General perception is that Financial Applications are mainly meant for book keeping, and that they do not have much relevance from business perspective.
Probably this was true decades ago, when accounting was manual, historical, and produced financial statements like P&L, and Balance Sheet for meeting statutory requirements.
In the present day integrated information management through online and ERP environment, accounting does provide useful, relevant, timely and powerful information, for assisting the management in the achievement of the organizational objectives.
Let us take the most common business objective of improving ROI (Return on Investment) which can be monitored through various Financial Applications. Clarity on relationship of various Financial Applications with ROI, can help us appreciate how Financial Applications are important for achieving business objectives.
ROI can improve by:
- Increasing Profit or
- Reducing Investment.
Profits can increase through:
- Increase in Revenue or
- Reduction in Costs.
Increase in Revenue could be due to:
- Better price realization or
- Higher volumes.
Reduction in Costs could be
In Variable Cost (like better procurement of Raw Materials, or reduced Wastages) and
In Overheads like Manpower Cost or General Administration Expenses.
Coming to the Investment side of ROI:
Reduction in Investment could be due to-
a. Planned minimal Investment in Fixed Assets and good utilization of Fixed Assets or
b. Managing with lower Working Capital.
â€‹Reduction in Working Capital could be through-
a. Lower Current Assets (Inventory, Receivables and so on) or through
b. Higher Current Liabilities like better Payment Terms with Vendors.
Improve Return on Investment, Improve Margins, Improve Profitability, Reduce Costs, Strengthen Controls, Reduce Risks, timely information on performance to stakeholders are common business requirements. All the above information needs are met through various Financial Accounting and Management Accounting reports making Financial Applications relevant for meeting business objectives.
For more articles from me and to know about my book "Translating Operations Into Money”, please visit www.operationstomoney.com . My book is also available on display at the World Book Fair 2015, Delhi, being held from 14th February 2015 to 22nd February 2015, in Hall number 64, Stall number 11 of Notion Press.
Tulasi S Sastri