For Small Business Executives & Owners
Joe Madden and Terry Francona are considered two of baseball’s best current managers. Their baseball acumen and experience rank up there with those of the top managers of all time; managers like John McGraw, Joe McCarthy, and Casey Stengel. Yet, in a managerial clash with any of those legendary managers, Madden and Francona would have a distinct advantage. They do not rely solely on the accumulated wisdom from their many years in the game; they supplement that wisdom with accurate and relevant analytical data.
Madden and Francona no longer need to rely on long-held baseball assumptions like “left-handed batters struggle against left-handed pitchers” or “it’s best to always have two infielders on each side of the field.” With accurate, relevant and actionable analytical data they know exactly how a specific left-handed batter has performed against a specific left-handed pitcher. They can determine the probability of a specific batter hitting a ground ball to one side of the infield and shift three infielders to the high-probability side of the field. The analytics available to a 21st Century major league manager give them a definite advantage over the legendary managers of the past.
Not unlike baseball managers, executives at small to mid-sized business place a lot of reliance on their business acumen and experience when they make critical business decisions. The data most use in supporting those decisions is, however, limited to long-held assumptions, industry rules-of-thumb and the cost information that comes from their organization’s financial accounting system. This puts them in the position of a mid-20th Century manager working in the early 21st Century; long on knowledge and experience, but short on accurate, relevant and actionable information.
An organization’s financial accounting system is designed to report its overall financial position at a specific date and its overall financial performance over a specific period of time. The operative word here is “overall.” Financial accounting systems are not designed to provide accurate costs for individual products or services, profitability measures for customers, markets or product lines, costs of the organization’s operating processes, or data for evaluating capital expenditure opportunities, make or buy options, or purchasing decisions. Most are minimalist systems created to comply with external accounting rules and regulations. Using information from such a system to support decision making is like a doctor diagnosing a patient without the benefit of X-Rays, CAT scans, MRIs, blood tests or any other tool that assesses the internal workings of the human body.
Managerial costing is a collection of tools and concepts designed to provide the kind of accurate, relevant and actionable cost information experienced business executives need to provide a competitive edge to their decision making and enhance their organization’s odds of succeeding in an ever more complex and competitive marketplace. It involves the creation of a cost model that accurately reflects the fundamental economics that underlie the organization’s operation and provides reliable cost information on which to base the myriad of decision situations busy business executives must face every day. Fortunately, the development of such a model is well within the means of any business organization, regardless of its size.
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