How Digital Accounting Improves Profitability

Accounting is a sunk cost, a necessary process which brings to the company only expenses and no added value. Little wonder it is called a cost center. Oh, wait! You believed that? If you believe that, then you are far from being correct. In fact, the company’s profitability relies on the effectiveness of the accounting and finance function. Digital accounting improves profitability, that is the gospel truth.

In this article, we will explore the various ways a company's profitability can be efficiently improved through digital accounting and finance. How to learn how? Keep reading on.

The Powers of Accounting & Finance

The function of accounting and finance is a supporting function to the core business. It serves both internal customers, such as sales, logistics, marketing as well as external customers, such as the company’s customers. So, how can a supportive function, serving both internal and external customers, might affect the company’s profitability?

Accounting and finance cannot run market tests, cannot oversee the logistics or customer care. On the other hand, what accounting and finance does, is a series of steps that are the map to the company’s profitability. The treasure is high dividends, hence high rates of returns to investors and payback to creditors. Hence, the company’s creditworthiness. So, how does it work? Quite simply, provided that the actors within the function have a clear view of what it takes to do the job.

How Digital Accounting Improves Profitability: The Pure Process

Preparation: Firstly, it all starts with preparation. Forecast, budget, or business plan, regardless of how you name it, this is the very first step that every entrepreneur, business manager or CEO must go through before acting. Having set the targets, counted the risks, the company decides to act. Now is the time of sales, inventory, expenses, investments, payments, and collections.

Proper Documentation: The accounting and finance department takes control by proper documenting. Some people call it bookkeeping, but when properly done it is so much more than this. It is a source of invaluable information. When using the proper tools for registering sales, that is customer, item, geography, price, you can have a wealth of information regarding what customers buy and do not buy, at what prices, at what places, even at what day or what time within the day.

Inventory control: Digital accounting enables the management to keep track of inventory, by location, by supplier, by item. Proper accounting will keep track of inventory that is ordered and invoiced by the supplier but not received yet. Digital accounting will have a detailed analysis of the prepayments that took place to the suppliers. When did the supplier deliver the goods or services agreed? Under what price or payment terms? Did the guarantees work, or they were only promises that were not kept? All these matters are well documented through digital accounting. Being a supporting function, many times also called back office, means that it is vital for the profitability of the company. How can you transform the back office into a mechanism ensuring the company’s profitability? Digital accounting is a treasure of information. The company has prompt and accurate information concerning all details of sales invoices. What item was sold when at what price at whom? When was the invoice collected? Did the cheque bounce? Every part of the sales cycle can be traced and analyzed, guiding the company into the pitfalls of the sales process.

Cost analysis: Digital accounting has more to offer. All purchase invoices are documented in detail, so the company knows both the purchases for a given period, as well as the full cost of purchases per item. Having realized the actual cost of goods sold, the company is in position to set the price point per item, per family, per brand. So, the company may compete effectively in each market, while maintaining a desired level of gross margin.

Operating Income: The next level of profitability is operating income, or EBITDA (Earnings before interest, depreciation, and tax). This is used to evaluate the effectiveness of the management. EBITDA depicts how well the management sets the company in the market. The better the company competes, the higher the gross margin. The more effective it is, the lower the operating expenses against industry average, thus the higher the EBITDA. Digital accounting provides accurate and prompt information regarding the course of operating expenses. Payroll expenses, rent and royalties, sales expenses, utilities, marketing, travelling and other operating expenses are closely monitored. When the suppliers invoice the company, then the invoices are booked, while when there are contracts not yet delivered, the respective provisions are booked.

So far, we have seen how digital accounting may help the company monitor both sales positions, through monitoring sales invoices, as well as profitability, by following up on purchase costs. The company may analyze the company’s performance by going through the operating expenses as well. In case an expense is growing more than budgeted, then the management may examine what are the roots of this problem. A sales employee did more travels to the customers, without gaining the purchase orders expected. A marketing program did not deliver the ROI the supplier had initially promised.

Digital accounting may provide a detailed analysis on the investments per department or per type. When a fixed asset is bought, properly booked, with a detailed analysis in the fixed assets registry. Moreover, the accounting department may assign a unique code to every fixed asset, making it simple to perform physical countdown. When a fixed asset is assigned to an employee, then it can be traced. No more “lost” mobile phones and laptops and forgotten tools.

CONCLUSION

Digital accounting assists the company’s management in reaching important levels of profitability. Provides great analysis on all levels of profitability, sales, gross margin, operating expenses, EBITDA. This analysis is translated into valuable insights of competing and effectiveness of operations and running projects. Valuable tools available to the CEO, CFO, and the management team.