If You Can't Measure It You Cant Manage It Essay

Introduction There are many things one can measure in a business; from production costs; employee absenteeism; budget variances; waste; customer satisfaction; business unit performance, the list could go on and on, however how are these measurements relevant and how do they add to business performance, does simply measuring something mean you can influence it? If you can’t measure it you can’t manage it” has been stated by more than one influential business or academic expert; Deming, Drucker, Kaplan, this is another list that could go on, however, this is a statement that has not been made without critism. This report will have a brief overview of the popularity of accounting measures, and then we will apply the “If you can’t measure it you can’t manage it” ideas to some specific contexts in order to demonstrate different views on the topic.

Finally, we will conclude with our opinion. Discussion Cost and management control information became of great importance during the 19th century as large production, transport and distribution businesses came to the fore (Kaplan, 1984). Production businesses needed to monitor the efficiency of their multiple processes in completing and end product and transportation businesses were dealing with larger numbers of cash transactions than any one before.

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As businesses grew larger more hierarchical and often separated geographically, ways to monitor the performance of divisions and manage aspects of the business were needed and the measurement of processes and costs became widely used. In the early 20th century this trend continued as companies created many of the management practices, based on the measurement of production characteristics and costs, which still formed the bases of almost all management accounting processes up until the late 1980’s and many of them onto today (Johnson & Kaplan, 1987).

The late 1980’s saw a great amount of focus on management accounting measures as the dysfunctional effects of focusing on traditional quantitative measures became more and more apparent in an evolving economy. Academics and consultants began to emphasize the importance of non financial measures and managements need to measure and manage a wider variety of aspects through the creation of tools such as Kaplan & Nortons balanced scorecard. Managers have long been taught to pay close attention to a wide ariety of measures and that by monitoring and measuring an aspect of business that they will be able to influence that item in the future. In order to control an item we must have clear indicators of where it has been, then we have the ability to decide targets for the future and be able to align employees with these targets in order to gain long term results. However once you move away from traditional business processes this route becomes somewhat more blurred.

There are varying degrees of measurability in business from traditional accounting measures such as gross profit percentage, net profit and accounts receivable days, which can be measured accurately and reasonably reliably and therefore provide meaningful information to managers for decision making, to the “softer” aspects such as intellectual property or corporate culture which still require management and control but prove difficult to measure in a reliable or meaningful way.

One of the management accounting concepts which popuralised the idea of needing to measure everything in order to adequately manage it was Richard Demings Total Quality Management. Quality costs include the costs of preventing quality problems, the costs of findings quality problems, the costs fixing quality problems that are found when the product is still in the manufacturer’s hands and the cost of fixing quality problems that are found when the product is in the hands of customers (Kaplan, Atkinson, 1998). Deming taught top Japanese executives to measure and continuously improve these costs.

Budgeting plays an extremely important role in performance measurement which help managers to make sound decision as the comparison of budgeted with actual results can be made. Cash budget, sales budget, production cost budgets, capital overhead budget, capital expenditure budgets, and etc. need to be measured properly in order to manage the entire system towards the goal of organisation as budgeting affects all areas and it is vital to know where weaknesses lie so they can be managed to an acceptable condition with due priority.

A way of measuring against an accepted standard is needed in providing reliable information that assures us that what we are doing is right. If there is no measurement, it makes it difficult for us to justify any increases in expenditure or change. However, budgeting is widely critised (Hansen, Otley, and Van der Sterde 2003; Jenson, 2001; Hope & Fraser, 2003). Using budgets in performance measurement “creates gaming, dist trust and ill will. Distorts incentives, motivating people to act in ways not consistent with the overall best interests of the firm” (Jenson, 2003).

Budgets are an example of how using measurement to manage can move the emphasis from the underlying objective the measure is trying to gain to the measure itself. The use of measurement for control in budgets can be contrasted with Intellectual Property which cannot be measured accurately like more tangible assets. The task of managing intellectual property and using it to the create shareholder wealth is difficult when a firm cannot borrow against them, insure them, or even audit them properly. This is a significant problem when intellectual property is becoming such a valuable part of business.

Many firms will choose to spend significant funds on activities such as employee training when they are unable to measure the outcome, however this does not mean that firms should ignore the importance of intellectual property. This is similar for organisational culture, which is a vital part of organisational success (Barney, 1986; Heck & Marcoulides, 1993; and Denison & Mishra, 1995) yet it is hard to measure in quantitative terms. Through recruitment, training, mission statements, social activities and branding organisation’s create a corporate culture that they think will help them be successful.

By focusing on these immeasable items firms can manage there outcomes, however, it requires more insight into underlying economic factors than quantitative measures. The ability of firms to measure many items can also distract managers from what is truly important or bombard them with to much information to process. If managers only focus their attention on the things which can be measured then important aspects of business will go unnoticed and unimproved. Some management accounting tools have gone part way to counteracting these problems.

Kaplan & Norton’s balanced scorecard provides a way to integrate non-financial measures, drawing managers attention to some aspects of business which previously went unmeasured and often unmanaged. Risk provides another way to look into the way measurement and management interact. Risk is an important factor that organisations face, managers need to be proactive in their attitude to risk management and come up with tools to mitigate as much of the identified risks as possible to maximise future gains. Risks need to be managed, however the measurement of some risks present a difficult task.

For example litigation risk, political risk, or risks caused by natural disasters. Organisations may be able to come up with some hypothetical assessment or know they are more susceptible to this risk now than they used to be but there can be no true measurement of many types of risk. How are you to measure the chance of some future event beyond your control, especially in today’s rapidly evolving business world? Despite the inability to measure some types of risk they still a need to be managed through internal controls. Conclusion

The premise that “If you can’t measure it you can’t manage it” is certainly a contentious one that covers many aspects of management and accounting. Although many areas of business certainly benefit from close measurement and monitoring, the changing nature of business to a knowledge based economy with less traditional processes which can be reliably measured has meant that managers need to be careful to also manage areas of their business which cannot be measured in traditional ways ensuring they are not over emphasising measurable items so that the underlying purpose of there measurement it not forgotten or distorted.

Bibilography Barney, J. , (1986). Organizational Culture: Can It Be a Source of Sustained Competitive Advantage? The Academy of Management Review, 11(3) 656-665 Denison, D. , & Mishra, A. , (1995). Toward a Theory of Organizational Culture and Effectiveness, Organization Science, 6(2) 204-223 Hansen, S. , Otley, D. , & Van der Sterde, W. , (2003) Practice Developments in Budgeting: An Overview and Research Perspective, Journal of Management Accounting Research 15 (1) Heck, R. , & Marcoulides, G. , (1993). Organizational Culture and Performance: Proposing and Testing a Model, Organization Science, 4(2) 209-225.

Hope, J. , & Fraser, R. , (2003) Who needs budgets? Harvard Business Review, 108-115 Jenson, M. , (2001) Corporate budgeting is broken – lets fix it, Harvard Business Review, 79(10) 95-101 Johnson, T, . & Kaplan, R. , (1987) Relevance lost: the rise and fall of management accounting, Harvard Business School Press, Boston Kaplan, R. , (1984). The evolution of management accounting, The Accounting Review, 59(3), 390-418 Neely, A. , (1999). The performance measurement revolution: why now and what next? International Journal of Operations & Production Management, 19(2) 205-228 , MA, ,


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