A Martian Among Financial People —
That’s how a colleague once described me and one day he asked, “What makes you “unique”?” For the record, Webster’s defines unique as “being the only one”. I am an accountant by training, and I have spent a lot of years in factories as an internal auditor, cost/financial analyst and manager, which does not strike me as terribly “unique”. However, his comment was made in earnest and because accountant’s generally are logical and seem to have a compulsive need for closure, I dug a little deeper to see if I could come up with an answer to his question.
My approach started with a list of all the skills that I had acquired throughout the years to see if I could come up with something to support his hypothesis. Frankly, as I stared at the results of the exercise, my first thought was: “How the hell did this happen?” It took me some time to work through that question. But in the end, the answer to his question…. and mine, was easy. Good, bad or indifferent, I am what I am, due to the cumulative impact of thirty-seven years of experience, eleven “watershed” learning's and a single “ah-ha” moment.
The “ah-ah” moment occurred shortly after my promotion to Operations Accounting Manager for a large business unit in a publicly traded company. At that point, I was already thirteen years into my career, and I knew all the usual transaction accounting stuff, as well as how to prepare and audit financial statements. Also, since I had spent a lot of time on factory floors watching production operations with industrial engineers, I had a pretty good idea of what actually went on inside a factory. But now I found myself in the top financial chair for my business unit and I was clueless about how to manage a $90MM business unit made up of five plants in three different countries in a way that resulted in a profit. Basically, the answer to my dilemma manifested itself in my “ah-ha” moment, which all came down to about two minutes during a half day discussion on the corporation’s annual profit plan.
During the presentation of the plan to the executive staff, the CFO carefully explained the profit and loss statement. He started off with the earnings per share number Wall Street was expecting. He then worked his way up to the revenue line highlighting a few key numbers along the way: selling, general and administrative expenses, factory fixed costs and contribution margin. Special emphasis was made regarding the contribution margin as a percentage of sales. It was at this point that the light bulb turned on.
I knew from my work with the industrial engineers, who did all of the company’s cost estimating, that all projects were quoted to a 28% contribution margin. So the company’s “economic and management formula” was clear — quote to a specified contribution level, then manage fixed cost in relation to that and, assuming that you hit your planned revenue level, you generate a profit…… simple as that.
You can complicate the reporting and add levels of sophistication if you want to, but once you strip away the blue smoke and get past the mirrors, the fundamental economics always, in my experience, boil down to that simple formula. After more careful consideration, this might be more aptly titled as my “well duh” moment.
Maybe it’s my simple view of the world that makes me the Martian and maybe it’s the cumulative impact of the other things I’ve learned. Who can really say? One thing for sure though, I am not “unique”. I prefer to think of myself as “unusual”, which Webster defines as “uncommon”. Regardless of how you categorize the moment ….. or me …… it took another twenty-four years plus eleven watershed moments to pull it all together into a more comprehensive framework and to confirm the simple truth and power of my “ah-ha” moment.
If you’re curious, the eleven watershed moments relate to the following concepts (they are in no particular order):
1 — Idle Capacity, Fully Absorbed Costs and Marginal Contribution
2 — The Importance of Understanding and Controlling Variation
3 — Random Variation and Monte Carlo Simulation
4 — The Nuts/Bolts of Accounting in an Enterprise Resource Planning System
5 — Determining Critical to Success Factors (Six Sigma Style)
6 — Six Sigma’s Fundamental Equation — The Output is the Result of a Process Working on an Input plus Variation or Y = F(x) + e
7 — The Importance of Knowing Your Break-even Point
8 — Lean Manufacturing and Creating Problem Solving Cultures
9 — Industrial Engineering 101 and Shop Floor Observations
10 — The Best Damn P&L Reporting Format …. period.
11 — Connectivity: Goals, Objectives, Strategy and Tactics
In the interests of brevity, I will save writing about these items for another day