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It’s the operation!

Thousands of years ago, the citizens of Babylon created the first business operations records. Since then, accounting has supported running the business and portrayed the financial position in a single effort. However, business operation has evolved exponentially, and accounting records have remained anchored in a distant past. Accountancy used to be a powerful business tool. Today, accounting records have become a ballast, and most organisations have yet to realise it. How did we get here? And most importantly, how do we move ahead?

Most of us know Luca Pacioli, a Franciscan friar, the father of modern Accountancy. He was a mathematician and close associate of Leonardo DaVinci, with whom he frequently shared ideas. His mathematics book, Summa de arithmetica, is one of the first ever printed books and includes a chapter about the double-entry method. His publication about the Venetian way of keeping accurate business records helped the development of corporations and the rapid growth of trade in the 15th Century.

The two most important Accountancy books were the Journal and the Ledger, with two support books for Inventory and Balances.

The Journal sequentially recorded every transaction in its monetary value using at least two accounts, one for the debit and the other for the credit; the sum of credits and debits had to be equal, hence the double-entry. Then, the entry was copied to the Ledger, which had a page for each different account and its running balance. The Inventory and Balance support books recorded the entries for items, customers, providers and purses, or banks and updated the corresponding remainder.

At that time, Accountancy was carried by hand on large, heavy books, using pen and ink. The number of items, customers and providers was relatively small. Supply chains, albeit global, took long enough to have time to post records in a timely fashion; manufacturing processes were slow, simple or both, which allowed for precise direct cost calculation per batch.

The Industrial Revolution, which started in England in the 19th Century, changed everything. Suddenly, producing articles was faster, supply chains were quicker, and doing business became much more complex. Markets demanded more variety, and the number of items, providers and customers grew exponentially. Pen, ink, and paper records done by hand were not fast enough; something had to be done. The search for mechanical alternatives began.

At the dawn of the 20th Century, Hermann Hollerith, who created the tabulating machine, began providing solutions to Accountancy using mechanical devices. The computing era began. Accounting records expressed in monetary units charted the course for solution development. Reporting the financial position and operating results was the priority; running the business was not.

Developers oversaw two facts; on one side, business operation was becoming even more complex; on the other, accounting records were supposed to communicate how the business was running in a language stakeholders could understand. They didn’t get it that 500 years before, accounting records reflected the business operation in what was their real-time.

For several decades, corporations have needed solutions prioritising running the business. However, today most enterprise software platforms neither support running beginning-to-end business processes nor building reliable accounting records that reflect reality in real time. Organisations must make critical decisions on their best estimates, and people work long hours to reconcile operational and accounting data. It isn’t working!

A new paradigm is required to build information that reflects reality in real-time.

The foundation should be detailed transactional information that supports fully integrated beginning-to-end business processes and shows what is happening in the organisation at every moment. This information base must link every step in the process to the previous and posterior ones in a blockchain-like data integrity fashion that guarantees the accuracy and validity of each record. This is the new Operational Ledger with its new Transactional Double-Entry.

Every transaction should instantaneously impact the inventory and balances to build actionable data in real time based on a single source of truth. This way, everyone can access dynamically created queries and reports, and the heavy end-month processing needed to construct static data warehouses disappears.

This operational data contains much more information than the simple accounting records required to build Financial Statements. This simplification into monetary-only aggregate records can and should be derived automatically via algorithms. Privileging the operation and deriving the accounting posts brings us back to the beginning: information supports running the business and portrays the financial position in a single effort.

And remember, it’s the operation!

Rafael Funes

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