The Business Needs Strategic and Predictive Accounting

The Office of the CFO is under pressure to evolve. Decision-makers across the business are shifting from traditional valuation-based practices to strategic accounting, which emphasizes value creation through good decision-making, deep and wide business insights, and collaborative guidance.

This shift is creating a widening gap between what finance and accounting teams are charged with delivering versus what business leaders and executives need. Both sides yearn to be more strategic and have more time and information to make better decisions. But, the business also needs insights into current costs, guidance on investment opportunities, and predictions into how those decisions could impact future costs and profit margins.

The gap is caused by the burden on finance and accounting teams to plow through slow close and consolidation processes, deliver on reporting requirements, and provide planning and budgeting guidance. All too often, there is little time left to work with the business or think strategically.

To close this gap, organizations need to shift from analyzing historical information to developing predictive insights through driver-based budgets, rolling forecasts, and what-if scenarios. This requires a focus on strategic accounting.

In order to understand why the business and accounting team are often misaligned, it’s important to first understand the three components of accounting.

1. Tax accounting focuses on tax returns and payments rather than preparing public financial statements. It’s a must-have for every business.
2. Financial accounting is intended for external reporting, such as for regulatory agencies, banks, stockholders, and the investment community. Financial accounting follows compliance rules aimed at recording the company’s transactional performance. Again, it’s a must-have.
3. Managerial accounting is using financial information to inform and guide decisions across the business.

 

Managerial accounting uses historical data. A widely held belief is that the only purpose of managerial accounting is to collect, transform, and report data, but managerial accounting covers three categories:

• Cost accounting represents the assignment of expenses into outputs, such as the cost of goods sold and the value of inventories. This is standards-based and aimed at external audiences.
• Cost reporting and analysis represents the insights, inferences, and analysis of what has already taken place in the business in order to track performance for the benefit of internal stakeholders.
• Decision support with cost planning involves decision-making and using historical cost reporting information combined with other economic data, including forecasts and planned changes (e.g., processes, products, services, channels), to make business decisions that lead to a financially successful future.

Cost accounting is governed and regulated by GAAP or IFRS rules and regulations and describes the past in accordance with principles of financial accounting. The other two methods, however, are used to interpret what took place in the past and how that might inform future performance and outcomes. They are two halves of the same decision-making process:

• Cost reporting and analysis simply provides an explanation of what happened.
• Decision support with cost planning shows you possibilities of what’s to come.

As shown in the figure above, the value and usefulness of each category within managerial accounting increases as you move from analyzing historical information to analyzing strategic and predictive, forward-looking information. Cost accounting is a starting point but adds little value to strategic and predictive decision-making. On the other hand, cost reporting and analysis adds critical context to cost measurements. This answers, “What happened?” and lets managers see real outcomes with greater transparency. For example, cost reporting and analysis answers, “What were costs last period?”

Cost reporting and analysis is a great first step in strategic and predictive accounting because it helps inform the business on cost performance and outcomes. However, strategic accounting teams then focus on how those outcomes drive, predict, and inform future performance. This is what the business wants from the Office of the CFO. They want to know, based on what happened, what is likely to happen next and how they can influence that potential outcome.

Strategic and predictive accounting guides behavior at all levels, from the CEO down to each employee. What it uncovers is then used to investigate, inform, and identify past and present cost changes to advise the business on potential future outcomes. But it only provides the forecasts and predictions. It then takes collaboration between the business and the Office of the CFO to develop critical and higher value-add proposals and guidance.

The business wants answers to the, “Then what?” questions. For example, “If we take this action, then what is the ultimate impact?” To get there, accounting teams must change their mindset from tactical and reactive accounting to strategic and predictive accounting

However, there is a catch. When cost reporting and analysis shifts to decision support, the analysis starts to look less at costs and more at the eventual business impact. For example, if the costs were X, how did that alter future expenses? To answer that requires deeper information on resources and their capacities and determining how granular cost elements contribute to and correlate with revenue, profits, risks, and more. The Office of the CFO then needs more data from more areas of the business, all centralized, easily accessible, and instantly analyzable.

This process gets even more complicated (and requires more data and more collaboration with the business!) as the value proposition is elevated beyond just costs. Then the business wants to know how the elements of time, resource allocation, workforce planning, marketing effort, sales coverage, productivity, and more all work together to more accurately predict which strategic direction the business should take.

One key takeaway to manage this complexity is to keep the process as simplified as possible for the Office of the CFO and the business, because complexity can disrupt communication and collaboration. Even at the most tactical levels, such as working across many disconnected spreadsheets and collaborating over tangled email threads, it’s critical to rely on a platform that is intuitive to both the business and their finance and accounting counterparts. But then, the platform also needs robust reporting tools, purpose-built financial and business analytics capabilities, and the modern predictive powers of artificial intelligence and related technologies.

Today’s predictive analytics and prescriptive analytics help teams generate forecasts and predictions that can then be tested against potential business decisions. It’s easy when using a robust finance and accounting platform like Planful to integrate operational and financial information into a single decision-support and planning framework.

Planful combines broad costing (including activity-based costing), budgeting, forecasting, reporting, and workforce capacity planning capabilities with purpose-built financial and business analytics. This unites the Office of the CFO and the business on a centralized, intuitive platform where accounting and finance teams can investigate past performance, inform executives on predicted outcomes, and guide future business performance.

Historical reporting (i.e., the descriptive view) only provides partial value to the business. The crucial component of the value equation comes when the Office of the CFO and the business can work together to plan for the future. To do so, accounting teams need predictive accounting capabilities that drive strategic accounting insights.

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