We were having a discussion the other day about whether it would be more profitable to teach finance concepts to the people doing the actual work on the shop floor (‘workers’) or to teach the finance and accounting people (‘suits’) the details and nuts and bolts of how the myriad operations of the facilities work. The purpose is to leverage the knowledge of all the people in the organization in making good financial decisions at every level.
One of our group is a finance professor, PhD, who has for years taught corporate finance to MBAs and finance majors at major universities. Currently she’s compressing years of finance into days for people in an Executive MBA program. One theory of the fast-track Executive MBA program is that the people are seasoned businessmen and are in the program to see the big picture. Unfortunately, or fortunately, individual basic misconceptions in dealing with money become apparent. You may be thinking that those who are confused are the VPs in Marketing or Operations. Well, that’s sometimes true, but not unexpected and unlikely to lead the company into major strategic errors; however the ones most adamant about their misconceptions yet potentially causing grave strategic errors will be the occasional VP in Accounting.
When you ask your VP in Marketing to give you projected returns, you take them with a grain of salt knowing that a lot of guess work is involved. However, are you aware that your VP in Accounting may be doing the same, but in reverse? If your VP in Accounting is actively into cost accounting, then he is in effect trying to justify prior, sunk cost purchases, decisions already made, by attributing the costs of those purchases to present and future production. There are so many different ways of attributing fixed cost to production, and it’s such a political process, that it’s obvious that it’s as much a guessing game as the one your Marketing VP makes. Unfortunately, the guessing on allotment of costs propagates to the shop floor so that the people in operations are told to use the wrong equipment and spend valuable time and raw materials producing the wrong product. The ‘workers’ will think that what they’re doing makes no common sense, and they may well be right.
So, getting back to our discussion about whether it would be more profitable to teach finance to the ‘workers’ or to teach the ‘suits’ more about operations on the floor, a bit of both may be in order. Working together, listening, learning the others language and concepts would go a long way. Each is an expert in their own right, but each would make more rational decisions with a way to understand the input given by the other.
It’s well worth anyone’s time to read some of the series of books by Eliyahu M. Goldratt based on constraint theory. Several books have been written that continue along the same ideas with ‘throughput’ accounting. Much of this is similar to literature on managerial accounting and ideas in operations management.