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Below is a cache of http://www.maxager.com/news/articles/strategic_finance_coverstory11.2006.pdf. It's a snapshot of the page taken as our search engine crawled the Web.
The web site itself may have changed. You can check the current page or check for previous versions at the Internet Archive. Yahoo! is not affiliated with the authors of this page or responsible for its content. Shareholders Pay for N o v e m b e r 2 0 0 6 I S T R AT E G I C F I N A N C E 2 7 B Y M I C H A E L R O T H S C H I L D No oneparticularly management accounting expertswould dispute the old saying, You cant manage what you cant measure. Yet consider for a moment what is perhaps the most critical financial goal of manufacturing firms: return on assets (ROA). Investors rate the management performance of CEOs and CFOs of manufacturing firms largely by their ability to wring profits from the assets under their control. As such, ROA is perhaps the premier metric of quarterly and annual results. But how many manufacturing firms are able to measure and report on ROA at the transactional level of detail? How many provide their middle-management ranks with accurate, timely, detailed reporting of ROA by invoice line item, pro- duction run, customer order, production line, etc.? Virtually none. Cover Story Shareholders Pay for ROA THEN WHY ARE WE STILL LIVING IN A MARGIN-ONLY WORLD?
ROA may be the central financial goal of manufacturing firms, but even todays
advanced management accounting sys-
tems, including sophisticated activity-based
costing (ABC) and enterprise resource
planning (ERP) systems, arent capable of
calculating, reporting, or modeling ROA at
a level of detail sufficient to allow man-
agers to know the ROA impacts of their
day-to-day, deal-by-deal choices and trade-
offs. Consequently, ROA is really nothing
more than a high-level, after-the-fact, end-
of-the-quarter or end-of-the-year, rearview
mirror report card on CFOs and CEOs.
ROA cant be managed because it cant be
measured at the transactional level where profit-making
business decisions actually get made. If truth be told,
there is no effective linkage between the key financial goal
of manufacturing firms and their daily operating deci-
sions because the strategic ROA goal hasnt been translat-
ed into a pragmatic, tactical measure of business activity. Following this logic, its my contention that, despite decades of massive investment in sophisticated informa-
tion systems, when it comes to the management account-
ing challenges facing managers of complex, asset-
intensive manufacturing enterprises, an enormous gap
remains between managements need for actionable,
profit-optimizing information and the capabilities of
todays advanced systems. Further, I would argue that, as a direct consequence of this weakness in management accounting systems used by
complex, asset-intensive manufacturers, shareholder
returns in industries including chemicals, steel, semicon-
ductors, electronic components, paper, packaging, plas-
tics, and several others often fall well below an acceptable
rate of return on investor capital. Viewed on the global
scale, in this $2 trillion sector of manufacturing, I esti-
mate that this problem causes an annual profit shortfall
of more than $100 billion. In short, inadequate and
superficial measurement of ROA allows misguided man-
agement decisions that, in turn, are causing $100 billion
per year to be frittered away. Thats real money. W H AT A B O U T P R O F I T ? Before we drill into the details of this problem, lets go
back to basics. First, consider how most well-trained busi-
ness people think about and define the ultimate goal of
any business: profit. If you were to ask a dozen experi-
enced managers seated around a conference table to sug- gest the best definition of profit, a few would undoubt-
edly mention gross margins, and others would say operat-
ing earnings or profit after tax, earnings per quarter,
earnings per share, return on assets, or return on equity.
Still others would show their sophistication by spouting
an alphabet soup of acronyms: ROS, EBITDA, ROCE,
ROIC, RONA, EVA
The web site itself may have changed. You can check the current page or check for previous versions at the Internet Archive. Yahoo! is not affiliated with the authors of this page or responsible for its content. Shareholders Pay for N o v e m b e r 2 0 0 6 I S T R AT E G I C F I N A N C E 2 7 B Y M I C H A E L R O T H S C H I L D No oneparticularly management accounting expertswould dispute the old saying, You cant manage what you cant measure. Yet consider for a moment what is perhaps the most critical financial goal of manufacturing firms: return on assets (ROA). Investors rate the management performance of CEOs and CFOs of manufacturing firms largely by their ability to wring profits from the assets under their control. As such, ROA is perhaps the premier metric of quarterly and annual results. But how many manufacturing firms are able to measure and report on ROA at the transactional level of detail? How many provide their middle-management ranks with accurate, timely, detailed reporting of ROA by invoice line item, pro- duction run, customer order, production line, etc.? Virtually none. Cover Story Shareholders Pay for ROA THEN WHY ARE WE STILL LIVING IN A MARGIN-ONLY WORLD?
ROA may be the central financial goal of manufacturing firms, but even todays
advanced management accounting sys-
tems, including sophisticated activity-based
costing (ABC) and enterprise resource
planning (ERP) systems, arent capable of
calculating, reporting, or modeling ROA at
a level of detail sufficient to allow man-
agers to know the ROA impacts of their
day-to-day, deal-by-deal choices and trade-
offs. Consequently, ROA is really nothing
more than a high-level, after-the-fact, end-
of-the-quarter or end-of-the-year, rearview
mirror report card on CFOs and CEOs.
ROA cant be managed because it cant be
measured at the transactional level where profit-making
business decisions actually get made. If truth be told,
there is no effective linkage between the key financial goal
of manufacturing firms and their daily operating deci-
sions because the strategic ROA goal hasnt been translat-
ed into a pragmatic, tactical measure of business activity. Following this logic, its my contention that, despite decades of massive investment in sophisticated informa-
tion systems, when it comes to the management account-
ing challenges facing managers of complex, asset-
intensive manufacturing enterprises, an enormous gap
remains between managements need for actionable,
profit-optimizing information and the capabilities of
todays advanced systems. Further, I would argue that, as a direct consequence of this weakness in management accounting systems used by
complex, asset-intensive manufacturers, shareholder
returns in industries including chemicals, steel, semicon-
ductors, electronic components, paper, packaging, plas-
tics, and several others often fall well below an acceptable
rate of return on investor capital. Viewed on the global
scale, in this $2 trillion sector of manufacturing, I esti-
mate that this problem causes an annual profit shortfall
of more than $100 billion. In short, inadequate and
superficial measurement of ROA allows misguided man-
agement decisions that, in turn, are causing $100 billion
per year to be frittered away. Thats real money. W H AT A B O U T P R O F I T ? Before we drill into the details of this problem, lets go
back to basics. First, consider how most well-trained busi-
ness people think about and define the ultimate goal of
any business: profit. If you were to ask a dozen experi-
enced managers seated around a conference table to sug- gest the best definition of profit, a few would undoubt-
edly mention gross margins, and others would say operat-
ing earnings or profit after tax, earnings per quarter,
earnings per share, return on assets, or return on equity.
Still others would show their sophistication by spouting
an alphabet soup of acronyms: ROS, EBITDA, ROCE,
ROIC, RONA, EVA
