Why Failure to manage the Business causes the Economic Crisis
Corporations, financial institutions, and other enterprises do not manages their businesses
The Business Change Forum discusses the problems of 20th century management used today that lays organization and management structures over the business and does not manage the business. The actual business in “investments in capital as solutions of worth utilized for costs and effectiveness of performance to produce value and quality in results” is not defined, organized, or managed. This failure to manage the business is the fundamental problem that leads to all economic, financial, business, industry, and corporate governance problems.All the problems cited by experts and the media as the cause of the economic crisis are really just the apparent symptoms of the failure to manage the business.
The current economic crisis is caused by the inability of corporations, financial institutions, and other enterprises to manage the business. Anyone following the news of the crisis has seen bank and corporate management cite such problems as the following as the cause of their losses and failures:
- Financial institutions are not able to manage “asset value” in their investment portfolios
- Corporations cannot plan or manage the actual return on investments
- Corporations cannot manage investments to know current and future capital worth
- Management does not have the business information needed to anticipate and prevent problems
- Current accounting practices produce inadequate and inaccurate information
- Corporations do not know full costs incurred or value created across operations
- Corporations are not able to manage effectively all the various units of the corporation
- Corporations are unable to consolidate corporate businesses into one oorporation business
- There is no structure to manage businesses, finances, industries, markets, and economic sectors as an interrelated whole
These are just some acknowledged examples of the unsolvable problems of 20th century management that afflict all enterprises today. Many commentators and experts call for new business management practices to solve the problem. These problems can never be solved by more 20th century management structures and practices laid over the business. The problems can only be eliminated by learning, organizing, and managing the business directly. A new set of actual business management practices organize the business for 21st century business management.
Financial institutions are not able to manage “asset value” in their investment portfolios
Financial institutions cannot manage “asset value” as part of the business. Asset value is actually capital solution worth. Every investment made in any business is a capital solution that must be managed to understand the amount invested in the solution and the result value produced by utilization of the solution, whether used as a solution in the business or as an investment to produce income, dividend, or growth results. Capital and financial investments are not managed as specific solutions to produce managed result value during the life of the solution and managed result value in the sale or disposal of the solution at the end of its life.
Corporations cannot plan or manage the actual return on investments
The only way to plan investments to produce a known return is to identify and plan the specific solutions investments as distinct capital items, the specific results to be produced by the solution, the performance costs to be incurred in solution utilization, attributed value-added to results over the life of the solution, plus result value-added from the sale or disposal after the solution life. Result value added is not planned or managed today. Few capital investments are planned and managed as individual solutions. Most are lumped together in a development project or are simply considered as “intangible assets”. Thus, the actual investment amount, the performance costs incurred in the utilization of the solution to amortize the investment amount, and the result value-added for the gain or loss on the solution normally is unknown. Certain investments in tangible fixed or financial assets may be managed, but only for depreciation or normal accounting, rather than as a part of the business to produce planned results. The return on investment in performance costs absorbed and measured and attributed result value-added to date is not known.
Corporations cannot manage investments to know current capital worth and future worth in disposal
Since solution investments and capital development are not managed properly, it is difficult to manage solutions in operation. Even if capital is identified as a specific solution, it is accounted for by inadequate 20th century accounting rather than managed as capital utilized in business performance to produce results. Solutions are given an arbitrary worth (asset value), because the worth to the business is unknown. Financial investments may be given a worth based on the anticipated gain on the sale of the asset. This worth is entered in the accounts and not managed on a continuing basis.
The worth of any capital solution is the unamortized investment balance to be absorbed as performance costs, positive or negative result value-added attributed to the solution in utilization over the remaining life, plus the result value-added in the sale or disposal of the solution. Capital solution worth must be assessed and updated regularly in the management of the business in the utilization of solutions to produce results. If the current solution worth is less than the unamortized balance, the solution is a problem and incurs additional performance costs. If the potential result value-added from the sale of the solution declines, the solution worth declines, producing current performance costs.Today, the decline in solution worth comes to light only when a customer defaults or when it is time to sell or dispose of the solution asset. Then the accumulated unabsorbed performance costs require large “write-offs”.
Management does not have the business information needed to anticipate and prevent problems
20th century management captures massive amounts of data related to structures laid over the business but does not capture actual business data. The three components of the business in results, capital solutions, and performance of a solution to produce a result are not defined to organize and structure the business. Result metrics in the volume, value, total performance costs, quality, value-added, risk, symptoms of problems, goals, and others are not captured as a set. Capital measures in solution capacity, investment amount, performance costs to date, unamortized balance, qualifications, reliability, return, worth, cause of problems, solutions to problems, solution potential, and others are not captured as a set. Performance indicators in capacity utilization, performance cost, effectiveness, uncertainty, contribution to result value-added, problems, expectations, and others are not captured as a set related to the solution utilized and the result produced.
Since this essential business data is not captured, actual business management information cannot be provided to management. Excessive information technology resources are devoted to processing masses of data on overlaid structures, instead of simply managing one set of actual business data. Management is deluged with mountains of conflicting, incomplete, and inaccurate information related to structures laid over the business, and receives no information on the actual status and progress of the business.
Corporations do not know full costs incurred or value created across operations
20th century management problems with unknown costs and value creation are well-known and can never be solved by more 20th century management. Corporate plans, strategic maps, budgets, and other structures do not plan strategic result value. Capital is not managed as specific capital solutions to know and manage full costs. Accounting accounts for actual and accrued cash against an arbitrary account structure, and not full financial and non-financial business data against the actual business. Cost accounting captures only some known costs against centers or activities that are not related to the business. Costs are not captured against the value produced in results. Results are not managed in result chains to manage value-added. The business is managed by inaccurate and incomplete financial statements. Compliance reporting measures the corporation based on arbitrary overlaid structures rather than reporting actual business costs, value, and other business information.
Corporations are not able to manage effectively all the units that comprise the corporation
Large corporations have problems managing all the diverse units. Profits in one unit can be wiped out by losses in other units. There is no structure for managing the business of the corporation. Overlaid structures for organization, plans, accounts, performance management, functions, processes, and so on hide the business and are difficult to consolidate. Consolidation is in limited cash accounts,financial statements, and special statistical reporting rather than consolidating the corporation business.
It is very difficult to identify actual result symptoms, performance problems, and capital solution causes at higher levels of the corporation to take action to improve deficient capital solutions utilized at a lower level. The only way to manage the corporation business is to manage all businesses in the corporation with consistent business structures that consolidate up to the corporation business structure.
There is no structure to manage businesses, finances, industries, markets, and economic sectors as an interrelated whole
There is a lot of talk of the need to a new structure to manage financial institutions and corporations and the impact on the economy. Corporations report based on financial statements and various reporting structures, but there is no way to add up actual businesses to businesses for an industry, such as the finance or automobile industry, or economic area or sector. There is no way to manage capital utilization across businesses to manage financial and other capital utilization. There is no way to manage consistent result inputs and outputs from businesses to manage markets and economic impact.
The structure needed is available today. That structure is the business. But the structure cannot be used because financial institutions, corporations, and other enterprises fail to manage the business.
Managed current and strategic businesses add up to a business structure for a corporation. Managed businesses also add up to a business structure for an industry, region, sector, or economy. Managed capital solutions and results in a business add up to total solution demand and consumption, and total result demand and supply in managed markets. Managed capital utilization and output results within an industry support management by industry groups and governments. When the business structure is in place governments have the information to manage economic cycles and to anticipate problems within an economy, or economies adding up to the managed world economy.
The only solution is to manage each actual business and to manage corporations, industries, and economies as the consolidation of businesses
The many articles at the Business Change Forum explain the problems outlined in this article and the business management solution in detail. Business management is the only solution to the underlying problem that caused all previous crises, the current economic crisis, and will cause future crisis if financial institutions, corporations, and other enterprise do not manage their business. 21st century management conventions and standards guide consistent definition and reporting of any business to be consolidated at a corporate, industry, market, sector, or economy level. Structures laid over the business today are eliminated along with 20th century management problems.
Once natural 21st century business management is understood, actual enterprise management, corporate management, financial management, industry management, market and trade management, and economic management becomes routine and is supported by one structure of complete, consistent, and accurate business management information
21st century business management eliminates 20th century problems
Business management eliminates costly 20th century problems that cause the financial and economic crisis. Business management maximizes capital worth, performance effectiveness and result value, while minimizing capital investments, performance costs, and result risk.
Result-performance Management (R-pM) provides the knowledge needed for direct business management. The Business Management Toolkit, is available today to document and develop business management. The Business Management Toolkit subscription is offered at a nominal price to encourage wide management of businesses around the world to prevent the problems that caused the economic crisis. Subscribe to the Business Management Toolkit, and receive future updates, at result-performance-management.com.
The Solution to the Economic Crisis is explained in free downloads
Three free white papers explain the dead-end 20th century management problems that caused the economic crisis, the way to eliminate the problems, and a government program to address the crisis by stimulating the economy, solving the problems, building an structure for financial and economic management, and organizing local businesses to flourish in the eventual recovery.
- How to Eliminate Problems that caused the Economic Crisis explains the major unsolvable 20th century management problems and the 21st century business management solution
- The Only Solution to the Economic Crisis; Manage the Business explains how to manage the business to capture actual business data and provide management the information needed for actual business, corporation, industry, and economic management
- A Government Business Management Program to Answer the Economic Crisis outlines a government program to encourage business management and manage economic cycles to prevent future crisis
These three white paper downloads are available free to R-pM Community Members at result-performance-management.com. There is no cost or obligation to join the R-pM Community. Join by entering your email address and password. Your email address is protected and used only for download problems and occasional R-pM Member news and white papers
