from studying decisions and procedures of actual firms, but from the
stylized models of managerial and firm behavior articulated by
“theorists” in other academic disciplines. Thus, the models were not
developed for or tested on actual enterprises.
The obsolescence of contemporary management accounting
systems has likely created significant problems for the managers of
large, diversified organizations. Contemporary cost accounting and
management control systems are no longer providing accurate signals
about the efficiency and profitability of internally managed
transactions. Consequently, managers are not getting information to
help them compare the desirability of internal versus external
transactions. Without the receipt of appropriate cost and profitability
information, the ability of the “visible hand” to effectively manage the
myriad transactions that occur in a complex hierarchy has been
severely compromised.
The loss of relevance in most companies’ cost accounting
systems is particularly unfortunate for the global competition of the
1980’s. The consequences of inaccurate product costs and poor
accounting systems for process control and performance measurement
were not severe during the 1970’s since a combination of high inflation
and a weak dollar sheltered most U.S. companies from foreign
competition. High levels of worldwide demand for U.S. products during
that decade placed a premium on production throughput. Higher costs
and, and occasionally, goods of substandard quality could generally be
passed on to customers. The competitive environment for U.S.
manufacturers completely changed in the 1980’s. First, disinflation
reversed the previous inflationary psychology, and manufacturers
could no longer recover cost increases through higher prices. At the
same time, a sharp increase in the value of the U.S. dollar made
foreign produced goods less expensive to the U.S. consumer. Also
manufacturers in Japan started to place an emphasis on adapting
improved quality standards.
Current cost accounting systems attempt to satisfy three goals:
to allocate certain period costs to products so that financial statements
can be prepared monthly, quarterly, and annually; to provide product
cost estimates to product and business managers; and to provide
process control information to cost center managers. It would be
desirable to have a single systems satisfy all three cost accounting
objectives. But given the low cost and high power of information
processing technology, this should not be a necessary design criterion.
Of more importance is to perform each function well.
The obsolescence of management accounting systems has not
occurred overnight. The systems, whose intellectual roots can be
traced to events sixty to one hundred years ago, worked well for the
times in which they were designed. It has been speculated that the
dominance of financial accounting procedures, both in education and in
4
The book helps your answer such questions, and you will find that
financial analysis is more than an interesting arithmetic exercise. You
can find numerous examples that illustrate the major principles of
financial analysis and the potential benefits from attentive financial
management. These examples can help you profit by applying the
principles to any business circumstance.
5
You can also find many of the major tenets of financial management
crystallized in a set of concise Financial Facts. For example, one
Financial Fact marks the current ratio that usually represents adequate
liquidity in a business. Another relates financing costs to the return on
a firm’s assets. Still another emphasizes the value of prompt trade
payment practices.
Unique business circumstances often qualify the management
tenets set forth in many Financial Facts, but collectively they provide
the foundation for effective management of a business enterprise.
To illustrate, a summary of the primary justification of the book:
FINANCIAL FACT 1:
Financial management is critical
to the success of every business.
Every chapter ends with a Financial Fact. The book doesn’t reveal
any secrets, but it should become a profitable management tool
whether you use it only as an occasional reference or as a primary
guide for making financial decisions. This book will allow non-financial
IT managers gain a basic understanding of a firm’s financial
management.