To many people, management accounting is almost synonymous with cost accounting. Yet management accounting can, and should be, so much more. Management accountants aspiring to become business partners with others in their organizations need to focus on all the factors affecting profitability – costs, revenues, and investment. Yet revenue management is not a central focus for management accounting systems in most organizations. Traditionally, corporate finance has focused too much on cost management and investment management at the expense of revenue management. Management accounting needs to get past its traditional supply-side dominant view where revenue management takes second place to cost management.
A key change required in management accounting thinking is an understanding that the main reason resources are acquired and employed by organizations is to acquire revenue, either in the form of sales or valued service (e.g. public service or charities). This in turn requires a greater focus on client needs and recognition of variations in the needs of different clients. Segmenting clients into groups based around need is of course market segmentation but the missing link is the coupling of resource use with each group.
Client segmentation is not the sole prerogative of marketing but also affects service / product design, production, and delivery, involving all activities and resources within an organization. Understanding how servicing different client groups drives revenues must also encompass how different client groups drive costs; typically the same driver applies to both. Revenue and cost management are two sides of the same coin: neglect of one will hinder the other.
To be sure, revenue management doesn’t go without attention in most organizations. However, too often that attention is in the hands of professionals without the full-throated support and expertise of management accountants and financial analysts. That gap presents a competitive opportunity for organizations and professionals to invest in rigorous causal modeling, analytics, and systematic support of revenue drivers that can dramatically move forward value creation. Revenue management work is taking place, but management accountants need to strengthen and accelerate that work.
Revenue management models, often described as yield management models, have been established and applied in organizations for many years. However, these models are limited to particular types of organization structures operating in specific types of markets. Here at PACE we are working on developing a descriptive framework for revenue management that can be applied across all types of competitive organizations and industries. How are you addressing the need for advancing revenue management practices in your organization (or at your clients)?
Raef … Your article is spot on. Thanks. The profit equation is this: “top line (revenues)” minus “middle line (costs)” equals “bottom line (profits)”. Profits are a derivative of the top two lines. Both of them need to be considered and managed.
There is a special case for revenue manage for industries with the following characteristics (e.g., hotels, airlines, cruise ships):
... Fixed capacity
... Perishable inventory (an empty hotel room or empty airline seat is revenue last forever)
... Segmentable demand
... Time-variable demand patterns
... Relatively high fixed and relatively low variable costs
For those types of companies, they can maximize revenue by “selling the right product at the right price to the right customer at the right time”
The 80:50:30% profit rule costs companies dearly! "Understanding how servicing different client groups drives revenues must also encompass how different client groups drive costs."
What happened in the COVID crisis, as the product mix was disrupted? Some products sold less, others more, and then products died, while there are new products also.
The result is dis-connect! Now, the old cost structure is allocated on a very different product structure.
This causes very distorted signals: 1_ formerly high volume products are overloaded with obsolete costs and seem unprofitable, however, are not 2_ newly strong products seem very profitable, but are not burdened with their fair share of overhead cost allocations 3_ products that are constrained, because of supply or capacity bottlenecks, accumulate high overhead costs and burn a hole into the earnings The correct action for these dis-alignments between product mix > process tasks > costs structure requires a fresh perspective with these questions: 1. Which products/tasks/costs do we need to eliminate? 2. Which tasks/costs must we do less of? 3. Which tasks/costs should we do more of? This will increase earnings by cleaning up obsolete cost. This approach can remedy the unfortunate situation of the 80:50:30% profit rule, where for example: 20% of products deliver 80% of profits 60% of products deliver 50% of profits 20% of products eat up 30% of profits!
I think the three questions you listed are important ones to ask, especially during these turbulent economic times. In order to answer them it's important to have managerial costing models that provide decision-useful information. It's why so much of this site is devoted to talking about these models and how they should be designed. Managerial costing models should be based on the principle of causality - cause and effect. The distorted signals in your example are great examples of the kind of "information" you get from a poorly designed system, which can lead to poor managerial decision making!
@rlawson Thanks for your answer! I will check out your site in more detail!
I agree with all the points above it’s important to consider revenue opportunities as well as being sensible about costs and understanding that cost to serve clients with your products and services can vary. It’s of course critical to understand and focus on what the clients need, stoplock or blockbuster are leading examples to avoid in that respect.
To close the loop on opportunities to maximise revenues and be sensible about the costs you spend, I guess it’s important to assure you receive all of the revenues for your products & services delivered, I have worked with some companies that we predicted had lost around 30% in extreme cases but regularly around 10-15%. it tends to be very industry specific depending on what kind of industry and product or service you are delivering, in my experience at least.
Critical of course in most these endeavours is team work. In my experience the most successful examples of doing this is not simply the management accounting department but a collaborative approach with people from different departments coming together with this specific focus in mind.
Yes, as you note, shrinkage is a huge problem in some industries, and needs to be controlled or it will have a major impact on the "bottom line".
And team work, a/k/a business partnering,is certainly critical here as elsewhere. Doug Hicks, one of our members here, is writing a management accounting novel (see https://www.profitability-analytics.org/greatexpectations, publication date: Oct. 13) that you might find interesting. It's the story of a controller that learns to partner with others in her organization to find ways to make it more profitable. It will be a great read to help accountants and managers learn how to work together!
This applies to the not profit sector as well. I have these fascinating discussions with our central administration that official tuition is not the way to measure revenue when you scholarship it down. Latest argument we should have more fully scholarshiped athletes because they increase tuition.
En muchas entidades hay una gran confusión en el manejo de los descuentos, acuerdos comerciales e indicadores que les permita tener optimizar los precios y maximizar sus ingresos,
Los modelos de planeación tradicional, no son mas que juegos de "centros de costo y cuentas del E/R", los cuales están muy alejados de los esfuerzos de centricidad en el cliente.
Es importante tener una vista integral de tanto de la optimización del ingreso, como de la base de costo para poder incrementar la rentabilidad de manera satisfactoria. Por esto es importante que el financiero pueda proveer información valiosa tanto para la parte comercial, como en las operaciones de producción y entrega.
One important way management accountants can contribute to revenue management is by helping to identify customer segments that will pay more for upgraded product/service attributes and customer segments that will become buyers at a lower price point for lesser attributes. This enables a company to acquire more customers under its demand curve.
Doing this places a premium on timely and accurate marginal revenue and marginal cost information. This means understanding your fixed and proportional costs thoroughly as defined by the IMA Conceptual Framework of Managerial Concept's concept of Responsiveness. It also means eliminating distorting allocations that have weak or non-causal relationships in accordance with the Concept of Attributability.
But think of the benefits of starting a business conversation with a focus on growing revenue and customer needs - very positive! You'll have everyone asking for better cost information without having to raise the topic.
This is brilliant Larry, thanks for sharing!