Steven Sinofsky

[Mike Maples] spent many years watching people fight to move expenses to other teams, claim revenue for their own team, or even fight against the price of shared corporate services. This “allocation” dynamic is extreme “finance gymnastics” that grows exponentially complex as the business cross-dependencies grow. Ultimately the meaning of P&Ls derived from allocations becomes the undoing of most rational thought in an organization — hiring, investing, … [ Read more ]

Steven Sinofsky

Going back to the history of accounting, a P&L is a tool used by executives to inform decisions around resource and capital allocation, pricing, etc. In a large organization, it is very difficult to assign revenue and costs to a specific unit within a company and even more difficult to offer true span of control or accountability to a unit leader. The creation of P&Ls … [ Read more ]

Charles Horngren

Decision-making is the ultimate reason why accountants and finance people exist. The way to judge the quality of an accounting or performance management system is to determine whether it is spurring quality decision-making.

Christopher Bartlett

Accounting is about understanding and interpreting and getting behind the numbers, and how you use the numbers to really understand the business. Management is all about complexity and diversity and dynamism.

Fred Reichheld and Rob Markey

If a hard asset like a machine is somehow impaired, a CFO must reflect the asset’s lower value on the books. The same applies to a contract or piece of software. If customers, on the other hand, suddenly decide they hate doing business with your company, this asset is clearly impaired—but the CFO may not even know about it until too late. And even if … [ Read more ]

Peter Drucker

After 40 years of preaching, we have convinced everybody that cash flow is more important than profit. (Everybody except Wall Street, and Wall Street will never learn that lesson. There are no slower learners than securities analysts. I can testify to that; I was one. So they and the companies they promote still run into credit crunches, which kill about four of every 10 new … [ Read more ]

Charles Handy

There is nothing wrong with accountancy training — for accountants. But accountants are taught to give priority to the visible financial costs and assets, not to the less quantifiable human assets, which they regard as costs. They focus on the past rather than the future, because that alone can be accurately measured and audited. Their training regards risk, uncertainty, and the unknown as undesirable.

Robert Kaplan

If you have only one product and sell to only one or two large customers, you don’t need much of a cost system to learn where you are making and losing money. But companies typically have hundreds of different products or product variations and hundreds or thousands of customers. In this situation, traditional cost systems will not accurately trace a company’s expense base to each … [ Read more ]

Justin Pettit

We often find that improper costing of fixed costs and capital, such as the cost of capacity, creates misleading signals of performance and value in a business’s portfolio. First, traditional costing systems today ignore the cost of capital. Second, the treatment of excess capacity is often incorrectly treated as a unit cost, instead of the period expense that it truly is.

Indirect overhead costs are often … [ Read more ]

J. David Campbell and Felix Barber

Return on capital measures the productivity of capital investments. How useful is this measure for businesses in which capital investments tend to be small and returns of more than 50 percent are common? For people-intensive businesses, it is more important to know about employee productivity than capital productivity.

Brian Plowman

Activities consume resources – people, materials and equipment – and this consumption can be measured. Activities are triggered by events, which can be counted, or decisions, which can be reviewed. Activities produce outputs – products and services, which can be counted and measured. Activities can be undertaken by different methods, which will vary the unit cost. Activities are linked together to form business processes. Understanding … [ Read more ]

David Larcker

Eventually everything shows up in earnings and cash flow, but it shows up late.

Charles W. Mulford

What amount of value creation can be assigned to the efforts of management for a particular time period? That is the essence of accounting. Otherwise, it’s simply an appraisal process.

Tim Reason

This is the crux of the fair-value debate: each side agrees both qualities are important, but fair-value advocates emphasize relevance, while historical-cost advocates place greater weight on reliability.

Robert H. Herz

Accounting has historically not defined income as change in wealth, or change in net worth or value. It has defined it by thousands and thousands of conventions that measure allocations of historical costs.

…if accounting prompts strange behavior solely because of the accounting, that’s not a good answer.