Who defines PACE's mission?

Post by Lukas Rieder

The executives of a company must ensure that it achieves a market-driven return* on the

invested assets. Only then will investors take the risk to invest in that company.

For me these executives and their direct employees are PACE's key customers. They need a management control system allowing them to plan and control the variables they can

influence directly and independently in their area of responsibility. This has little to do with

financial accounting, double entry bookkeeping and depreciation rules.

It is the cash flow before interest and taxes (CFBIT) these managers can and should

control directly. They decide which products or services are offered and at which net sales

prices.

Determining CFBIT requires a set of tools that reveal which costs are directly caused by the

manufactured or sold product or the service provided (proportional costs), and which costs

are incurred to ensure that the organization is ready to perform (fixed period costs).

Even the best financial accounting system cannot provide this data as it only processes

values. Prerequisite is a managerial costing system that separates the costs directly

caused by the unit produced (and afterwards sold) from the period-driven fixed costs in the

cost centers. The relevant data for this can only be found in the ERP-System and in the cost-

center plans (see the article “Costing System Attributes that Support Good Decision Making” from Lawson, White, Cokins, Hicks, Krumwiede, published 2019).

Inventory valuation, depreciation rules, interest and taxes are issues tackled by the CFO, the

board of directors, the auditors and the legislative institutions. They only come into play

once the money has been earned and generated the CFBIT.

Consequence:

Cash flow before interest and taxes is the really important value managers have to report

to owners or shareholders!

To achieve this market-driven return for a company is not only the task of top management,

but also of all downstream managers who are responsible for the company's net revenues and costs, i.e., those responsible for sales, production, and purchasing, as well as all cost center managers.

As PACE members, we should focus on these planning and control requirements. After all,

the money must first be earned before CFO’s and accountants can prepare their balance

sheets for external reporting and for the tax authorities.

We should not use the label “Management Accounting”. Costing is the better term because

it values the consumption of quantities and times in plan and actual.

* Aswath Damodaran from New York Stern University calculates since many years market-

driven return rates for different countries and industries. It is insightful to study the

interest rates demanded by investors in various industries and markets.