Looking Forward

Dec 30, 2014

There are certain parts of my life that I sometimes wish I could have a replay button. By that I mean, if I was able to “revisit” a certain time period and look forward it might change one or more of the decisions I made at that juncture.

About four years ago, I was working with a food processing company trying to help them develop a new costing model. This was a by-product of the initial engagement which resulted in a major upheaval of the accounting department and some significant changes in production as well. I was originally called out to the company because they were struggling with profit margins, cash flow, and was not able to get timely or effective reporting from the accounting department.

Once the personnel and software issues were resolved, we spent several months touring the facility, discussing costing methodology and identifying inputs into the model. We eventually came up with what I believed to be a sound model that accurately allocated resources to the products as they were consumed. We had a final meeting to review the model, the process, and ultimate implementation.

Within a few months, they started to regress. The owner did not like the numbers he was seeing (even though I believe they were significantly more accurate) so he insisted they go back to “the old way” of costing the products. Try as I might, I could not convince them to stay with the new model we had developed.

Fast forward four years, and I received a phone call last week: “our financial statements do not make any sense, inventory fluctuates too much, the profit margins are not consistent and we are strapped for cash and not making any money.” As you might imagine, I am smiling to myself thinking “I told you so,” but I won’t go there. It is time to revisit the cost model and help the Company determine accurate costs again. But is that enough?

If he had his crystal ball working four years ago, he would have been able to look forward and see that the sales and pricing decisions he was making based on erroneous costing information would continue to give him what he had always had, only worse. The answer is no, that is not enough. I can and will help them get their costing back on track and understand why they are not making money. That is the easy part. The harder part is looking forward. Once we have all that data, they need to use it to make decisions for the future. Which products should we maximize sales? Should we consider getting rid of any product lines? The most important question: What would happen IF…….

Any scenario you can put behind “if” should be able to be answered using your data and your cost accountant. The reports that identify what we did are valuable information, but you need to look at what we can do to move your Company to a higher level.

Categories: Cost Accounting