CFOs Vanguards or Villains?
I continue to get mixed signals regarding how advanced CFOs are with their journey to become a strategic adviser. Numerous articles describing the vision of CFOs and their staff after completing a successful financial transformation of their processes have been published in finance and accounting magazines and consulting firms' center of excellence websites. I, too, have written inspirational blogs and articles about accountants transitioning from bean counters to bean growers -- but I am unsure how much the evidence supports the vision.
CFOs who are bold may candidly describe their managerial accounting practices and systems as “aged” and, at the extreme, as “Medieval.” The bold CFOs are unafraid to admit that their existing reported information may be both flawed and incomplete. The flawed aspect deals with continued use of non-causal cost allocation factors that lead to misleading simultaneous under and over-costed products and services (because cost allocations must have a zero-sum error to reconcile). The incomplete aspect deals with not tracing and assigning the channel and customer-related expenses reported below the gross profit margin line. These channel, selling, customer service and marketing-related “costs to serve” are arguably more important than product costs. Why? Because as products and standard service lines are increasingly viewed by customers as commodities, suppliers must shift to differentiated services, deals, offers and discounts that are tailored to grow sales and profits from different types of customer micro-segments.
Bold CFOs will embrace business analytics. They will appreciate how analytics are applied by the line functions (e.g., marketing using segmentation analysis of customers; operations using forecasting methods for production planning). But they will also appreciate how analytics can be used in their accounting and finance functions.
Strategic CFOs Reality or Myth?
The large corporations may have embraced some advances, such as implementing activity-based costing systems to remove the costing distortions. My concern is with the small and medium size businesses and smaller divisions of corporations.
The basis for my consternation is a result of many conversations I have had with CFOs and financial controllers at AICPA, IMA, CIMA, and other finance and accounting institute conferences. In such conversations the truth is exposed. The CFOs or their staff members reveal that they continue to apply decades-old managerial accounting practices such as single burden rate-based standard costing.
In today’s data and analytics-driven businesses environment, we need vanguard CFOs. I specifically chose the word “vanguard” because by definition it refers to the leading party of a military formation who scouts and secures ground in advance of the main force. Vanguards also help shift power from the powerful to the powerless. A vanguard is a strategic leader.
There are commonly accepted explanations why companies continue with arcane managerial accounting practices, but I believe there is a less-accepted reason for this behavior. Before I explain my opinion, let’s considera few commonly accepted reasons.
Why Do CFOs Delay Adopting Progressive Methods?
Commonly reasons for lack of progress include:
Financial accounting dominates over managerial accounting. CFOs’ attention to regulatory compliance and investment community reporting is a fiduciary responsibility, but it detracts from time needed to improve internal reporting for insights and better decisions.
Misconception of complexity. CFOs often view the effort to produce more detailed and accurate costing as excessively complicated and, therefore, not worth the effort. So the status quo holds. In practice, costing is modeling and not T-account journal entries. Successful costing models are not oversized and complex; they are successful because the cost assignment structure is designed as right-sized. The design stops when there are diminishing returns on extra accuracy for the incremental level of effort to collect, validate, calculate and report the information.
Fear of two sets of books. Some CFOs recognize that if they use alternative (and, of course, better) cost allocation assumptions compared to generally accepted accounting principles (i.e., GAAP), then managerial and employee teams will have two different reported costs for the same product. CFOs fear this will confuse their managers. Which cost is correct? Of course, the correct one is the cost that models with cause-and-effect consumption relationships of the resource expenses through work activities and into the costs and profits of products, services, channels and customers.
My Theory of CFOs’ Lack of Innovation
Although there is some validity to each of these explanations, I believe the impediment preventing CFOs from being more progressive is that they do not sufficiently understand the decision-making needs of the various departments they serve, such as marketing, sales and operations. Today, with increasing global volatility, faster moves from competitors, and the shift of power from suppliers to purchasers, a company’s internal users of managerial accounting information need a much sharper pencil than in the past. They need to know the ROI on a marketing campaign and how profitable each customer is, not just how large a customer’s sales volume is.
A CFO or accountant may not fully appreciate what it is like to walk in the shoes of a CMO, VP of sales, or VP of operations. As progressive CFOs take more time to understand the goals and processes of these functions, they will cross the bridge to become strategic advisers and contributors. They will be vanguard CFOs.