Risk management vs Digital accounting: Any Connection?

Most entrepreneurs focus their time, energy and resources into building marketing & sales funnels, and following up with a number of KPIs. Most of them consider accounting to be a static procedure, with only a supporting and distinct function to the core business. But they are wrong. In this blog post, we will identify the strengths of digital accounting in ensuring an efficient risk management is established in a business.

What Makes Digital Accounting Special?

Digital accounting is an integral part of the Core business, when appropriately applied it provides insights into all aspects of the company. It may guide the management into making rational and informed decisions regarding the areas of marketing, sales, pricing, planning, research, and development, hr, capex. Digital accounting may even provide insight into which customer to invest into, or which product to boost at any given time.

Furthermore, digital accounting goes far beyond providing business intelligence. It may function as a safety nest for the company, providing assurance for its going concern assumption. We should always have on our mind that businesses fail because they run out of cash, not because they cannot sell. Therefore, selling is an important but not sufficient condition in ensuring that business will be long standing.

So, how does digital accounting might help the company survive, even in tough market conditions?

Risk Management vs Digital Accounting: How it works

(1) Budgeting and Forecasting: Firstly, digital accounting provides the foundation for building a proactive culture from the top management down all levels of hierarchy. Every company’s management needs to have a sharp vision regarding the future course of the company. The market offerings, the customers that want to serve, the markets that want to enter and the change in the life of the consumers that wish to happen. All these are great if they can measure up.

Wishful thinking is not enough in reaching goals and overcoming challenges. The management needs to depict these issues into clear set numbers and then work backwards into detailing the necessary changes and challenges needed to overcome in achieving these goals.

Through the process of budgeting and forecasting for the coming periods the management depicts the vision into specific numerical objectives. Such objectives might require high performance in both quantitative as well as qualitative terms. Furthermore, the management may see all the challenges that need to be overcome for the company to thrive.

(2) Financial Planning and Analysis: The company needs to first of all assess and manage its liquidity risk. Through financial planning and analysis, the management may decide which path to follow in selecting which market to enter, the suppliers to collaborate with, the sustainable level of operating expenses and of course the maximum amount of capex that each year the company may sustain. Digital accounting might help the company gain and sustain a competitive advantage.

Financial planning and analysis guide the company into deciding on which market, product, service, or other attribute to invest in gaining a competitive advantage over the competitors. An advantage that is expected to bring additional sales and cash to the company, thus helping it to survive and grow profitably.

Extreme weather conditions have a significant impact on the operations and profitability of each company. From the rising energy cost to the disruption of operations due to extreme cold, each condition affects the company and thus it is vital that this risk must be assessed and managed beforehand.

The function of financial planning and analysis provides a forwarding looking assessment on the different implications of each case on the company’s performance. From rising costs, thus hurting profitability, and increasing liquidity risk, to losing customers as the company is in no position to service them due to disruption of operations. Each of these unfortunate cases have a cost, while each of the alternative solutions have a cost as well. Increased investments in CAPEX to equipment and machinery mean less resources available to buy inventory.

More personnel available to work offsite lead to more payroll cost, thus increasing OPEX. These choices are not easy to be made without the contribution of accurate cost and probability analysis of financial planning.

(3) Collaboration: Collaborating with other functions of the company, such as operation and marketing, may produce the most viable investment alternative. Thus, finance working together with other functions may propose to the management of the company the most suitable alternative to invest in gaining competitive advantage and maximizing its cash position.

Can Digital Accounting Help?

Digital accounting might serve as a forward-looking tool. Moreover, it may serve as a KPI measuring past performance and focusing on critical areas, with the scope of the finance department or not. Digital accounting provides the foundation for building a power business intelligence unit, rapidly informing the company’s management on the spot, when needed. Minimizing the time needed to reconcile accounting books with all scopes of a company's performance, leads to a phenomenal informational tool, readily available when needed.

Increasing receivables, which might lead to cash shortage, decreasing sales margin or making large orders to suppliers, can be easily traced, and reported to the management right on the spot, when the problem firstly appears, before its too late.

Is it possible to design a marketing program without knowing costs and projected sales beforehand? Is it possible to envision the company’s future, without being in position to depict the objectives into numerical targets to be met at specific points in time? Digital accounting is a necessary tool in assessing risks, long before they arise and become problems, and effectively managing them.

Stay with us, as we are going a step forward in our application of digital accounting into business performance, by examining the impact of digital accounting on the company’s profitability.