Lean Accounting with Event Types

In a period of economic downturn, competitive advantage goes to those companies that can reduce their expenses and operate more efficiently than their competitors. The purpose of this post is to investigate how companies can reduce their bookkeeping expenses, a burden that is common to every business in existence. Can most financial recording be made simple enough that it does not require a skilled financial worker to perform the chore and can it be done with a minimal amount of data-entry labor?

For most transactions within a typical company, the answer is an obvious “yes.” This is evidenced by the use of modern Point-of-Service (POS, i.e. cash registers) that are implemented with software that automatically records the critical accounting data of each revenue transaction as it occurs. Thousands of transactions are fully recorded for the company’s accounting system with the mere push of a button by a relatively untrained clerk at a check-out counter. Many business transactions are already fully automated and are nearly costless to the business.

But, there are many other forms of business transactions than the revenue-generating operations that occur essentially within a cash register. Expenses, capital investments, depreciation, and payment of credit are just some of the transactions that cannot be handled by the modern cash register. However, as we will see, these less automated transactions can also be reduced to a minimum effort by people who have no bookkeeping skills.

How can advanced bookkeeping be accomplished by people who do not understand debits and credits? To fully satisfy all of the requirements of the Generally Accepted Accounting Practices, the only thing that a worker would have to do is enter the amount of a transaction and select the type of event that the transaction represents. The selection process would be made easy with a user interface that presents the various “Event Types” in an intuitive and foolproof manner.

Hidden within each “Event Type” would be the identity of the accounts that are credited and debited. The person doing the bookkeeping could be an untrained clerk who has been given a simple introduction to the few Event Types that are affected by his role in the company. The selection of debit and credit is transparent to him, making the bookkeeping process simple.

The person entering data would also have control to set the date, but the default of the current date would suffice in the vast majority of cases. The Event Type would supply a default note about the transaction, which the user could also edit at his own will.

In summary, very advanced bookkeeping could be performed by the unskilled by simply selecting the type of the event and entering the amount. The particular Event Types and the accounts that they affect could be tailored to fit any business model in any industry. The resulting effect of the use of Event Types would be to reduce the most challenging bookkeeping operations to an operation requiring less skill than the operation of a cash register.

10. Financial History

The financial history of a company is potentially its primary source of business information. It can easily be expanded to provide more information on a much timelier basis. It even can be used to formally measure the rates of change that are occurring in the company (true “financial calculus”).

However, before the financial history of the company can be a truly useful tool for investors and managers, it needs to be unfettered from the constraints of the traditional accounting model. Today’s accounting is limited by its attachment to the fiscal period and its inability to adapt itself to the specific informational needs of the company. Neither of these limitations is necessary in the age of the ubiquitous computer.

We need to rediscover the fundamental information of a company’s financial history – the record of simple transactions in the bookkeeper’s journal. By exploiting this information in its fundamental form, a company can use its experience of the past as a powerful analytical tool that will guide it and its investors into the future. See Banking the Past, page 218.

8. The Virtual Fiscal Period

We measure business success by unit of time. Earnings and cash flow, for example, are a business’s most important measures of success and they can be expressed meaningfully only as amounts per quarter, month, year, or some other unit of time. Business is an activity and its failure or success can only be measured by the rate of activity through a period in time.

The activity of a business expands and contracts from year to year, quarter to quarter, and even day to day, however, the critical financial measures of a company’s activities is currently only available on a quarterly basis. This schedule of measurement does not allow the company to gain insight about the effects of sales and marketing campaigns, for example, which occurred during certain weeks of that quarter. Determining which weeks were the best during the quarter, or which days of the week brought the best revenues, or how much better revenues were during a particular campaign, are all critical pieces of business information that are typically not available to a company. Financial reporting is limited to a fixed fiscal period and the only unit of time that can be report on is the company’s official fiscal period (typically a three month quarter).

Almost important as the rigidity of measurable time unit is the delay in reporting. While decision-makers are desperate for information, they must often wait months for a report on the company’s earnings and cash flow to help guide them in allocating resources.

This critical limitation of financial reporting by time unit is simply not necessary and is a product of a reporting technique that is five-hundred years old and was designed to assist the manual bookkeeper who worked with quill and parchment and without the assistance of even a slide-rule. In today’s computer age, earnings can be speedometer on an executive’s dashboard that is providing him with a real-time view on the activity of the business and the changes that they are causing.

A company’s dependence upon a rigid quarterly report is based upon the use of database known as the general ledger that performs the simple algorithm of sorting transactions so that an ancient bookkeeper can manually perform addition upon the transactions that affect each account. This sorting can be done in seconds with the modern computer and the general ledger can now be a simple algorithm that provides, upon demand, the same information as the stored database (see the previous post where this algorithm is referred to as a Virtual General Ledger).

As a process, rather than a stored database, the virtual general ledger can produce earnings and cash flow statements for any day, month, year, or other period of time that the user is interested in (he can produce fiscal periods from deep in the past as well as to the current moment). In other words, the virtual general ledger provides the business executive with a perfectly accurate virtual fiscal period.

See Banking the Past.