Significance of understanding the business in context of Accounting

When I used to work at a Big4 in their Audit and Assurance department, one of the things that I loved and which got me enthused was filling a template on Understanding the Business and process notes. It was only later that I could better appreciate the significance of this step from the perspective of accounting domain for several reasons. My understanding and beliefs now are that one can manage mammoth multi location businesses, only through efficient use of strategic understanding of business, its processes and technology.

First, we’ll touch upon the sources of understanding business along with some data points to note and then the benefits emanating from it.

Sources of understanding business, depending upon their availability at hand:

• Website of the business – legal name, lines of businesses (LOBs), geographic outreach, factory or office locations, large customers or clients, technology used, recent news about the business, high level strategic plans, leadership and team details with respective background etc.

• Financial statements and other government filings– financial results, business summary, financial KPIs, annual reports etc.

• News bytes – any significant events relating to the company or the relevant industry.

• Conversations with employees and existing process notes – This step is super helpful to correlate your understanding of businesses and processes from various resources with the actual operating level of business and processes on the ground.

• Type of transactions – A lot can be gleaned from the business transactions taking place instead of just recording them as accounting entries hitting ledgers.

• Others – other sources and information as maybe relevant in the context of work execution like audit reports, investor reporting etc.

Benefits emanating from above exercise:

• Accurate Financial Reporting: Knowing the business processes helps accountants accurately record transactions and generate financial statements that truly reflect the company’s financial health.

• Effective Budgeting and Forecasting: A deep understanding of business operations allows accountants to create realistic budgets and forecasts, which are essential for strategic planning and decision-making.

• Compliance and Risk Management: Familiarity with business processes ensures that all activities comply with relevant laws and regulations, reducing the risk of legal issues and financial penalties.

• Cost Control and Efficiency: By understanding how different processes work, accountants can identify areas where costs can be reduced and efficiencies can be improved, leading to better resource management.

• Enhanced Communication: Accountants who understand the business can communicate more effectively with other departments, ensuring that financial insights are aligned with operational realities.

• Informed Decision-Making: Detailed knowledge of business processes enables accountants to provide valuable insights and recommendations that support informed decision-making and facilitating insightful discussions with all levels of the client organization.

Hope the above is useful in your professional endeavours and please share with us anything that we can add or modify in the above blog post, as we believe in constant unlearning, learning and updation.