Advantages and Disadvantages Of Departmental Accounting
Departmental accounting is a strategy being implemented or used in various organizations around the globe. But what exactly is departmental accounting? Well, it is a type of financial strategy to manage financial information by dividing an organization or company’s financial records into different departments. And all of that is to better allocate the resources and for some other perks.
However, like everything else, departmental accounting also has a few downsides, and that is what we are onto today’s post. Here we will be taking a good look at the possible advantages and disadvantages of departmental accounting. So, if it is something that intrigues you, we advise you to stick a little longer with us. Here we go.
Advantages Of Departmental Accounting
As always, let’s first start off with the possible pros aka advantages of departmental accounting. Let’s get down to it then, shall we?
1. The Smart Way Forward
See, when there are different departments within a company, it is much easier for the auditor or the manager to check for which department is performing quite well, and which are struggling. That way, the overall strategy-making and plan execution becomes a simplified process. And that is one of the biggest advantages of utilizing departmental accounting. By taking a look at the financial data of each department, the decision makers of the company or organization can prepare a proper growth plan and mitigate or deal with any challenges that a particular department is facing within the company.
2. Watching Where The Money Is Going
When there are multiple segments aka departments in a company, it is much easier for a manager or any other decision-maker to see which department is spending a lot of money and getting the lowest ROI. This can be a really helpful thing when the company decides to do the cost-cutting or cost-controlling. Suppose a department is performing decently, but that particular department is spending a bunch load of money, in that case, the company can work on the optimization of that department and control the overall cost. That can result in any other department within the company getting more financial resources, which can be quite helpful in growing the company in the long run.
3. Analyzing Profitability
As we discussed earlier, how good of a strategy departmental accounting is to see where the most sendings are happening in a company, right? That can also mean that it would be much easier for the company to analyze its profitability by not overcomplicating things. In other words, a company can see which department has been the most profitable one, and from there on, they can allocate more resources to that particular department to further boost the profitability or work on the other departments to reach the new profitability goals.
4. Better Use Of Resources
In companies or organizations where departmental accounting is not utilized, the overall working scene is a little cluttered and hectic. But if there are different departments, assigned for specific tasks, then the company can perform even better. With this type of strategy, a company can precisely allocate resources like funds, personnel, and equipment more effectively. That way, the company can direct these resources to the departments that need them the most resulting in an overall better work environment and significant growth potential for the company in the long run.
5. Better Budgeting
When a company is divided into several departments, it is much easier for the departments to complete goals as per the budget allocation at the departmental level. This way, each department can stay aligned with the overall growth plan of the company without worrying about the budgeting thing.
6. Policy Formation
If a company has different departments, then it is much easier for the decision-makers to prepare and implement policies at the departmental level for the better functioning of each segment of the company. By doing so, the company can have better control over everything that goes in or happens in the company.
Suppose a company has set some goals for a particular department, and if that department fails to achieve those goals in a certain period of time, then the manager or decision-makers can turn to the head of that particular department rather than assuming that individual within that department will take accountability.
8. Attracting More Investors
A company with a proper departmental accounting setup can attract more and more investors and stakeholders. That’s because such an accounting strategy increases the transparency of a company, especially the publicly traded ones. So, it is much easier for investors to check how well a company is performing.
Disadvantages Of Departmental Accounting
Finally is the time to look at the not-so-good side of things with departmental accounting, ready for that? Here we go.
1. The Complexity Issue
See, the first issue with departmental accounting is that it makes the overall financial handling of a company a really complex job. Since now you have a bunch of departments to deal with, you’d need to go through all of their financial records when doing an audit. The equation is pretty simple here, the complexity increases with the number of departments within a company.
2. Not So Cost Effective
As we talked about the cost thing in the advantages section, but in reality, setting up different departments, and managing all of them all at once cost a lot of extras, both in terms of money and time. When dividing a company into several segments or departments, you’d have to train the personnel, use software for each department, allocate funds, and manage everything.
3. Poor Coordination Problem
This is not a departmental accounting thing, but more of a company thing. See, when there are different departments within a company, it can happen that some departments fail to coordinate with the others, and that can lead to a whole lot of other problems and extra costs.
4. Reduced Overall Efficiency
We know that we talked about how departmental accounting can be beneficial in optimizing the performance of specific departments within a company. But keep in mind that by doing so, the company can unwillingly reduce the effectiveness of another department, and this can lead to overall efficiency reduction.
5. Not An Easy Change
If the departmental accounting isn’t already in place from the very beginning, it may result in the employees not accepting the change when the company decides to introduce this strategy later on. This can happen because of several reasons like the employees might be used to specific software or systems and the change can be a little hectic or complicated for them.
6. Data Security Concerns
When handling the data of multiple departments, the risk of data breaches increases significantly. That’s because with different departments, more people have access to the financial records of the company, and that can lead to these data breaches. That is why it is essential for companies to have some security system in place to mitigate such risks.
There you have it. Now you know a lot about departmental accounting, how it works, and what are its perks and negative sides. Well, in our opinion, departmental accounting can do wonders for a company if implemented just right. However, like anything else, this strategy also has its set of cons, that’s why you must learn or know how to mitigate these negatives.