managers to:
- Establish the appropriate policies in order to reduce expenses; End possible causes of losses and, To increase profits, that is, to clean up the economy of the company.
A good understanding of financial functions is essential to the development of any business in today's world of finance, and gaining this understanding will allow you to become a much more efficient executive.
MANAGEMENT CONTROL
Management control can be defined as a system that enables the objectives set by the company and its different units to be achieved through a set of summaries and systematized data. It is also called management control or top management control.
The manager is responsible for the overall running of the company and cannot avoid that responsibility by the fact that he has delegated the authority to others to make decisions in their respective areas.
As we had previously noted, for the good management of the management, information is required above all, not only internal to the company, such as the resources it has
(material, human and financial) but also external, such as the economic, political, social situation, innovations and technological changes, changes in consumer tastes, etc. Forgetting any of the aforementioned factors can end a company since everyone is having a direct or indirect impact on the objectives set.
The objective of the management control is therefore to maintain permanent information on the internal progress of the company as well as its external environment to reorient the action when differences are detected between the results and the plans drawn up. (6)
MANAGEMENT CONTROL BY PROBLEM AREAS IN THE COMPANY:
Marcel Moisson in his book on management control modifies the traditional thinking of functional areas in the company and introduces a new approach to managerial control raised in his view of six serious events that may affect a company or "problem areas" on which the CEO must take great care if he wants to be successful in his management.
These areas are:
A) Bad financial management:
In this area they must control:
- The figures of net sales; The portfolio or debtor clients; Advances of the clients; Behavior of the expenses; Provisions of treasury (flow of funds) Planning and control of Income and Expenses and, g) The available working capital.
B) Excess Inventories.
C) Excess Development:
This situation presents 3 important phases:
- Excess technical development: Consistent in producing more than can be placed on the market, and leads to maintaining excess inventories of finished products. Excess of commercial development: It means selling or compromising the sale in more than what can be produced.
The consequences for the company translate into:
- Failure to comply with delivery times; Trauma in production to serve clients who demand compliance; Decay in the good name of the company vis-à-vis its customers; Possibility of withdrawal of clients and, Inclination to increase the productive means (machinery and equipment) due to the same market situation, planning exaggerated widenings, with the danger that once the production capacity has increased, dissatisfied customers have passed the competition or the level of demand has fallen due to the economic cycles of any industry and financial difficulties arise due to not attending to the obligations contracted.
- Excess of personal development: Surcharge of work in the personnel which causes:
- Tensions and exhaustion caused by fatigue; Weakening of efficiency; Excessive concentration on routine aspects, neglecting the important or fundamental aspects of their work.
D) Excess Machinery:
It leads to an underutilization of existing equipment, greater financial charges for amortizations and interest when they have been acquired with loans, there is loss of profit and it has an unfavorable impact on the same productivity of people when seeing machinery and equipment wasted.
These are elements that must be controlled in this regard:
- Percentage of use of the productive means; Yield of the personnel; Monetary yield of the immobilizations, that is, the relation profit on fixed assets.
E) Low Profitability:
A company has an insufficient profitability when an adequate profit is not obtained according to the capital invested and the risks inherent in the business.
To evaluate this point, the following will be taken into account:
- Productivity of sales (Profit / Sales); Rotation of investment (Sales / Total Assets); Return on investment (Profit / Total Assets).
F) Little integration of personnel into the social and economic life of the company.
In this area you should control:
- Absenteeism; Internal rotation of personnel (transfers-promotions) External rotation (withdrawals) Complaints and claims Initiatives and suggestions. (7)
MANAGEMENT CONTROL BY CRITICAL AREAS:
It consists of carrying out a periodic evaluation of indicators in the vital points or critical areas of the company.
In this sense, we cannot speak of a fixed norm, nor can we generalize the same critical areas in all companies. What should be controlled is a management decision.
Once the general critical areas are established, they are divided into sub areas, which may have one or more indicators or relationships that allow the activity to be analyzed as a whole instead of considering isolated parts of it.
Example of critical areas of a business:
I. Critical area on financial situation:
1.1 Subarea: Profitability.
1.1.1 Indicator: Profit / Total Assets
1.1.2 Indicator: Profit / Sales
1.1.3 Indicator: Sales / Total Assets
1.2 Subarea: Liquidity.
1.2.1 Indicator: Current Assets / Current Liabilities
1.2.2 Indicator: Current Assets - Inventories / Current Liabilities.
1.3 Subarea: Indebtedness.
1.3.1 Indicator: Liabilities / Total Assets
1.3.2 Indicator: Liabilities / Equity
2. Critical area on business situation.
2.1 Subarea: Sales
2.1.1 Indicator: Sales in physical units
2.1.2 Indicator: Sales in monetary units
2.1.3 Indicator: Sales expenses / Total sales
2.2 Subarea: Orders
2.2.1 Indicator: Orders received
2.2.2 Indicator: Orders fulfilled
2.2.3 Indicator: Orders in process
2.3 Subarea: Purchases
2.3.1 Indicator: Purchases made / Purchases budgeted
2.3.2 Indicator: Stocks of raw materials
3. Critical area on production.
3.1 Subarea: Quantity
3.1.1 Indicator: Total production quantity
3.1.2 Indicator: Quantity of production by geographical areas.
3.2 Subarea: Quality.
3.2.1 Indicator: Defective percentage
3.2.2 Indicator: Percentage of waste
3.3 Subarea: Stocks or «stoks».
3.3.1 Indicator: Existence of products in process
3.3.2 Indicator: Existence of finished products
3.3.3 Indicator: Inventory rotation
4. Critical area on costs:
4.1 Subarea: Total Costs
4.1.1 Indicator: Total Cost Volume
4.1.2 Indicator: Total unit cost
4.2 Subarea: Manufacturing Costs
4.2.1 Indicator: Total manufacturing costs
4.2.2 Indicator: Manufacturing unit cost
4.3 Subarea: Administration Costs
4.3.1 Indicator: Total Administration Costs
4.4 Subarea: Cost of Sales
4.4.1 Indicator: Total cost of sales
5. Critical area on Productivity
5.1 Subarea: Technical Productivity
5.1.1 Indicator:% of equipment utilization
5.1.2 Indicator: Maintenance machine hours
5.1.3 Indicator: Profit / Fixed Assets
5.2 Subarea: Labor Productivity
5.2.1 Indicator: Productive man hours / Available man hours.
5.2.2 Indicator: Utility / Number of people
5.2.3 Indicator: Production / Man-hours
6. Personal critical area
6.1 Subarea: Pay for Labor
6.1.1 Indicator: Total number of people
6.1.2 Indicator: Total payroll value
6.1.3 Indicator: Average salary
6.2 Subarea: Environment
6.2.1 Indicator: Rotation
6.2.2 Indicator: Internal rotation (promotions)
6.2.3 Indicator: Hours of absenteeism
6.2.4 Indicator: Complaints or claims / Number of people
6.2.5 Indicator: Suggestions / Number of people
6.3 Subarea: Industrial Safety
6.3.1 Indicator: Number of accidents with disabilities
6.3.2 Indicator: Man-hours lost due to accidents
7. Critical area on Customer Service
7.1 Subarea: Customer Opinion
7.1.1 Indicator: Customer complaints for quality
7.1.2 Indicator: Customer complaints for non-compliance.
7.1.3 Indicator: Returns
7.2 Subarea: Customer Service
7.2.1 Indicator: Number of new clients
7.2.2 Indicator: Credits granted to clients
7.2.3 Indicator: Discounts granted to customers
8. Critical area on Relations with the environment
8.1 Subarea: Political Situation
8.1.1 Notes on incentives, taxes, labor, tax, etc.
8.2 Subarea: Economic Situation
8.2.1 Annotations on inflation, devaluation, foreign trade, economic cycles, etc.
8.3 Subarea: Social Situation
8.3.1 Annotation on social pressures, idiosyncrasy, illiteracy, etc.
8.4 Subarea: Technological Situation
8.4.1 Notes on technological advances, new products, etc. (8)
BIBLIOGRAPHY
(3) Arch, Richard, Dooley and Nemo, Pedro. Encyclopedia of Management and
Business Administration. Orbis Publishing House. Spain. 1984
(5) Balwin, Carlos. and Fernández, Mario. General Introduction to Accounting. Editorial Norma. Colombia. 1990.
(one). Bolaños, A., Cesar and Alvarez, Niño, Jorge, U. Commercial Accounting. Editorial Norma. Colombia. nineteen eighty one.
(two). Johnson, Robert, W. Financial Administration. Continental Editorial. Chile. 1972.
(4). Business Organization. International Schools. Fascicle 7104-C. Business Administration Course. U.S.
(6) (7) (8). Umaña, López, Luis. Advisory Magazine. Sign. Article «The Creation of Companies, our future». Bogotá. Colombia.
