There are lots of parts that go into financial statements, but sometimes there can be one thing in particular that can be really key.  Without it, the financials are going to struggle to grab real solid meaning.  Without it, financials will always be subject to question.  Without it, financials can take a lot longer to produce and what is produced isn’t quite so good.

Often times, that key can be cost accounting.  Perhaps, the most important number in the income statement can be the gross margin.  What kind of margin is earned on the goods you sell or the services that you provide?  If you don’t know that number, you can’t really be sure how well you’re doing as a business.  And, if you don’t have the cost accounting in good shape to drive that particular number, then you don’t know that answer.

When I was CFO for a pharmaceutical firm, I walked into a company where the cost accounting was in shambles.  The cost did not really reflect the movement of goods going through the plant.  The president had no confidence in the cost to the LBUs for quoting prices to customers.  We’d have no confidence that our inventory at the month end was costed out properly and that we had any reasonable idea on what our gross margins were.

Turn the picture ahead a couple years and it was 180 degrees different.  There was total confidence in the cost accounting system.  It was a cornerstone of the pricing that the president did.  Everyday we’d have gross margin reports from the previous day and we’d have high confidence in those numbers.  We’d have such confidence that we could tell right from those numbers if anything had happened wrong during the previous day.  For example, if bottles of a thousand had suddenly been billed out as bottles of a hundred, it would stand out like a sore thumb.  We’d catch it right away and make the correction.  Numbers for the financials were able to be closed out very quickly.  We had high confidence in our inventory numbers that they were costed out properly.  Putting it all together, we were very confident in the margin number that was being produced in the financial statements.  In other words, we had a handle on how the business was really performing.

And none of that would’ve happened without having this strong cost account system in place.  The cost accounting was the key.

So, give yourself a good check on your financials.  How confident are you about your costs?  How confident are you that you know the costs to produce your products or deliver your service?  If you are, congratulations you have some good numbers that reflect how you’re actually doing.  But, if you don’t, time to get it fixed, otherwise you’re just asking to fool yourself in terms of how you’re really doing.  You’re asking to make faulty business decisions everyday in how your price products for customers on your inventory levels and other business decisions.  Get the cost accounting fixed quickly.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value