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| David Cuykendall Click for Index Page |
Process outputs are either delivered internally for internal
purposes, or externally for compliance purposes (GAAP financials, regulatory,
contract, and tax reporting).
While the transaction processing and compliance processes are production-like, many more are not production like and are of an entrepreneurial nature.
These non-production like financial information processes forge efficiency patterns that drive profits. However, these efficiency patterns are notoriously difficult to define; hence they are often treated as trade secrets.
While the transaction processing and compliance processes are production-like, many more are not production like and are of an entrepreneurial nature.
These non-production like financial information processes forge efficiency patterns that drive profits. However, these efficiency patterns are notoriously difficult to define; hence they are often treated as trade secrets.
The controller
develops information regarding the financial impact of organizational actions
and subsequently helps internal decision makers use that information to further
the organization’s goals.
Also, the information the controller develops is aimed at accountability that complies with specified quality criteria, providing the right conditions for sound decision making and ensuring that no assets illegitimately exit the organization.
Also, the information the controller develops is aimed at accountability that complies with specified quality criteria, providing the right conditions for sound decision making and ensuring that no assets illegitimately exit the organization.
There are two dated paradigms about financial information:
(1) All users of cost and other financial information need the same kind of
information; and (2) Cost information is only based in accounting transactions
that are traced to a general ledger account.
Financial information
is not homogeneous
One kind of cost information has a historical or results perspective. Its purpose is to record what has happened in the past, and it is used by people outside of the organization — bankers, creditors, fiduciaries, regulators, and taxing authorities.
A second kind of cost information has a right now time perspective. Internal workers making day-to-day, real time decisions about the organization’s business processes need this kind of information. A third kind of cost information has a forward-looking predictive perspective.
One kind of cost information has a historical or results perspective. Its purpose is to record what has happened in the past, and it is used by people outside of the organization — bankers, creditors, fiduciaries, regulators, and taxing authorities.
A second kind of cost information has a right now time perspective. Internal workers making day-to-day, real time decisions about the organization’s business processes need this kind of information. A third kind of cost information has a forward-looking predictive perspective.
There is no argument that one must
“tic ‘n tie” historical cost information for external users. However, that is
not a characteristic of the cost information needed by internal users. The
information needed by internal users must be actionable, timely, and indicative of the causes of the costs. Importantly, this information must address the poorly understood subject of entrepreneurial (profit-driving) efficiency patterns. It
cannot contradict information from the general ledger, but it certainly does
not have to tie to the general ledger.
The controllers’ three financial information processes are
as follows:
- Develop and communicate fiduciary (compliance) financial information.
- Develop and communicate operational financial information.
- Develop and communicate predictive (forecast) financial information.
The constraints of historical cost information
Traditionally, organizations relied solely on cost
information with a historical perspective. The management objective was cost
recovery, and historical information supported achievement of that compliance
objective. Using historical cost information
exclusively to manage costs is a very narrow way of supporting cost management.
An aware controller working to support an aware enterprise,
designs and implements new processes — separate and
distinct from the fiduciary (compliance-oriented) financial information process to develop and
communicate operational and predictive cost information.
Recurring processes
are those task performed every month or every week or every day. They are normally concerned with transaction
processing and routine reporting.
In contrast, ad hoc
financial information recurs only on an occasional (non-calendar driven) basis
or is a special issue that may
involve a bundled set of ad hoc responses.
This does not mean that the process
of developing the financial information is ad hoc. The process to develop and
communicate operational and predictive financial information can and should
become a mature stable process.
The table shown above shows that optimum fiduciary (compliance) information process consists primarily of recurring effort. It is quite production like.
In contrast, the optimum operational and predictive information process consists of tasks designed to deliver ad hoc responses. Sometimes an ad hoc request for operational and predictive information is made more than once, often in consecutive periods.
In contrast, the optimum operational and predictive information process consists of tasks designed to deliver ad hoc responses. Sometimes an ad hoc request for operational and predictive information is made more than once, often in consecutive periods.
The mistake organizations make is to assume that this operational and predictive information will then always be required and that this information should be provided through a recurring process.
The issue is that the operational or predictive information may not be needed in every period; in fact the information may never be needed again. That is the nature of operational and predictive information and the reason for a process of ad hoc responses. The resource wasted by a recurring process that is not needed or used is obvious.
The issue is that the operational or predictive information may not be needed in every period; in fact the information may never be needed again. That is the nature of operational and predictive information and the reason for a process of ad hoc responses. The resource wasted by a recurring process that is not needed or used is obvious.
The controller needs to continually asses the configuration
of financial information processes and nurture processes that fall within the
optimum configuration as they stabilize and mature.
Software tools play a
supporting role only, something the runs counter to the IT centric
obsessions of our age, even though it has been almost two decades since commoditized financial management software packages have
automated almost all formerly manual financial management
processes.
The primary focus must always remain on the informational needs of the business, first, and the management process intended to generate the information, second.
The fact that the controller operates three different information processes, dictates that the controller uses three different software tools to support his information processes.
General ledger accounting data is only marginally valuable to the operational decision maker because it doesn’t relate cost to the actual non-calendar rhythms of the business, nor does it relate cost to the business’s often unrecognized efficiency patterns.
The mistake often made with using the features of standard packaged financial management software is to use the single model of deductive inferences based on historical financial information to satisfy the information needs of the regulatory and financial users of fiduciary AND the users of operational and predictive finanical information. It can’t be done within that single model.
The primary focus must always remain on the informational needs of the business, first, and the management process intended to generate the information, second.
The fact that the controller operates three different information processes, dictates that the controller uses three different software tools to support his information processes.
General ledger accounting data is only marginally valuable to the operational decision maker because it doesn’t relate cost to the actual non-calendar rhythms of the business, nor does it relate cost to the business’s often unrecognized efficiency patterns.
The mistake often made with using the features of standard packaged financial management software is to use the single model of deductive inferences based on historical financial information to satisfy the information needs of the regulatory and financial users of fiduciary AND the users of operational and predictive finanical information. It can’t be done within that single model.
The users of operational and predictive financial information need
information at different and incompatible levels of aggregation and
classification than the users of fiduciary financial information.
Further, the strategic decision maker needs predictive information
while the operational decision maker needs real time, actual performance
information. These two time perspectives of the requisite financial data are
also incompatible within a single model.
The process based model of the accounting function that
divides financial management into fiduciary
(compliance) activities, operational information
activates, and predictive (forecast) activities provides
guidance for initiating and guiding the transition to an non-IT centric
conception of the controller function.
It characterizes HOW the controller must design and implement new processes — separate and distinct for the fiduciary financial information process — to develop and communicate operational and predictive cost information.
Finally, the approach introduces a model that relates the frequency of information generating tasks to the kind of information the processes provide. The model frees the controller from a calendar driven mindset and guides him in designing new processes and managing the transformation of the financial management function.
It characterizes HOW the controller must design and implement new processes — separate and distinct for the fiduciary financial information process — to develop and communicate operational and predictive cost information.
Finally, the approach introduces a model that relates the frequency of information generating tasks to the kind of information the processes provide. The model frees the controller from a calendar driven mindset and guides him in designing new processes and managing the transformation of the financial management function.
