A paradox which continues to puzzle me is how chief financial officers (CFOs) and controllers can be aware that their managerial accounting data is flawed and misleading, yet not take action to do anything about it.
Now, I’m not referring to the financial accounting data used for external reporting; that information passes strict audits.
I’m referring to the managerial accounting used internally for analysis and decisions. For this data, there is no governmental regulatory agency enforcing rules, so the CFO can apply any accounting practice or cost allocation method that he or she likes.
Read moreEnterprise and corporate performance management (EPM/CPM) methods embedded with business analytics are a hot topic. Will they stay hot? Or are they a business improvement fad, like the quality control circles in the 1980s? My bet is these methods are keepers. Why? It is for many reasons. A major one is the EPM/CPM methods are so fundamental to an organization’s health.
Read moreI was recently a presenter in the financial planning and analysis (FP&A) track at an analytics conference where a speaker in one of the customer marketing tracks said something that stimulated my thinking. He said, “Just because something is shiny and new or is now the ‘in’ thing, it doesn’t mean it works for everyone.”
That got me to thinking about some of the new ideas and innovations that organizations are being exposed to and experimenting with. Are they fads and new fashions or something that will more permanently stick? Let’s discuss a few of them:
Dashboards– Visualization software is a new rage. Your mother said to you when you were a child, “Looks are not everything.” Well, she was wrong. Viewing table data visually, like in a bar histogram, enables people to quickly grasp information with perspective. But be cautious. Yes, it might be nice to import your table data from your spreadsheets and display them in a dashboard! Won’t that be fun? Well it may be fun, but what are the unintended consequences of reporting performance measures as a dial or barometer?
Read moreA managerial movement is now in motion and picking up steam. It is the application of business analytics for organizations to gain insights to determine good decisions and the best actions to take. This topic was once the domain of “quants” and statistical geeks developing models in their cubicles. Today applying analytical methods is on the verge of becoming mainstream.
One way to draw my conclusion about this emerging movement is that there is much chatter and debate about the topic. Articles in IT magazines and websites about analytics of all flavors, such as correlation and segmentation analysis, are increasingly prominent. Debate is always healthy. Some IT analysts view applying analytics as a fad or fashion or way overvalued. Others claim that an organization’s achievement of competencies with analytics will provide a competitive edge.
Predictive analytics is one type of analytical method that is getting much attention. This is because senior executives appear to be shifting away from a command-and-control style of management – reacting after the fact to results – to a much more anticipatory style of managing. With predictive analytics executives, managers and employee teams can see the future coming at them, such as the volume and mix of demands to be placed on them. As a result, they can adjust their resource capacity levels and types, such as number of employees needed or spending amounts.
Read moreWhat distinguishes strong from weak leaders? This raises the question if leaders are born or can be grown. It is the classic “nature versus nurture” debate. What matters more? Genes or your environment? This question got me to thinking about whether business analysts within an organization can be more than a support to others. Can they be leaders similar to C-level executives? Some answers for me came from a provocative talk by Alan G. Dunn, President and founder of GDI Consulting and Training Company. I share some of Alan’s thoughts in this article.
Three primary success factors for effective leaders
Having knowledge means nothing without having the right types of people. One person can make a big difference. They can be someone who somehow gets it altogether and changes the fabric of an organization’s culture not through mandating change but by engaging and motivating others.
Read moreNarrowing the gap between marketing and finance
As I stated in the opening to this article, there can be wide gaps and personality differences between the function of the CMO and CFO.
But maybe a paradigm shift can effectively eliminate that gap. Marketing thinks to act locally for global impacts to increase sales. Accounting thinks to take actions that lift the most profitable sales. Their common focus is what actions to take.
Position your accounting and finance team to provide marketing with the insights for making the best decisions – in this example, by identifying your most profitable customers – while marketing takes action to weight their efforts toward those insights is the ultimate win for both teams and your business.
Later that week Sandy and Jim bumped into each at the water cooler. Sandy confirmed with Jim that her team would have the profitability by customer report to him by the end of the week. Jim was thankful and assured her his team would use the report’s insight to position their product most effectively in the store and maybe “change the color of our kitty litter”
Read moreYou have an opportunity to change the world; but I am worried about you. Understandably, you are probably not interested in a finger-wagging lecture from an old fuddy-duddy and grandfather like me. But, that is not my intent, so please hear me out.
Here’s my main concern: It’s possible that you are overly obsessed with social media. There is more to life than Facebook, video games, You Tube, Internet surfing and endless texting. Sure, each past generation has had its share of new gadgets and technologies to become immersed in – but none compare to what has become available to your generation.
Don’t get me wrong; the Internet and smart phones are great. But, they can also be time-consuming distractions that keep you from focusing on more important things – like career-building and learning activities that prepare you for the future.
Read moreI was educated as an industrial engineer, but I sometimes masquerade as an accountant. Engineers are not perceived as very worldly or sophisticated. They are often pictured with a shirt-pocket protector stuffed with pens. But some engineers, like me, do have appreciation for the performing arts. For example, I appreciate classical music. In particular, I admire and am in awe of the great classical music composers. How did Tchaikovsky and Mendelssohn transcribe such beautiful music as notes from their brain to a page of musical score for so many instruments? (Hint: I don’t think they had a smartphone or email to distract them.)
I believe that in the next few years the adoption rate for enterprise performance management (EPM) methods imbedded with business analytics will accelerate. Core EPM methods include strategy management (strategy maps, balanced scorecard, dashboards); profitability analysis (by products, channels, and customers); driver-based budgets and rolling financial forecasts), enterprise risk management (ERM); and continuous improvement (lean and six sigma quality management). They should ideally be seamlessly integrated.
Read moreImagine that you are a data analyst or perform financial planning and analysis (FP&A) who works for an organization with executives, managers and colleagues who do not appreciate the power of data analytics or management accounting to improve an organization’s performance. If you could have one superpower, what types of powers might capture the attention of your co-workers?
The ability to fly – An analyst who can soar to great heights and get a holistic view with perspective can better see what is really happening. How are customer demand patterns changing? How are supply chains being obstructed? With unstructured text analytics and sentiment analysis, what is being said in social media about your organization or your competitors?
Time travel – An analyst who can travel back and forth through time could perform experiments by changing variables and seeing the effects. They could continue to repeat their experiments for sensitivity analysis to understand how independent input variables impact dependent variables. How much is the impact? Project driver-based rolling financial forecasts? What actions might work best?
Read moreA managerial movement is now in motion and picking up steam. It is the application of business analytics for organizations to gain insights to determine good decisions and the best actions to take. This topic was once the domain of “quants” and statistical geeks developing models in their cubicles. Today applying analytical methods is on the verge of becoming mainstream.
One way to draw my conclusion about this emerging movement is that there is much chatter and debate about the topic. Articles in Accounting, Finance, and IT magazines and websites about analytics of all flavors, such as correlation and segmentation analysis, are increasingly prominent. Debate is always healthy. Some view applying analytics as a fad or fashion or way overvalued. Others claim that an organization’s achievement of competencies with analytics will provide a competitive edge.
Predictive analytics is one type of analytical method that is getting much attention. This is because senior executives appear to be shifting away from a command-and-control style of management – reacting after the fact to results – to a much more anticipatory style of managing. With predictive analytics executives, managers and employee teams can see the future coming at them, such as the volume and mix of demands to be placed on them. As a result, they can adjust their resource capacity levels and types,
Read moreA primary purpose of this Profitability Analytics Center of Excellence (PACE) website and its associated LinkedIn group is to advocate that CFOs and accountants get out of the 1960s and into the 21st century by applying progressive management accounting methods and systems.
One of the debates that the four PACE Directors, including me, have is whether to nudge and persuade CFOs and accountants to adopt progressive management accounting methods with a carrot or a stick. Here are the debate positions:
Read moreEver notice how the personalities and dispositions of animals often resemble humans’? An organisation’s pursuit of adopting FP&A involves personalities of all types. How are they like the creatures that populate our planet? Here is a zoology of analogous types of employees that you might recognise.
Lions
These are the managers whom co-workers respect. They are bold and lead their pride. With FP&A, their boldness enables them to have the will to try emerging managerial concepts. These include strategy maps and their companion, the balanced scorecard; activity-based costing to measure product and customer profitability; and driver-based budgeting with rolling financial forecast updates.
Read moreThe organization mansion has many rooms.
Business schools tend to divide their curriculum between hard quantitative-oriented courses, such as operations management and finance; and soft behavioral courses, such as change management, ethics and leadership. The former relies on a run-by-the-numbers MBA-like management approach. The latter recognizes that people and human behavior matter most. This separation of the curriculum is like chambers in a mansion.
In one set of chambers are managers who apply the quantitative approach of Newtonian mechanical thinking. They see the world and everything in it as a big machine. This approach speaks in terms of production, power, efficiency and control, where employees are hired to be used and periodically replaced, somewhat as if they were disposable robots. Some “data scientists” work in these rooms.
Read moreThe objective of sales and marketing is no longer about growing market share and sales, but rather it is about growing profitable sales. Accountants must accurately measure the ‘middle line’ to subtract from the ‘top line’ because the ‘bottom line’ – profits – is a derivative from both of them. And to use large aggregated indirect expense cost pools with a non-causal allocation factor (e.g., sales amounts, number of labour/machine input hours, number of units produced or services delivered, number of employees in a department, square feet or meter) to allocate costs is irresponsible. The results are distorted, flawed, and misleading. FP&A analysts and accountants should know better.
When the consultant advised his inquiring company that their competitors are not using ABC, then it is a case of the blind leading the blind. And, remember, that in the land of the blind the one-eyed man is king.
Read moreA paradox which continues to puzzle me is how chief financial officers (CFOs) and controllers can be aware that their managerial accounting data is flawed and misleading, yet not take action to do anything about it.
Now, I’m not referring to the financial accounting data used for external reporting; that information passes strict audits. I’m referring to the managerial accounting used internally for analysis and decisions. For this data, there is no governmental regulatory agency enforcing rules, so the CFO can apply any accounting practice or cost allocation method that he or she likes.
Perils of poor navigation equipment
Perhaps some CFOs and controllers are simply lazy. They do not want to do any extra work or have two sets of books with potentially confusing product and service-line cost numbers. This counterintuitive phenomenon can be described this way:
Imagine that several centuries ago there was a navigator who served on a wooden sailing ship that regularly sailed through dangerous waters. It was the navigator’s job to make sure the captain safely and efficiently sailed the ship from one point to another. In the performance of his duties, the navigator relied on a set of sophisticate
Read moreIf Hollywood can make sequels to movies, why can’t I? This article is my sequel to my previously published “Can Accountants Grow the Beans Too?” article.
Here is an edited excerpt of an e-mail to me from an accountant I have known for years. His name will remain anonymous for his own protection.
I left my job with Xxxxx. Most of the VPs there did not understand strategy execution or managerial accounting. A few others and I tried to spread the word for about two years. It was just always a struggle to get buy-in for strategy execution, a balanced scorecard, dashboards or driver-based budgeting and rolling financial forecasts. Our guys weren’t really interested in profitability modeling or using any activity-based costing. I tried to do one driver-based budgeting project, but the accounting software could not handle it. It is sad.
What can be said after reading his note? My intent is not to alienate some readers or exhibit the inflammatory and uncivil rhetoric and language we have been reading about the media and politicians in the USA. I simply want to illustrate (again) that the field of accounting will eventually need to deal with
Read moreThe reputation of CPAs, perhaps exaggerated, is that they are precise, introverted, and conservative. Whether they are employed by a public auditing firm or by an organization, a CPA’s traditional responsibilities have been financial stewardship and assurance of financial accounting compliance with regulatory and tax agencies and typically report past historical data.
Generally, CPAs have not had a reputation for deep involvement with operations and sales management nor being a strategic advisor to their executive team, although articles by the media, consulting firms, and IT analysts have been claiming this is a trend and direction for them.
Are the claims becoming reality?
Maybe there is now a glimmer of change. Perhaps CPAs are increasing in numbers with their transition to expanding from being primarily financial accountants to managerial accountants. I have some evidence for this.
Here are some impressions I have from presenting at AICPA financial planning and analytics (FP&A) conferences in the US. (As many are aware the AICPA and CIMA created an alliance, the CGMA. I have authored two CGMA books). A first sign of change of this transition from “bean counter to bean grower” is that the number of conference attendees at AICPA FP&A conferences is increasing.
Read morePeople think by comparisons. So let me give you an analogy. I am a big fan of movies – old black and white ones, new ones with special effects, and most types in between. I especially like musicals. One of my favorite musical films is West Side Story, released in 1961. And this December 2021 Stephen Spielberg has directed an update of the movie.
The movie is a retelling of Shakespeare’s tragic romance Romeo and Juliet. What does a Broadway musical and its subsequent film version have to do with profitability analytics? Plenty. Here is the background.
Please oblige me if you are so young that you are unaware of this film or have dismissed it as a silly folly about two tough 1950s New York City street gangs – the working-class white Jets and the Puerto Rican Sharks – dancing and singing. West Side Story has parallels to what it takes to complete the full vision of a successful implementation of profitability analytics methods.
Read moreThe popular New York City Broadway musical Hamilton has drawn attention to the founders of the USA who wrote the USA’s Declaration of Independence in 1776. Subsequently in 1789 the USA’s Constitution became the supreme law. The first ten amendments to the Constitution, known collectively as the Bill of Rights, declared specific protections of individual liberty and justice, provided guarantees of personal freedoms and rights, and placed restrictions on the powers of government.
Today the users of management accounting information deserve a similar “bill of rights”. Most users feel underserved by their CFO and accountants with flawed and misleading information and a lack of visibility and completeness in the information. Some managers and executives feel oppressed by their CFO and accountants.
Read moreQuite naturally, many organizations over-rate the quality of their enterprise and corporate performance management (EPM/CPM) practices and systems. In reality, they lack in being comprehensive and how integrated they are. For example, when you ask executives how well they measure and report either costs or non-financial performance measures, most proudly boast that they are very good. Again, this is inconsistent and conflicts with surveys where anonymous replies from mid-level managers candidly score them as “needs much improvement.”
Every organization cannot be above average!
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