Three Crucial Accounting Terms


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There are three crucial accounting terms that need to be looked at in depth for best practices.

1.Financial Function: The traditional definition of this term in accounting that that it is a process of managing capital and cash flow, or a process of planning and controlling profits. However, according to some professors this definition fails to capture modern best practices of accounting. There was a time when finance was not accountable for its performance. However, as cost pressure has increased over the years, financial functions have to be defined clearly for best practices. Finance has to explain how it adds value to the business, if it doesn’t then it will lead to losing business by losing access to scarce resources. This means failure of risk management.

There are five corporate finance functions that are related to the following best practices:

  • Raising capital for the investments and other company operations
  • Choosing projects by evaluating expected returns and risk associated with using  capital budgeting functions
  • Managing cash flow, equity and debt ratio to make the most out of company value
  • Encourage ethical behavior by putting a company governance system in place
  • Maintaining optimum risk-return trading to exploit shareholder value

2.Control Function: This can be considered as the critical element for the success of any organization with risk management and best practices. It is usually discussed as the process of adjustment and feedback. However this is not all control function is about. When the management of a company plans the strategies and makes changes in plans as they are executed, it is a control factor. Making sure that other people do what is expected is also a control function and a form of risk management. Control function involves establishing standards, analyzing the performance in comparison with standards, and correcting the deviations in plans from standards.

Control functions are important because sometimes employees and other key personnel fail to act with the interest of the organization at heart. Controls help guard against undesirable behaviors and ensure best practices. At the same time, they encourage good behavior and actions, and personal limitations.

3. Planning Function: This means deciding an action in advance with best practices for risk management. This means planning steps to be taken in order to achieve a target. There are six basic steps in the planning function for business organizations. The management must take the following steps:

i. Establishing Objectives: Planning requires knowing the objectives that must be achieved.

ii. Establishing Planning Assumptions: When managers and CEOs plan on a course of action it requires making assumptions about the future with regards to outcomes and risks associated.

.iii. Establishing an Alternative Course of Action: There must be backup plans in case the plan does not work as expected. This is necessary to ensure risk management.

iv. Establishing derived plans: Establishing sub plans or derived plans for lower levels in the organization are necessary for achieving the main objective.

v. Establishing Surety about Co-Operation: Subordinates and other key members that partake in the plans for success must cooperate at all levels.

vi. Following Up on the Plans: Once the plans are executed, they must be followed up to ensure successful outcomes. This also helps monitor the progress for risk management.

These three crucial accounting terms can prove very effective best practices if managers maximize them appropriately.

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