Does Your Organization have a CFO or a CFno?

For those who are familiar with my blogs, articles, PACE Forum pieces, and my PACE LinkedIn posts and comments you can probably predict where this article is headed.

You would be correct if you anticipate that I will now write about my frustration with CFOs and their accountants who are not progressive and too slow to adopt modern management accounting methods.

I often humorously say that many CFOs and accountants are still in the 1970s. But perhaps that is not so funny.

With Us or Against Us?

When I write that subheading above who is the “Us”? Of course, it is the users of the management accounting information that the CFO and accountants are supposed to be serving. By the term “users” I mean managers of sales, marketing, operations, supply chain, R&D, and personnel plus their employee teams. I can also add the CxO executive team and even some members of the board of directors as “users”.

My assertion is that the CFO and accountants are underserving their users with incomplete, opaque, inaccurate, flawed, and misleading management accounting information. The users are being denied the information they need that provides them with the insights to make better decisions.

The Imbalance Problem

The problem begins with the imbalance of emphasis of external statutory and compliance financial reporting for government regulatory agencies (e.g., the USA’s SEC) dominating over internal management accounting. The purpose of the former is for “valuation” (e.g., inventories, cost of goods sold) whereas the latter’s purpose is for “creating financial value” for shareholders and owners by providing insights for better decisions. Most CFOs and their accountants place their emphasis on the former rather than the latter.

But the problem worsens. Many CFOs and their accountants take the convenient route when allocating indirect expenses (commonly called “overhead”) to calculate product or standard service-lines costs. They allocate expenses (e.g., salaries, purchases) into costs like “spreading butter across bread”. They use broadly averaged cost allocation factors that violate costing’s universal causality principle. Examples of these cost allocation factors are sales volume, number of employees per department, square feet, or number of direct labor input hours. There is no cause-and-effect relationship! The result is their calculated costs are substantially inaccurate compared to reality. Yes, they reconcile exactly to the dollar or Euro for the external financial accounting, but they are wrong with the parts.

Activity-based costing [ABC] resolves this problem. And this is where the “CFno” accounting and finance directors are. They are skeptical of ABC due to misconceptions that lead to their doubt that the benefits from implementing ABC and its superior costing will exceed the administrative effort and cost to implement ABC and then to subsequently continue to maintain and update the ABC system.

Misconceptions

The list of misconceptions is long. It includes: (1) There might be 1,000+ work activities to be defined; (2) then the IT department will need to extract 1,000+ quantity drivers from the ERP and other transactional business systems for the costing calculation; (3) that every employee will need to complete a daily time sheet [and employees hate timesheets]; (4) that it will take six or more months to implement the ABC system; (5) that some managers will not want other managers to “know the truth” about their costs [and in some cases the profit margins they are responsible for]. 

Using the rapid prototyping with iterations method to implement a permanent, repeatable, and reliable ABC system removes those misconception. Using this rapid prototyping method an ABC system can be implemented in 3 weeks that will have reasonably high cost accuracy. It will certainly result in much higher accuracy than the traditional overhead “butter spreading” method that often has 30% or more error for products or service-lines compared to the ABC calculation.

User Bill of Rights for Users of Management Accounting Information

Take a few minutes to read the PACE blog I authored in this link below.

A Bill of Rights for Users of Management Accounting Information | PACE (profitability-analytics.org)

Creating a “Yes” CFO

So, I repeat the question that is the title of my article here: “Does Your Organization have a CFO or a CFno?” I speculate that your answer is the latter – a CFno.

How can this be resolved? Provide your CFO with educational information about ABC. Help remove their doubts about ABC. Appeal to your CFO that you and your co-workers need better information. Appeal to your CFO that they can demonstrate adding true value to your organization. Convince your CFO that he or she can transition from a bean counter to a bean grower.

PACE’s Profitability Analytics Framework (PAF).

The takeaway from this article is germane to understanding PACE’s Profitability Analytics Framework (PAF).

The Profitability Analytics Framework (PAF) provides you and your organization with a methodology to find the answers and knowledge you seek. It helps you investigate your company through several lenses including formulation, validation and execution of your strategy focusing on costs, revenues, and investments. It enables clear thinking to systematically investigate answers to critical questions and provide the wisdom you need to move forward in a profitable way.

Gary … Gary Cokins

gcokins@garycokins.com