Management Accounting – Sunshine is an Effective Disinfectant

Do you believe that your management accounting system provides the reasonably accurate and visible costs for its executives, line managers, and employee teams to provide them with the insights to make good decisions?

Tick … tick … tick.

Do you believe that your CFO and their accountants are tied to arcane, stale, and flawed management accounting methods?

Tock … tock … tock.

Wait, do I see your hand being raised? Will your answers be “no” to the first question and “yes” to the second question?

As the NASA astronaut Jim Swigert said to NASA Mission Control during the Apollo 13 space mission returning from the moon, “Houston. We have a problem.” He was reporting an explosion to one of the service module’s oxygen tanks.

Well, your organization has a problem.

Progressive Management Accounting

The problem is there is a distinction between external statutory and GAAP compliance financial reporting and internal management accounting. The purpose of the former is for government regulatory agencies and investors. It is used for “valuation” (e.g., inventories and COGS). The latter’s purpose is for “creating financial wealth creation” for shareholders and owners by providing those needed insights for better decisions. Internal management accounting is much more important than external financial reporting.

There is this simple equation: “top line minus middle line equals bottom line”. However, if the middle line costs are calculated with traditional and simplistic “butter spreading” cost allocations that violate costing’s universal “causality principle”, then the costs are inaccurate, flawed, and misleading … and therefore so are the reported profit margins of products, service lines, distribution channels, and customers. (Activity-based costing [ABC] resolves this problem.)

Management Accounting and the Wind and Sunshine

You cannot see the wind, but you can see the power of the wind. Management accounting is like the wind. When expenses and the calculated costs that consumes the expenses are made visible, then one knows what is causing the costs. Progressive management accounting methods are like turning a light on in a dark room for the executives, line managers, and employee teams.

Progressive management accounting is also like sunshine. And sunshine is an effective disinfectant. Just like a chemical agent that can be used as a disinfectant to destroy microorganisms, such as bacteria, viruses, and fungi, progressive management accounting can destroy misleading information. And better yet, it can replace that flawed information with repeatable and reliable information to provide those insights to make better decisions.

A Choice for CFOs and Accountants.

CFOs and their accountants have a choice. They can take actions or not take actions. That is, they can continue with the status quo in their reporting, or they can make the changes to improve their reporting which in turn will lead to improved operational and financial performance for their organization.

They need to balance their heart and their mind. All thoughts come from the brain, manifested in the mind, but influenced by the heart. The heart is a metaphor for emotions and intuition. If the CFO and their accountants have care and feelings for their executives, line managers, and employee teams, then they will do the right thing – apply progressive management accounting.

The PACE Profitability Framework (PAF)

The takeaway from this message is germane to understanding PACE’s Profitability Framework (PAF). While some seek a step-by-step instructional manual, the problem with these is that they take a one-size-fits-all approach, and the real world is more complex than that. In contrast, the Profitability Analytics Framework (PAF) provides a methodology to find the answers and knowledge that organizations seek. It helps organizations investigate what is happening through several lenses including formulation, validation and execution of an organization’s strategy focusing on costs, revenues, and investments. It enables clear thinking to systematically investigate answers to critical questions and provide the wisdom needed to move forward in a profitable way.

If you are a seeking that wisdom, then now is a time learn about PACE’s Profitability Analytics Framework (PAF) and understand what it can do for your organization.

Gary … Gary Cokins

gcokins@garycokins.com