My dad was an accountant. I grew up around accounts and those green accountant spreadsheets that you tore off a pad (pre-computer). I took a year of an accounting course in college. God knows why. At that time, I had no wish to go into business. And I surely was not going to follow dad’s path. But, accounting is the language of business, and it seemed like a good thing, I guess.
When I did get a job in a manufacturing business, I wound up doing some cost accounting. That discipline is at the intersection of accounting, industrial engineering and operations. Because of that, I was appointed the official “liaison” person between the product development/engineering department and the accounting department for a few years.
I learned the importance of knowing costs. Served me well.
Now I talk to people such as Peter Martin of Invensys Operations Management who has dedicated much of his professional life the past few years trying to make process control and accounting come together. The problem is great. If accounting doesn’t measure it, then it isn’t “real.” Engineers talking in engineering units to managers talking in accounting units aren’t communicating. This is what I learned from Martin.
This weekend, Bill Waddell wrote a blog post on “no such thing as non-financial metrics.” He is a Lean consultant and his blog is a must-read for manufacturing people. “[Accounting] cannot calculate the precise financial impact of changes in employee turnover rates or fluctuations in delivery performance, so they assume it must not be as important as concise cost figures. Too often, proposals to improve performance to these critical things accounting should know how to dollarize but doesn’t are shot down because the people proposing the improvement cannot do accounting’s job for them – that is to calculate a financial return from improving these measures.”
So, should managers take this situation lying down? “Shame on managers who play along with this thinking. The existence of critical non-financial metrics is merely proof that accounting has more work to do, but certainly not proof that these things are not critical drivers of financial results.”
Then, as anecdotal proof, he discusses this recent encounter. “While touring an aluminum extruder a few months ago I asked an operating manager why he thought accounting is so hung up with direct labor. His answer: ‘Because it’s easy to count.’ He is absolutely correct. Accounting systems count the things that are easy – purchase prices and direct labor. The rest they either fudge with allocations or ignore all together, like delivery performance. That is no way to run a business. The fact is that, in many cases – most cases probably – the things too difficult for accounting to quantify have a lot more to do with whether the company is going to succeed or not than the things accounting can dollarize.”