Fort
Wayne, Ind., May 26 -- Do you want to manage your business based on accurate
information, or on false and misleading data?
Are
you sure your best customer is making you money, or that your worst customer
isn't? Maybe you aren't allocating costs correctly. You could be losing your
shirt and not even know it.
"Millions
of dollars can be better managed if overhead is charged directly to the
department or product line that uses it," said John King, president of
Roster Network, an alliance of Indiana professional services firms. "It is
hard to believe that companies use arbitrary formulas to track their costs, but
they do. There's a better way."
Traditional
accounting methods spread overhead costs according to standardized formulas that
may have little to do with the real-world business practices. The result is that
when managers compare product lines, the profit picture can be dangerously
inaccurate.
Looking
in a fun-house mirror
"Using
formulas to track overhead is like looking in a fun-house mirror - and it's no
way to run a business," King said. "Many firms have no idea whether
they are making money on a product."
The
good news, King said, is that the solution is stunningly obvious: Use the right
tools to charge overhead according to the way it is actually used. "There
are systematic techniques to manage costs, such as the Position Matrix,
that paint a clear picture of
profitability by documenting what people do and how they do it," King said.
The Position Matrix
helps managers create meaningful
job descriptions and creates organizational systems based on real-world
experience, resulting in not only enhanced performance, but enhanced
cost-accounting. The result, in modem management parlance, is
"activity-based management."
"The
Position Matrix
allows managers to understand
the specific activities that their people perform and allocate the expenses
accurately," King said.
The
cell-phone example
Let's
look at an example: cell-phone expenses. A general contractor is working two
construction sites simultaneously. On one of his job sites the cellular
telephone is rarely used because a regular phone is available. On the other
site, the cell phone is the only means of communication, resulting in hefty
charges. Using traditional accounting methods to track overhead, the cellular
charge might be vaguely lumped together and divided equally between the two
jobs. In reality, the job that requires extensive cell-phone charges is less
profitable. But it will never show up that way on the books. And the use of
cellular telephones is really only one very. minor aspect of this owner's
business.
If you multiply this distortion by every overhead category the business might have, such as office supplies, clerical staff, vehicles, depreciation, toilet paper, computers, training, advertising, facilities, and travel, you can see how inaccurate the profit picture becomes.
Managing
based on reality
Businesses
that embrace activity-based management and the Position Matrix
system have abandoned these
haphazard formulas in favor of a much more accurate method: reality.
For example, our hypothetical contractor could charge the cell-phone
expense to the job-site where it is actually used, and not divide it
artificially among both sites. This seems obvious. "It is obvious,"
King said. "Obvious and simple to fix." The result is an accurate cost
-- and profit -- picture.
Everyone
shares accountability for profit
"Activity-based
management is a process that makes everyone within the company accountable for
the bottom line," says Mike Abel of Christen Souers Gehres Family Business
Advisers, a Fort Wayne based CPA firm. Abel says activity-based management is a
three-pronged approach to improved profitability. "ABM is primarily used to
improve business processes, provide strategic product cost data, and promote
continuous improvement efforts," Abel said. "It takes some patience to
methodically put the program in place and customize it for each individual
company, but you will recognize tremendous benefits."
The
real bottom line
"If
your company isn't using activity-based management, you're betting your company
on inaccurate information; it's that simple," says King. "Do you want
to use accurate financial data to assess your profits, or false and misleading
numbers? That's not overstating the need for ABM," he said.
"Using the Position Matrix system to accurately manage your costs gives you the real bottom line," King said.