Financial vs. Non-financial Information? A Seriously Misunderstood Issue

I still hear a lot of discussion about financial and non-financial information in accounting discussions. Usually, they are pitted in some sort of opposition. Typically, non-financial information isn’t considered “quality” because it isn’t audited. Whoa! All the advancements made in quality management, SMART manufacturing, marketing research, etc.- all done with that “low quality” non-financial information – isn’t real or impressive? All the while accounting allows everything to be depreciated based on the earth revolving around the sun, doesn’t consider R&D an investment, allows non-causal peanut butter spreads of massive overhead pools, etc. This stuff is real and very unimpressive!

The issue isn’t financial vs. non-financial. The issue is (1) monetary models and measurements built according to generally accepted accounting principles (GAAP) and financial reporting standards vs. (2) monetary models and measurements focused on internal decision support that follow causality as their core principle. Causal models seek to reflect resource and process relationships in a way that shows the operating and economic reality. I call this profitability analytics and managerial costing. Causality is not a core principle of GAAP or financial reporting standards…they have a different purpose….they are for investors and creditors to make comparative investment decisions. Profitability analytics and managerial costing are focused on internal decision support, allowing mangers and employees to make their organization better with highly useful and insightful information that allows them to optimize resources and processes and better meet customer needs.

There is a language problem in the accounting profession (and perhaps more broadly in business management) that is impeding recognition of the great value that a diversity of monetary modeling approaches can provide an organization and society. When evaluating data to create information, the worst mistake you can make is to use an incorrect or inappropriate model; no matter how good the data, the information will be wrong. Accounting very much focuses on one model – GAAP and external financial reporting. It’s an important model, but it is NOT (a surprise for some) an all-purpose model. Profitability Analytics is putting a spotlight on INTERNAL DECISION SUPPORT information and the need for monetary models based on causal resource, process, and customer relationships. This is also an important model!