FP&A Board Maturity Model: Best-in-class FP&A and how to get there
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Many of the PACE Forum blogs and articles have a recurring message. It is to nudge, and more strongly push, CFOs and accountants to get out of the 1960s and into the 21st century by applying and using progressive management accounting methods.
Martin Luther King, Jr. said that "the arc of history is long, but it bends toward justice." The origin of this sentence can be traced to Theodore Parker who was a Unitarian minister and prominent American Transcendentalist born in 1810. Parker called for the abolition of slavery in the USA in an 1853 collection of “Ten Sermons of Religion”.
So, what does this have to do with the mission of the Profitability Center of Excellence (PACE)? Plenty.
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 accountants place their emphasis on the former rather than the latter.
The word “justice” is in the quote above and the title of this article. Synonyms for justice are fairness, honesty, and righteousness. My message here is that an organisations executives and line managers (e.g., sales, marketing, operations, supply chain) deserve much better financial information from their accountants. The accountants typically provide flawed and misleading management accounting information. The accountants are underserving their managers. It is borderline irresponsible.
For example, many CFOs and 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, square feet, or number of direct labour 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 for the external financial accounting, but they are wrong with the parts. (Activity-Based costing [ABC] resolves this problem.)
Advocates of PACE’s mission distinguish a difference between hope and optimism.
Optimism is being confident in the future. It is the belief that things will eventually be alright, satisfactory, and positive. Hope, on the other hand, is the feeling that something wanted and desirable might happen. Hope is an aspiration of a good outcome that overcomes barriers and obstacles.
So, what are those barriers and obstacles? A major one is human behaviour’s natural resistance to change. Most people like the status quo – the current state. Another barrier is the belief that the benefits of applying progressive management accounting will not exceed the extra administrative effort to calculate the costs. That is, it is just not worth the trouble. Sadly, this barrier is due to the misunderstanding and misperception by accountants that applying progressive management accounting methods is too complex and complicated. It is not. (To learn why is not, search for the term “rapid prototyping implementation”.)
The advocates of PACE have optimism. We know that the arc is long but it will bend towards justice. Executives and managers will eventually receive the valid and reliable information that they deserve from their CFO and accountants.
Remember this. In the land of the blind, the one-eyed man is king.
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