What Accounting doesn't do

The business finance conversation often revolves around accounting. Results are presented primarily in financial terms and standardized by accounting rules. Operational results (as opposed to legal) are primarily derived through accounting bookings with some further detailing or inclusion/exclusion of defined elements. And operational result measurement is intended to give the management a fact-based view on how the business is performing.

Now, let's take a step back and go through why accounting rules exist. On the FASB and IFRS websites, the mission is stated something like this:

FASB - "to provide useful information to investors and other users of financial reports"

IFRS - "enabling investors and other market participants to make informed economic decisions".

In addition, some countries have a tax code which is to be used for tax accounting and determining the amount of tax to be paid by the business. So, the primary purpose of accounting is to standardize the way business information is presented to outside market participants and tax authorities. They provide a platform for a lot of different entities to understand each other, speak the universal accounting language. It is also a very good way of structuring transactions within a business, with the built-in control system and more than 500 years of continuous improvement. 

As good as the system of accountancy may be, it still is one way of looking at a business, but it is not the only way. The primary purpose of accounting is to translate business performance in a way that outsiders can understand. That is different from measuring performance for management to act on. Sure, the interests of shareholders and management are aligned and, in the big picture, investors' view on performance is also management's view. That's fine, I'm not arguing against taking an accounting view. What I'm arguing against is taking it as the only view and way of measuring performance.

Sales over several years, results made of both history and future, budgeting every 3 months, putting together investments and expenses and other such ways of measurement are more the exception, than the rule. And they are also a lot less frequent than monthly or yearly P&L measurements. The language you speak is the language you think in, so that is to some extent understandable.

Technology and data availability today allow us to measure and quantify performance in new ways, some of which are not governed by accounting rules. And I think we should make peace with the thought that such a measurement is also OK and perhaps explore more of it. As brilliant and genius the accounting system is, it's not designed for tackling the complexities of business performance. Accounting is meant for someone else, let's keep that in mind.

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