CFOs – Vanguards or Villains?
I continue to get mixed signals regarding how advanced CFOs are with their journey to become the “strategic advisor” that is so frequently mentioned in finance and accounting magazines and consulting firm’s centers of excellence (CoE) websites. There are countless articles describing the vision of CFOs and their staff after completing a successful financial transformation of their processes. And I have also 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.
The CFOs who are bold will candidly describe their managerial accounting practices and systems as aged and Medieval at the extreme. The bold ones are unafraid to admit that their existing reported information is 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 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, then suppliers must shift to differentiated services, deals, and discounts that are tailored to grow sales and profits from different types of customer micro-segments.
Strategic CFOs – reality or myth?
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 conferences that I regularly present at. The large corporations may have had some success, such as implementing an activity-based costing (ABC) system to remove the grotesquely costing distortions. My concern is with the small and medium size businesses (SMBs) and smaller divisions of corporations.
When I converse with them the truth is exposed. The CFOs or their staff reveal and confess that they continue to apply decades-old managerial accounting practices such as single burden rate-based standard costing. We need vanguard CFOs. The definition of a vanguard is the leading part of a military formation to scout and secure ground in advance of the main force. Vanguards also help shift power from the powerful to the powerless.
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. I will explain my opinion after listing a few commonly accepted reasons.
Why do CFOs hold back?
The commonly accepted explanations for lack of progression 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 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 over-sized 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 GAAP, then managers 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 the consumption relationships of resource expenses through work activities into the products, services, channels, and customers.
My theory
Although there is some validity to those three 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 buying customers, a company’s internal department 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 a customer is, not just how large a customer’s sales volume is.
A CFO or accountant with an MBA is not enough to 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 that bridge to become the strategic advisor and contributor that so many magazines proclaim that CFOs already are. They will be vanguard CFOs.