Thursday, December 20, 2007

Innovation Management - Role of the Accounting function

"If you ever become a marketer, then your friend in the company should be the accountant"

These were the words of advise given to me by my Marketing professor at Red McCombs School of Business in University of Texas, Austin. I recall this statement every time I think of costs involved in new product development or in every marketing endeavor I undertake.

The above words also applies to all persons leading an Innovation projects: Be it new product development, process improvement or research.

In the world of innovation, accountants & their contribution are one of the least appreciated. A success/failure of an innovation project is credited to the project manager or product manager or the development manager, but rarely the name of finance controller/accountant are even mentioned - sad but true.

The reason for this apathy is really simple: Engineers or product managers or development managers are far disconnected from the world of finance & accounting departments, that they really have no clue about the actual numbers. The problem is more acute in large companies, where functions and roles are so widely distributed that the development/product manager has no clue as where the accountant works! Added to the organizational complexity, there is a natural tendency among engineers to focus on the product - rather than monitor the expense accounts. Many engineers also find it extremely challenging to read an account books.

Accounting is a very important function

The role of the accountant is to maintain records of all expenses, keep financial checks and balances within the organization. All the great innovation ideas and projects can vanish in the wake of an accountant’s recommendation - So never underestimate the power of the accountant. Accountants control the money taps - they can turn it on or off.

Accountant is your partner

I remember a time when I was bidding for an IT project. The person with whom I had to work closely to develop the financial model was an accountant - a Chartered accountant. Together we developed the cost models and based on the cost models, we cameup with a pricing model to present it to the client.

When developing a plan for an innovation project, it is best to sit with an accountant and comeup with a financial plan. Gather the financial information that determines the viability of the project, at what levels of expenditure the projects become unviable, develop a plan to monitor the project expenses and constantly review the viability of the project. To do all this, you have to work with the accountant as a partner in progress.

Also remember this: Money speaks louder than ideas!

So if your idea is backed by the accountant, then people will listen to you.

Track all your Costs
Once a project is approved, then managers need to keep a close tab on the costs of the project. But that’s in an ideal world.
Reality in most organizations is that product/development managers have little clue of what their current costs are, what their total costs is, and how much more money will they need to complete the project. I have spoken to several development managers in several fortune-500 companies, and they don’t know their numbers, instead they will talk about the time frame of the project, head count etc., but not the numbers - because they do not know the numbers and nobody in the organization will ever tell them.

Smaller companies tend to do better. Managers in smaller companies know the costs and therefore can take better and faster decisions.

Understanding all the costs is a critical step in managing the project. It will help you plan better and know when and where to manage the costs. Accounting information also helps you to know when it is a good idea to kill a project. Kill the project when you know that the project does not deliver the promised financial returns to the investors. Here again your friend in the accounting department can give you with the required data for NPV, IRR financial analysis.

Money speaks louder that your ideas

Investors are constantly looking at the returns on their investments. So when you have a bright idea - but do not have the numbers to support it, the chances are that your ideas will not be considered for investment. But when you can substantiate the idea with profitability and have a thorough financial plan to support it, you will be heard and often the ideas will get approved.
New products will never sell itself to investors without the financial justification.

Product Development & Budgeting

New product development requires money - and that means budgets & an exercise in budgeting. Accountant will keep a track of the money spent for the project and can notify you at the first sign of trouble - way before you can exceed the budget. Such timely warnings will help you manage the operations and take better decisions.

Closing thoughts

Innovation Managers must know at least the basics of accounting to understand the numbers. Managers should take the initiative to contact the right person in the accounting department and then work as a team.


Eamon said...

Great blog

Would you be interested in exchanging links?

My website is on creative-thinking, communications and media.


Hithesh gattz said...

Hi Arun,
Great Blog. I am working in Unicita Consulting pvt ltd, bangalore on marketing communications which includes white paper,executive briefs like brochures, etc. It would be really nice if i could get an appointment to meet you.

Hithesh Gatty

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Anonymous said...

i like your ideas. Is it possible for me to know where you got your ideas? I am currently doing an assignement on role of accountants in developing new product in a firm.

I would really appreciate. Thank you.

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