Accounting - Is it Holding Us Back?

by Don Harkey

When I meet with a company who is considering launching a new quality program or implementing a training program, one of the first things I ask is "what are you trying to accomplish?". The most common answer is "we want to reduce our expenses and save some money". They want to improve their "bottom line". That is when I push back.

Here is an interesting hypothesis for you... I am beginning to believe that one of the most dangerous and hindering factors in American business today is Accounting. WHAT?!?

As a profession, accounting seems like a fairly non-controversial entity. Current accounting rules are seldom questioned and are taught like a hard science in many business schools. It is simply the way it is done... and it often leads to doing things wrong.

Companies often make decisions in order to drive their balance sheets. This is understandable as corporations are often judged by their balance sheets. Let me give an example.

A corporation allows its employees to keep a "vacation balance". In other words, employees are allowed to carry over unused vacation days to the next year. During the recession, the company decides to help their balance sheets by telling employees to drive down their vacation balance to nothing by the end of the year. What is the impact on the company? This is a major benefit for the balance sheet. The vacation balances show up as a liability owed to its employees. For example, an employee who makes $20/hour and has 80 hours (2 weeks) of saved vacation is a $1600 liability to the company (the company would "owe" the employee that money if they left). If this represented the average balance for an employee within a company of 10,000 people, cutting the vacation balances would "save" the company $16,000,000! That's a nice sum of money to talk about for the person who made that decision at evaluation time!

Take a second now and think about what the company just did. First of all, during a particularly challenging time in the company history, this response for the company is to send its people home. Rather than innovating, creating, and finding new value for its customers, the employees of this company are spending extra vacation time. This doesn't seem like a good idea.

Secondly, consider the actual impact of this move. The company needs a certain number of hours to make the product or service and run the company. In this example, we cut 800,000 hours of work out of the year. If the company has a decreased demand that requires 800,000 fewer manhours, then everything is balanced. This is seldom the case. If the company requires only 200,000 less hours than normal, then the company must make up the other 600,000 hours in production. The only way to accomplish this is to either hire more people or work overtime. At time and a half, this equates to $18,000,000 in overtime. Whoops!

OK. Yes, if the company had looked at the accounting closely, they would have balanced this out. However, the reality is actually more complex than the example above. Productivity is not linear (production/hour becomes less efficient as it slows down). Yet many companies prefer to oversimplify and send their people home on extra vacation.

The bottom line is that anytime a company focuses on running by the metrics, they make bad decisions. The metrics can be used to help make decisions, but the final decisions must be made strategically with the companies total future in mind.