Management accounting has been very methodology focused since the advent of Activity Based Costing, now almost 50 years ago. However, methodology choices were an improvement over a completely static management accounting body of knowledge focused on “cost accounting” to support financial statement product costing and inventory valuation. Profitability Analytics focuses on principles and deep understanding.
Understanding principles guides you to an effective methodology. The core principle is Causality, clearly understanding and modeling of “real” cause and effect relationships. “Real” means modeling the resources and interactions that drive a business: consumer/customer behavior, economic trends based on human behavior, productive resources and processes in operation, etc. Generally, “real” means non-monetary. They key is to model what will drive the monetary result. Money is generally a lagging indicator for revenue, cost, and investment performance. A central tenant of the IMA Conceptual Framework for Managerial Costing is that an effective, causal cost model is an operational model (of resources and processes) that is costed. Going straight to a cost model creates a severe disconnect from reality, understanding, and useability.
Deep understanding focuses on understanding the business – customers, markets, competitors, operations (value creating and admin/support), resources, processes, people, etc. This is why Profitability Analytics keys in on the strategic planning process. Effective engagement in this process requires in depth interaction and collaboration throughout the organization. The strategic planning process differs from the traditional budget process because it initially focuses on big picture - “What to do?” “How to do it?” and “Why do it?” – before getting to financial constraints and targets. This means really thinking about the competitive environment, company capabilities/shortfalls, and strategic objectives.
Management accountants’ expertise revolves around telling a strategic and operational story with money, but bringing money into a strategic discussion too soon can stifle the creativity of many non-accountants. And in the end, creativity drives growth and change….money is simply a tool to implement it.
Profitability Analytics focuses on the principles and understanding needed to both support creativity as a business partner and guide modeling the plan to ensure it is functional and then provides the feedback for rapid adaptation and learning as reality happens, financially and operationally.