Wednesday, March 5, 2014

Focus and Leverage Part 317

From time to time on my blog I discuss interesting and impactful books and give credit to the authors for writing them.  This is one of those times.  In today’s blog I want to tell you about what I believe is one of the best book ever written on the subject of Throughput Accounting.  The title of the book is appropriately, Throughput Accounting – A Guide to Constraint Management and the author is Steven M. Bragg.  The publisher is John Wiley & Son’s Inc. and the book was published in 2007.  Steven Bragg has authored over 30 books, has been the CFO or Controller for four different companies, and has his degrees in Economics and Finance.  I tell you of his credentials because he has lived and managed in two completely different worlds…..the Cost Accounting world and the Throughput Accounting world, so he completely understands the difference between both.

I have written about different accounting practices on numerous posts, but for those of you who are new to my blog, I want to start with the basics of these two dramatically different accounting methodologies.  For those of you who have been regular followers of my blog, you do know my view of traditional Cost Accounting (CA) is not a very good one.  From a very high level, what bothers me about traditional CA is the belief that the pathway to profitability is through cost cutting or saving money.  On the other hand, we believers of the Theory of Constraints version of accounting, Throughput Accounting (TA), know that the key to profitability is through making money.  So what’s the difference?

I’m going to quote Steven Bragg’s book preface because he sums up this difference so very well.  He writes, “The practice of throughput accounting is about how to wring more profits from your company by focusing strictly on the management of your bottleneck resource, or constraint.  This approach is entirely at odds with the traditional use of detailed allocations to arrive at fully burdened costs for your products, customers, and sales regions – which can yield results so convoluted that a company can become paralyzed with indecision.  Not so with throughput accounting, which yields crisp and easy to understand results for a broad range of management applications.” 

So why am I recommending Steve Bragg’s book?  For me, Bragg breaks down the subject of accounting in basic terms that everyone can understand and provides numerous real life examples of why traditional cost accounting leads companies down the wrong path to profitability.  And even though his writing is clearly focused on manufacturing operations, all of what he writes applies to a very wide range on industry types including Healthcare, MRO and other service based companies.

This will be the first of several postings on Steve Bragg’s teachings presented in this book.  He begins with an introduction to the concepts of constraint management, followed by supplemental information about how it is used in the factory for daily reporting decisions, but could easily apply to a hospital or an aircraft repair facility.  The book then addresses how constraint management can be applied within the accounting department, beginning with a comparison between it and other accounting systems.  Of particular interest are two chapters on financial analysis scenarios and case studies that show specifically how throughput accounting can be used to find the best solutions in a large number of real-world situations.

Another important part of this book is when he explores how the traditional budgeting and capital budgeting models can be adapted to integrate throughput concepts, as well as how control systems can be designed to warn of problems related to the constraint and several supporting functions.  One of my favorite sections of this book has to do with the selection of appropriate performance metrics.  I can only tell you that if you are an accounting manager, financial analyst, production planner or production manager, then this book provides you with the tools you need to dramatically improve your company’s financial performance.  And as I said, even though Steven Bragg has written Throughput Accounting for a manufacturing audience, all of what he writes applies to all other industries.  It’s time that the stranglehold traditional cost accounting has had on industry be unshackled and that a new way of managing companies be learned and applied.

In my next posting, I will begin to lay the foundation for this new awakening that needs to occur.  I will start with the basics of constraints management and then incorporate many of the concepts Steven Bragg has presented in his book.

Bob Sproull

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