The “Laws” that Support the Profitability Analytics Framework
Profitability Analytics Center of Excellence
A non-profit community of professionals helping companies use analytical models to enhance organizational value.
By Doug Hicks, Director, PACE
The word “law” has two quite distinct meanings. It may describe arbitrary regulations made by human consent in particular circumstances for a particular purpose, and capable of being promulgated, enforced, suspended, altered, or rescinded without interference with the general scheme of the universe. On the other hand, the word “law” is also employed to designate a generalized statement of observable fact.
In the first sense we may talk of tax laws, generally accepted accounting principles, or the rules of baseball. Such laws frequently prescribe that certain events will follow upon certain others; but the second event is not a necessary consequence: the connection between the two is purely formal. For example, if a fielder catches a batted ball before it touches the ground, the batter is “out.” There is, however, no inevitable connection between the capture of an in-flight baseball by a leather glove and the return of a human body from a patch of freshly mown lawn to a hard wooden bench. The two events are readily separable in theory. Should the rule-making body of baseball chose to alter the law, no cataclysm of nature would be involved.
In the second sense, we talk about the laws of nature. Such laws cannot be promulgated, altered, suspended, or broken at will; they are not laws at all in the sense that the laws of baseball or tax laws are laws. They are statements of observable facts inherent in the nature of the universe. Anybody can enact that murder will not be punishable by death; nobody can enact that the swallowing of a glass full of pure hydrocyanic acid shall not be punishable by death. In the former case, the connection between the two events is legal – that is, arbitrary. In the latter case, it is a true causal connection. The second event is a necessary consequence of the first.
领英推荐
The Profitability Analytics Framework has been designed to aid decision makers in developing the kind of comprehensive and relevant decision support information they need to optimize their organizations’ financial performance. It not a “method” like ABC, TOC, Kaizen, or the Balanced Scorecard. Instead, it is a comprehensive strategic management framework that encompasses revenue, cost and investment management – all three factors that determine return on investment – and addresses management’s need to formulate, validate and execute the organization’s strategy. At its core are causality-based models that reflect the fundamental laws of nature that underlie the organization’s operation, not arbitrary regulations prescribed by rule-making bodies or general formulas developed by subject matter experts.
Those causality-based revenue, operating, and investment models must be populated with data that also reflects laws of nature, not laws of man. This is especially true for expense and cost data. Financial accounting’s definitions of investment and expense must be reconsidered and modified. Investments must include those made in both tangible and intangible resources. Financial accounting’s need to assign “sunk costs” to future financial periods eliminated. A forward-looking replacement for depreciation that effectively measures the funds that need to be accumulated to preserve the existing capital base must be developed. Cost of capital must be recognized as a true cost of business. In short, financial accounting conventions which reflect laws of man must be replaced with economic laws of nature.
“Methods” such as those mentioned earlier can be used to effectuate portions of the Profitability Analytics Framework, but they are no substitute of the comprehensive view of the organization’s operation provided by the Framework.
If you would like to explore more PACE content, check out our?LinkedIn PACE Channel?,?website?,?Twitter account?and Podcasts on?Spotify,?Google?and?Apple Podcasts. Read our ebooks to learn more about?The Profitability Analytics Framework?and?6 Steps to Assessing and Improving Revenue Management Principles
Consultor: Analytics, Operaciones y Control Interno
2 年"Pero que todo se haga decentemente y con orden." 1Cor.14:40. Si, porque los seres humanos hacemos todo aspecto y actividad de modo mezquino, esto es con soberbia y vanidad, traduciéndose en corrupción, el timarnos y los embustes, incluso consigo mismo. Cualquier plan estratégico si no tienen capacidad de solvencia moral y ética de sus ejecutores, fracasara. Fracasaran las expectativas, la rentabilidad,
Associate Professor Of Accounting at Eastern Kentucky University
2 年Concur. Still, it is something of a dramatic change for too many accountants to view what we do as moving beyond simple allocations for financial reporting to economic modeling of the organization systems for true decision making. Perhaps the next question is how do we move beyond critiques to positive acceptance and equipping of accounting and finance professionals for these new roles.
ORTimes.org - Healthcare: Expert integration of data, risk management, and clinical, finance; 25+yr MD- Anesthesia & ICU; 2yr MBA: Risk mgmt, Data mgmt, Finance mgmt; TOC, Lean, 6sigma
2 年To me, anesthesiologist, much common accounting would be like unplugging our monitors and putting on a blindfold and earplugs before starting a case. As an anesthesiologist for surgery, we can easily have 10 different concurrent methods of monitoring physiological effects of different surgical techniques, fluid, and pharmacological actions. Every patient is unique. We quickly 'learn' each patient and adapt our interventions to what we see from our monitors (which includes non technical, sight, sound, smell, etc.) If all patients were the same at any time, and the performance of surgeons were exactly the same for a procedure... we wouldn't need monitors. We're experts at physiological principles, pharmaceutical effects, and most normal anatomy (with many variants). And, we can focus on what's out of whack by different consistent, or inconsistent, patterns among our monitors and other observations. I'm glad that PACE is pushing these changes. Maybe healthcare administrators will take note and use this knowledge. Thanks, Doug.
Founder and CEO: Analytics-Based Performance Management LLC; Expert in ABC, EPM/CPM, Profit Analysis, Budget, Analytics
2 年Doug ... I very much like your article. A way that I try to describe what you wrote is with this: "Rules are many, but principles are few. Examples of principles are gravity and the speed of light. They cannot be violated." But accountants violate the "causality principle" for management accounting when they allocate indirect expenses (i.e., overhead) for product costing like spreading butter across bread.
"Cost of capital must be recognized as a true cost of business. In short, financial accounting conventions which reflect?laws of man?must be replaced with economic?laws of nature." Well said!