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Management accounting shows the way

By Charles Holland*

Running a company is like driving a car. The important thing is what lies ahead. In the past, when one led a carriage, he had time to look around him and talk to other passengers. Now the driver, like the management accountant, needs to concentrate on what lies ahead. The windshield needs to be clear and clean. The windshield wipers must work well. The focus is on the road ahead. It is our future. The only certainty we have today is that business changes will be more frequent and profound.

Figuratively speaking, many management accountants are currently doing the equivalent of using their companies' headlights to light up the past and using the rear lights to inform interested parties about the future. Although counter-intuitive, that's how the management reports are handed over to executive teams to manage their companies. The focus is on the past.

When it gets dark or when storms form, the only option for them is to proceed slowly or even stop. When one is better able to see or visualize what lies ahead, with fewer surprises, he generates a decisive competitive advantage.

Software and automated accounting processes put companies on or nearly on an autopilot mode. In companies with high accountability, any differences between updated forecasts for the quarter or month versus actuals for the same period are promptly explained to the corporate leaders.

This high level of accountability obliges the management accountants in the company to ensure that updated forecasts are reliable. It's easier to spend time ensuring that forecasts are robust and reliable in order to avoid being massacred by the company's board and executive management when trying to explain significant deviations between forecasts and actuals.

However, many company employees are still resistant over inputting data into software planning and management tools such as Corporate Performance Management (CPM), Enterprise Resource Planning (ERP)/planning module, Customer Relationship Management (CRM) and similar management support tools. By not sharing their insights and knowledge they not only maintain the status quo as irreplaceable individuals but also inhibit the best results of the team as a whole.

An example of recurring deficiency in many companies is a lack of ability to transform routine and repetitive transactions of purchases and sales into formal annual projections of customer intentions. This includes describing the intentions, detailing products or services, amounts, quantities, product or service specifications, delivery dates and destinations. What has become a common practice in larger successful companies is much less frequently applied in smaller ventures. The savings are significant.

How effectively do salespeople really understand their customer's business? Are they prepared to delight and surprise their customers? Are they prepared to meet and listen to their needs? How many of these individuals provide solutions or ideas to reduce costs, increase sales or increase the value of goods and services to their customers? How many have background knowledge of customer behaviour? How many effectively use CRM software, B2B, note and netbooks, iPads, internet and websites to reduce transaction costs? How do they communicate to convert routine monthly conversations with customers and clients into formal annual commitments to purchase goods and services?

If the above seems expensive, what's the amount of lost sales revenue caused by the lack of precise information or the lack of inventory optimization? For example, how many companies provide timely, dashboard information to managers summarising firm sales and backlogged committed sales and related profitability? What about this type of data for the potential profitability of sales intentions?

How many companies issue internal forecasts, informing their managers in real time on sensitive assets and liabilities essential for the short and medium term strategic goals and objectives? In many companies those internal forecasts exists but they are not useful as they are not monitored correctly. What would happen if the forecaster's remuneration was based on the quality of the information he provides?

To be competitive and profitable we cannot delay changes. What is monitored and measured happens and needs to be considered. The past can't be changed, but we can improve the future by using prospective management tools better. Today, the companies' headlights focus on the past when they should point to the future in order to light the way for the company to follow.

*Charles Holland is member of IMA/ANEFAC chapter in Sao Paulo, member of audit committees of public companies and business advisor to several CEO/owners in Brazil. Before retirement he was an audit partner at EY Brazil.

 

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