RELEVANCE REGAINED by H. Thomas Johnson

Author:H. Thomas Johnson
Language: eng
Format: epub
Publisher: THE FREE PRESS
Published: 1992-07-15T00:00:00+00:00

Planning and Tracking

None of the comments made above about limitations of accounting information in the area of operations control should be construed to mean that accounting has no place in a globally competitive organization. On the contrary. Accounting has as important a role as ever helping companies evaluate the extent and financing of their operations. Companies have long used, and for the indefinite future will continue to use, accounting tools for planning and tracking financial results. In a well-run company, top management always must have a continually evolving sense of the likely financial consequences of plans and decisions. It was for that purpose that DuPont developed its famous ROI chart system nearly eighty years ago; and for that purpose people developed sophisticated modes of variance analysis and shareholder value analysis in the last thirty years. These planning and forecasting tools are as useful today as they were originally.

Companies also must know the cash implications of plans, decisions, and ongoing operations. Nobody likes surprises, at least not the type that lead a company toward bankruptcy. To avoid preventable mistakes companies must have sound cash budgeting and cash flow tracking systems. Traditional accounting tools have served this purpose for many, many decades and will continue to for years to come.

The point of everything said above is that information from systems designed to enforce fiscal responsibility— what Alfred Sloan referred to as top management’s responsibility to control the pursestrings— should not also be used to control operations. The ironic result, as the last forty years of American business history suggests, is to court fiscal disaster. As a general rule, then, top managers should resist rolling plan and budget information down to control operating processes. They should not invest resources in creating elaborate information systems to “tie-out” operating performance indicators with financial accounting performance indicators. Instead, they should invest in special studies as needed to explain unforeseen financial performance variances. And if special studies indicate that by running existing processes as well as possible a company can not generate desired financial results, they should resolve to adjust their plans, not beat up on the operating people and not step up efforts to cajole reluctant customers.

Figure 7-1 Old Management Information System

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