MARKETING MATTERSCEO JOURNAL


I Take It Back T


go of notions that have outlived their usefulness. Tis column is about the most important business lesson I’ve ever un-learned, and the one publica- tion I’d most like to take back. Drawing on my accounting educa-


tion and input from leading finance execs, I wrote an article in August 1990 titled “Te Bean Counter: Key to Marketing’s Success.” Boy did I get that one wrong. As I came to under- stand only years later, our industry’s “bean counters” were then and are now frequently obstacles to marketing suc- cess. Moreover, they are arguably the most potent impediment to metalcast- ers earning double-digit pre- tax profits. So, about that old article—I take it back. Tough ancient in its


DAN MARCUS, TDC CONSULTING INC., AMHERST, WISCONSIN


urning experience into wisdom requires constant new learning and a willingness to let


in maturity more likely to be harm- ful to the bottom line than helpful, but few among us have adjusted their thinking to fit these no-growth reali- ties. Most remain firm in the belief that absorption-driven sales growth is a sure fire path to profitability. So much so that conventional financial data and analysis are today more often than not misleading and counterproductive. Likewise, head scratching over cost absorption, fixed versus variable costs, breakeven, contribution, job cost, and the like has become irrelevant and unhelpful. Tese days, accounting analysis (when it isn’t being used to justify ill-advised equipment purchases and capacity growth) has become little more than


origins, “modern” accounting came of age around 100 years ago, when American manu- facturing was booming and naught could be seen but lim- itless growth ahead. Account- ing and corporate finance are today essentially the same as they were back then and steadfastly remain products of their time—rooted in, reflec- tive of, and strongly biased to growth. But our industry has been devoid of growth for around 30 years, a fact that causes the predomi- nant financial management mindset and accounting tool box to be at odds with marketing success and contempo- rary profit making. In other words, the transition to


maturity transformed major elements of accounting analysis, along with some bedrock financial management concepts, from assets to liabilities. Tis truth is best exemplified by one of those concepts, cost absorption, which shapes nearly every thought and recommendation emanating from accounting departments and lies at the root of almost all financial analysis. While volume effects are real, they are


Our industry’s transition to maturity transformed the predominant financial management mindset and accounting tool box from assets to liabilities.


a thinly veiled rationalization for tak- ing on new work, or keeping exist- ing work, that is underpriced and/or underperforming—all for the sake of obtaining or retaining volume which, the believers can’t help but continue to insist, will surely absorb cost and enhance profitability. But times have changed and has outstripped this un- derstanding of financial management and profit making. In maturity, it is more important


than ever for CEOs to control costs and understand each job’s contribu- tion to profitability. However, it’s my view that we can no longer rely on the bean counters to deliver unbiased and, therefore, helpful cost data or insight.


To begin to correct for such bias, CEOs need first to create truly mean- ingful income statements by burning off the fog generated by budgets (and budgeting), standard costs, and vari- ance analysis. Tese vestiges of the past obscure the business’s cost reality and should be replaced by a simple month- ly accounting of inventory changes and spending within each significant (and benchmarkable) cost of goods sold and SG&A expense category. At the part number level, CEOs need to un-learn the diktat to “know your costs” and embrace the wisdom of coming to understand each job’s contri- bution to profit, which is quite different from the margins conjured up by job costing systems. Even at their best, these systems are so full of old and biased thinking, assump- tions, and methods that they have ceased being worth the considerable trouble and ex- pense of maintaining them. Eli Goldratt, father of the Teory of Constraints, has been quoted as saying, “Cost accounting is productivity’s public enemy number one.” I agree, and would extend his indictment by saying cost accounting may well be profit making’s public enemy number one. Rather than hang on to


notions that have outlived their


usefulness, CEOs should pursue su- perior profits in part by shrinking the purview and size of accounting depart- ments, adjusting their own financial mindset, and moving beyond cost system unreality to a simpler and more helpful approach to judging a job’s contribution to profit. Conventional financial thinking and accounting data simply are not able to support profit- oriented management in zero-growth industries like ours, and for anyone who suggests otherwise, it’s time to take it back.


Keep the conversation going. Reach the author at tdcconsulting@outlook.com to comment on this or any CEO Journal column or to suggest topics for future columns.


December 2014 MODERN CASTING | 41


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