Recently I was describing the job of an accountant to a friend. I explained that many people view accountants as “bean counters” or “number crunchers.” Tracking transactions and reporting on a company’s financial condition are certainly important aspects of an accountant’s job. However, accountants have many more opportunities to add value.
To illustrate, consider a situation involving a hypothetical Acme Co. transacting business with Supplier Co.:
- Supplier Co. typically purchases any raw materials needed to fulfill orders and then converts them into finished goods. However, due to unique economic factors, Acme agrees to pay for raw materials to be delivered to Supplier. In essence, Acme’s payment (though not directly to Supplier but to a company that supplies Supplier) functions as a type of “deposit” or “prepayment.” Acme fronts some of the expense of the goods prior to taking ownership of them.
- In turn, Supplier is to convert the raw materials into finished goods and deliver them to Acme.
- As part of the arrangement, Supplier has agreed to reduce its selling price per unit (which originally included the cost of the raw materials) in order to compensate for Acme having paid for the materials up front.
- Suppose that Supplier encounters problems producing the finished goods. Perhaps some of the raw materials were defective or wasted. For whatever reason, Supplier delivers fewer units than Acme’s original order.
- This presents several challenges for Acme. First, Acme must determine how much it recouped of the cost of raw materials and how much it expended but did not recoup due to the shortage. Second, Acme must clearly detail to Supplier how the shortfall of units delivered hindered Acme from recovering its costs for the raw materials. If Acme paid for enough raw materials to produce 1,000 widgets but only 800 were delivered, Acme missed out on recovering 200 widgets worth of costs.
Enter the accounting and finance group. By staying alert to the ramifications of the short shipment — i.e., the failure to recover the cost of the raw materials that were paid to produce 1,000 rather than 800 widgets — the accountants can prepare analysis to detail the effects of the shortfall. The accountants can also work to negotiate with Supplier to provide a credit on a future order or to send payment to help Acme recover the shortfall.
Assuming Supplier values Acme’s ongoing business and wants to avoid legal problems, a clear and detailed analysis by Acme’s finance and accounting group could help Acme recover the “lost” funds.
I was once involved in a circumstance very similar to this. It was very rewarding to see the fruit of my efforts when the business I worked for received a payment from its supplier due to the shortage of units shipped.
Note that I would advise, whenever possible, avoiding prepayments and deposits or paying for supplies up front. However, sometimes these commercial arrangements are difficult to avoid depending on the nature of the industry and a host of other factors. When a company gets into a situation like Acme’s, the accountants need to exercise “situational awareness” and understand the ramifications for the business. The accountants can create value by driving the process of analyzing the shortfall and helping to negotiate for recouping funds from the supplier.
Recovering funds that rightfully belong to the business and avoiding wasteful spending can add value in much the same way as making sales and bringing in revenue for the business. This goes beyond traditional “bookkeeping” or financial analysis and reporting. The key is to exercise good stewardship and fulfill fiduciary obligations by treating the business’ money as if it were your own.