Most businesses these are focused on increasing sales; increasing the number of products, customers, and markets. Rather than focusing on cutting costs, focusing reducing labor or making the company smaller, they want to grow as quickly as practical. Despite this, many companies end up doing just that. How? Using the financial decision methodology that is built to allocate costs, not grow sales.
Businesses are required to use financial models that move them towards their objective. Throughput accounting, focused on cash flow, provides one that that is transparent and focused on moving the organization forward. By making better decisions, such as which products to outsource, which processes to improve, and what pieces of equipment to buy, managers are better able to help the organization reach its goal of making more money.
Is Traditional Cost Accounting Bad for Decision Making?
It is often difficult to see how decisions made in a local area affect the organization as a whole. This is particularly true of managers who are not able to see or affect every area of the organization. The organizational view of most managers is typically limited to their own area of responsibility and those nearby.
For the one responsible for the entire organization, the problem is even bigger. Their problem is gauging the decisions of many sub-leaders managing the various parts of the organization. They know that sometimes poor decisions are made. The issue isn't a single person making a bad decision, but if decisions are systematically poor. If most managers' decisions are based on a flawed model of reality, most decisions will lead in the wrong direction, creating more severe, long-lasting problems.
Larger, subdivided enterprises lose their system-wide perspective,the bigger the enterprise, the bigger the problem. Managers are forced to rely on decision rules that are interpret this disconnect, typically based on Traditional Cost Accounting. Throughput Accounting solves this problem.
Businesses are required to use financial models that move them towards their objective. Throughput accounting, focused on cash flow, provides one that that is transparent and focused on moving the organization forward. By making better decisions, such as which products to outsource, which processes to improve, and what pieces of equipment to buy, managers are better able to help the organization reach its goal of making more money.
Is Traditional Cost Accounting Bad for Decision Making?
It is often difficult to see how decisions made in a local area affect the organization as a whole. This is particularly true of managers who are not able to see or affect every area of the organization. The organizational view of most managers is typically limited to their own area of responsibility and those nearby.
For the one responsible for the entire organization, the problem is even bigger. Their problem is gauging the decisions of many sub-leaders managing the various parts of the organization. They know that sometimes poor decisions are made. The issue isn't a single person making a bad decision, but if decisions are systematically poor. If most managers' decisions are based on a flawed model of reality, most decisions will lead in the wrong direction, creating more severe, long-lasting problems.
Larger, subdivided enterprises lose their system-wide perspective,the bigger the enterprise, the bigger the problem. Managers are forced to rely on decision rules that are interpret this disconnect, typically based on Traditional Cost Accounting. Throughput Accounting solves this problem.
About the Author:
Learn more about throughput accounting. Stop by Mark Woeppel's site where you can find out all about performance measurement systems and what it can do for you.
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