Manufacturing managers may or may not be aware or agree, but the accounting profession sincerely believes it is your business partner. Accounting organizations and major accounting firms have published huge amounts of material instructing accountants how to become business partners to their organizations; and many claim that objective has been achieved. From speaking with manufacturing managers, it is clear there remains a sizable gap between what the accounting profession believes and what manufacturing managers experience.
However, manufacturing managers can and should use the accounting profession’s claims and assertions to negotiate a more productive relationship with their finance organizations. Let’s examine some key recent publications that manufacturers might want to cite in a discussion with finance.
The Global Management Accounting Principles by the American Institute of CPAs focuses on four principles: communication, providing insight to all managers, cutting though silos, and encouraging integrated, cross-organizational thinking to improve decision-making; relevant information, identifying past, present and future financial and non-financial data from internal and external sources; analyzing impact on value, connecting strategy to the business model; and stewardship, with a focus on long run value creation.
Manufacturers are often frustrated with cost and budgetary information that is difficult to connect with resources, operations and product in a cause-and-effect manner. The Institute of Management Accountants’ Conceptual Framework for Managerial Costing is a clear guide to creating cost information based on cause and effect for internal decision-making.
To show causality, a cost model needs to be based on a non-financial model of resources and processes that tracks capacity use in operational quantities. Cost data collection must be structured to reflect the operational model. The movement toward a less financial and more balanced look at business operations is an international movement. The International Integrated Reporting Council has identified today’s financially focused business reporting as a major obstacle to recognizing the long-term value of business operations. The International Framework has defined six forms of capital a business should report on: financial, manufactured, intellectual, human, social and relationship, and natural. The Framework also focuses on business model reporting with clear financial and non-financial definition of inputs, business activities, outputs and outcomes.
The practical challenge accountants face is that the capital needed to grow the business is obtained through capital markets. This places a premium on standardized external information regulated by standards, laws and audit. However, sustainable long-term value is created with internal information and the creativity and insights it enables. Money doesn’t create value; operations and innovation in manufacturing, engineering and marketing create value. Finance facilitates long-term value through effective internal information for improved decisions. The principle of causality is central to modeling financial value over the long term. Financial reporting that distorts the presentation of operational causal relationships is a disservice to long-term value creation.
Manufacturing managers focus on operations. When they improve efficiency, throughput or product, they are creating sustainable value. Consider the question: How many manufacturing managers have created Enron- or WorldCom-type outcomes? These are gross examples, filled with fraud and wrongdoing, but they are also examples where accounting and finance sought to create “value” alone. They departed from operational reality, and the result was short-term, unsustainable market value.
Advocating that finance focus on providing financial information that clearly reflects causal relationships in operations and processes is essential to create sustainable value in the long term. Achieving this type of information will require a big departure from financial accounting practices and the use of advanced managerial costing. A good place for manufacturing managers to press for a start is the budget or planning process, which typically operates outside the financial accounting system.
>>Larry White, CMA, CFM, CPA, CGFM, [email protected], is executive director of the Resource Consumption Accounting Institute, which trains and advocates for improved cost information, connecting operations to business performance.
