Building Competitive Advantage With Digital Accounting And Finance

In the past few years, the business world has been experiencing an inevitable shift in many facets; digital accounting and finance cannot be exempted. The concern remains whether entrepreneurs and business owners are ready to embrace the new dynamics. Specifically, we cannot ignore the fact that accounting and finance serve as sustainable building blocks of competitive advantage.

How many entrepreneurs believe that accounting, digital or not, has nothing to do with building competitive advantage? How many CEOs consider the function of accounting and finance as being a necessary cost? How many Board members have considered the option of outsourcing the function of accounting and finance to gain from cost arbitrage?

How many companies have found a way to drive value from the treasure of the function of accounting and finance? How many CEOs have considered asking their CFO their opinion regarding the next marketing program? How many marketing managers have discussed with the CFO what is the minimum margin necessary for the product to contribute to the company’s value?

Competitive Advantage: Through The Shareholder’s Lens

Viewing the problem of a company's profitability from the shareholders perspective is a remarkably interesting approach. The shareholder does not care for anything else apart from receiving a dividend yield high enough to verify to his or her spouse the choice of sacrificing money into investing into a business venture. This shareholder might not care for managing the company.

Therefore, there is a board of directors and a CEO most probably well paid for this purpose. In most cases the shareholder does not care about the daily or monthly operations. All that is required is that the company is professionally managed in producing enough earnings that will pay all bills and the dividend.

So, the question is: “why is it crucial to have proper accounting systems implemented in paying dividends annually?” Coming to this very interesting question, we must admit that accounting is the department responsible for enumerating a company's operations.

The accounting department is linked with all business aspects. From investments (CAPEX), to cash, receivables, payables, long term debt, equity, to sales, gross margin, EBITDA, EBT. To Make the long story short, there is no aspect, no operation, no project that is not linked with the accounting and finance department.

Having agreed to the fact that the accounting department has a unique characteristic of being linked with all other departments, we may start building the foundations for controlling and improving the competitive advantage of the company.

How to improve competitive advantage

Every company has a unique strategy, a unique perspective of defining success. Some companies choose to serve a niche, which is willing to pay a higher ticket if they have access to unique technology or experience. On the other hand, other companies choose to serve the mass market, providing a non-differentiated product or service, while competing on building cost advantage.

Let us work with these two extreme cases:

(1) The life of the CFO will be dedicated to financing and controlling CAPEX dedicated to research and development, either building unique technological products with advanced features or acquiring companies that have this knowledge and know-how. Most probably this CFO will not care about the level of gross margin, as the customers are willing to pay a higher ticket, which is a higher selling price for a unique product or service. Marketing programs might link a company's product with high industry level events, such as worldwide championship.

There are a number of challenges that the CFO, hence the company, must meet in delivering the requested high-ticket, high-tech products and services.

Firstly, the company must know the numbers. Must know the actual financial position to produce a business plan for the new product or service. How much CAPEX can the company afford to invest? How much time can the company provide to the team that is building this new product or service? There is no other way to master the situation other than digital accounting. The company must already have solid, rigid foundations in the accounting and finance function, in producing valuable information regarding the financial position of the company.

At the same time, the company must have alternative sources of financing, in case matters go south. Well, this requires a number of presentations to investors and bankers, in gaining financing at reasonable cost. From this perspective digital accounting is a prerequisite in transforming the past performance to an alternative path of the future course of operations.

(2) On the other hand, when the company chooses to serve the mass market, then the CFO faces a number of different problems. Most probably there will not be a high level of CAPEX. On the contrary, the company must monitor the profitability of each product, service, segment, and geography. A small deviation in profitability might lead to default as there is no gross margin to cover for the lost earnings.

Different situations, different cases, different strategies lead to different challenges to overcome. In all cases, profitability and cash flow are the key points that the CFO tries to solve, avoiding the problem of default. In all these cases, digital accounting is the tool that, when appropriately applied, is the foundation for overcoming these challenges.

Competitive Advantage: Through Digital Accounting

Digital accounting is the foundation for the solution in effectively competing regardless of the strategy applied. It is not uncommon for entrepreneurs to ask: how does digital accounting work?

Digital accounting provides real time information for current assets and current liabilities. Every day the management may know the levels of inventory per item or per location. Daily the company may know how much money is available in the banks. The company may know how much money each customer owes, when the sale took place and what did the customer buy. These are only examples of the information that can be extracted from digital accounting.

On a periodic basis, most monthly, the company may have a full analysis on the performance. How much sales, to which customers, which items and at what cost per item or per customer. Most valuable information when deciding on which customer to invest, which customer buys or does not buy certain products category. Therefore, what is the potential for further sales in each case?

As the management knows the gross margin per item and per customer, it can offer new products with lower pricing, thus sacrificing profitability in gaining new sales. Alternatively, if a customer is not profitable to serve, the management may decide to approach the customer and offer alternative products for similar price points but with lower costs. So, the business relationship might prove to be beneficial for both parties.

In some cases, the management might decide whether to launch a new product or start a new marketing campaign. This implies a number of investments for a large period. With the application of digital accounting, the CFO may present alternative scenarios for the impact of such decisions on the company’s financial performance. How much time does the company have until the first sale to start producing revenues and cash flow? What is the maximum amount of investment the company may undertake given the current financial position, without defaulting? How many sales are required for the project to break even? All these questions are depicted in different scenario analysis forecasting the coming periods.

Therefore, the management takes an informed decision regarding the future course of operations and can track the company’s performance making the necessary changes.

CONCLUSION

Digital accounting and finance is the foundation for making informed decisions and tracking company’s performance on a periodic basis. It is a tool that provides a competitive advantage to the management.