Archive for April, 2012

"The Game"

Posted April 30, 2012 By Fletcher Groves

(excerpted from a newly-added chapter in The Pipeline)

The intrepid, results-based consultant opened the portfolio, removed a set of game boards, and leaned them against the conference room wall. Then, she looked into her notebook carryall and removed the zippered pouches she would need. Two of the pouches contained poker chips, and the third contained multiple, different sets of six-sided dice.

“I need the conference room table cleared”, she said.

“Change is a necessary condition to any improvement effort. You can’t expect to get different results by doing the same things the same way. But, change is difficult, disruptive, time-consuming, and costly; plus, the effort can fail to produce the intended result.

“What we need to do is to be able to learn what to change, what to change to – I hate the hanging preposition – and how to make the change, in essence, we need to be able to discover, to figure things out, without the cost, disruption, and risk of failure associated with doing it in real life.

“What we need to do, is significantly reduce the learning curve.

“At the end of the previous session, I told you that I would help you pull all of the production principles and disciplines together in a way that you can use to more effectively manage production”, she continued. “The new approach that you will use to manage production – and to thereby improve operating and financial performance – becomes intuitive and simple in practice, but there is a lot to understand.

“It is an approach that is counter to what most of you have been taught; initially, it can be hard to grasp. In short – it must be learned. And, that kind of learning is a harsh teacher when it occurs at the cost of real operating performance and actual business outcomes.

“So – we are going to engage in some discovery-type learning, by which I mean the type of learning that occurs in business games designed to simulate the competitive, fast-paced, rapidly-changing, uncertain, risk-laden, variation-filled environment in which production decisions must be made.

“It creates learning based on what you experience and do, not simply what you hear and read.

“Games compress the learning curve into a span of days, by simulating production situations that speak to the circumstances you encounter in the real world – situations that are simplified in structure, fast to run, easy to see and understand, that we can modify and run again, over and over, until we get it figured it out, until we see and understand the principles.”

 

The Debate Over Costing

Posted April 16, 2012 By Fletcher Groves

Last week, I had the following exchange with Shinn Consulting’s Emma Shinn on LinkedIn’s Builder discussion group, on whether costs on the NAHB Chart of Accounts Income Statement should be allocated according to the rules of absorption costing or the rules of variable costing.

The matter of how the NAHB Income Statement allocates costs was the subject of an April 2009 post on “Escape from Averageness”, as well as a two-part series of posts in January of this year, summarizing the results of a CFO survey we conducted on the subject of the NAHB Income Statement preceding the 2012 International Builders Show (IBS).

Here is the exchange, in its entirety:

Monica Wheaton: Don’t Miss this Webinar on April 13th: Understanding and Analyzing Financial Statements to Improve Operations and Profitability. Financial statements can be exceptionally telling! This webinar will help you examine the most important part of the income statements, balance sheets and cash flow statements to understand and improve the overall financial health and operations of your company.

Fletcher Groves III: “Financial statements can be exceptionally telling!” Unfortunately, not as telling as they should be. A dissenting view: NAHB Part I here

Emma Shinn: I do respectfully disagree with your assessment of the NAHB Chart of Accounts – the purpose of the Chart is to provide a structure for collecting financial information in an organized and meaningful way. It provides builders the capabilities to produce reports that are meaningful and that will guide them in their decision-making process. In no way does it deter or hinder the contribution margin analysis you talk about. In fact, it facilitates such analysis as it provides the classification of cost and expenses in a way that facilitates the identification of the variable and fixed components.

The contribution margin analysis does not deter from the analysis of the traditional income statement and the valuable information it provides to the builders. The contribution margin analysis does provide an expanded view and I agree with you in that builders can benefit from also looking at the income statement from this point of view as it refines further the behavior of fixed vs. variable cost and expenses.

However, your assessment of the NAHB Chart of Account is unfounded and could not be farther away from the reality of what the purpose of the Chart is set up to be.

Fletcher Groves III: Emma, you don’t have to take my word for it. As part of the survey, we asked CFOs for insight related to the structure of the NAHB Income Statement (i.e., line item accounts in series 300-900), as it relates to cost allocation (variable v. absorption) and management tools (breakeven, CVP, etc.).

This an excerpt from one CFO:

“I am intimately familiar with both the strengths and weaknesses of the NAHB Chart of Accounts. It was a great tool for benchmarking our performance with other builders and to industry standards. It was interesting to benchmark our company, but the statements produced utilizing the NAHB Chart of Accounts were of no use when it came to making pricing decisions.”

The thoughtful examination of any managerial accounting or cost accounting textbook validates this CFO’s statements. NAHB Part II here

Emma Shinn: Once again, I respectfully disagree with that assessment. There is nothing in the chart of accounts that prevents a company from preparing a statement utilizing other analytical tools. The income statement you call the “NAHB Income Statement” is the standard income statement presented in any accounting principles class. If you want to do further analysis for specific managerial considerations, that is always highly encouraged. However, I again say the NAHB Chart of Accounts vs. the charts of accounts I normally encounter in my reviews of builders’ operations facilitates further analysis; it does not preclude the analysis.

Accounting, in my view, is primarily a management tool and we continue to encourage builders to view it as a very powerful means to help direct their management decisions. That is not to take away the role accounting also plays in reporting results to third parties, such as lenders and investors.

Fletcher Groves III: Emma, the NAHB COA Income Statement has a lot of attributes. However, there is a difference between what something “does not deter or hinder” or “does not preclude”, on the one hand, and what it positively, proactively enables, on the other.

That may be all our differing views are about. However, here are two of the specific points made on the matter, posted on SAI’s “Escape from Averageness” weblog in April 2009:

“The NAHB COA Income Statement treats Indirect Construction Cost as one of the costs that is deducted from Revenue to determine Gross Profit (the only difference between Gross Margin and Gross Profit is the inclusion of Indirect Construction Cost). But – do Indirect Construction Costs vary according to Revenue? Probably not. For the most part, they are non-variable costs that will most likely be incurred regardless of the Revenue produced.”

“The NAHB COA Income Statement treats Selling Expenses (including Real Estate Commissions) as an Operating Expense, as a part of overhead. Anything allocated to Selling Expense, therefore, should be a non-variable cost. Is that the case? No. The bulk of Selling Expense is a variable cost.”

Emma – some of the CFOs in the survey were very out-spoken on this issue, and the shortcomings of absorption costing are well-documented. Readers can decide for themselves.

Here is a link to the 2009 post: The Problem with the NAHB COA Income Statement here

I hope your webinar went well.

 

"Risen"

Posted April 2, 2012 By Fletcher Groves

(a version of this entry is posted on “Escape from Averageness” every year during Easter week)

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Easter 2012, Ponte Vedra Beach, Florida

The intrepid, results-based consultant reclined into the natural seat, at the back edge of one of the dry-eddy pools, where the beach resumed its slope more steeply upward, toward the dunes. She dug her bare feet into still-wet sand, and felt the remnant of last night’s high tide through her jeans and shirt. It felt good, she thought, as she rested her arms on her knees, gazed eastward, and studied the movement of sea and sky. She smiled, as she felt the morning sun, only moments above the horizon, yet already warming to her face, on what was still a cool morning in northeast Florida, even for early April.

She was comfortable in her element. A native Floridian, she loved the waters and land of her home state, although she wished she could have seen for herself the Cracker Florida her dad liked to tell her about – the Florida of his youth, as he would describe it, before air conditioning, before hordes of people, before interstates and theme parks.

This was her routine, every year, on Easter morning. Arrive before sunrise, take it in.

Her thoughts went back to the pre-dawn darkness of the very first Easter morning, to what the disillusioned friends and followers of the one they called Jesus of Nazareth must have been thinking, as they hid in fear. By every rational explanation and every shred of evidence, this man of so much promise, in whom they had placed so much hope, was dead. They had been eyewitnesses to that unquestionable death, and the effects of the torture that preceded it; Roman crucifixions left nothing to the imagination. They had been witnesses to his burial, and the security of his tomb.

It was more than the physical death of one man; it was the death of faith and hope.

Her thoughts moved to a time, not far removed at all from the darkness of the days immediately following the death of Jesus, as Peter and others publicly asserted that they were the subsequent eyewitnesses to the effect of His resurrection and the actuality of His ascension, and that, far from abandoning their faith in fear for their own lives and succumbing to hopelessness, they were willing to live their lives – to give their lives – for the lives of others, and for the faith and the hope that His crucifixion, death and resurrection gave all of them.

So it has been, that decision, she thought, for every Christian, ever since. So it was for her.

She smiled again, and whispered.

“Risen”.