Archive for the 'Financial Management' topic

Investors have lost trillions of dollars and more trillions are committed to attempt to clean up the financial crisis

We see the intervention by governments in the US and around the world to address the symptoms of the fundamental problems in 20^th century management. We see trillions of dollars of losses in stock markets and businesses worldwide, and more trillions being spent to buy low-worth capital asset solutions, unfreeze credit, and restore confidence in obsolete enterprise management.

While the distortions and risks created to replace fixed mortgage asset solutions with marketable security solutions sparked the crisis, there are underlying problems in the basic management methods utilized by all the enterprises involved that prevent them from understanding actual capital worth, the value-added by capital solutions in utilization, return on solution investments, projected gain or loss on specific solution investments, reductions in solution disposal worth, and the impact of reductions.

In addition, we see little effort to understand and eliminate the underlying unsolvable business management problems that cause this and other recurring crises, particularly on the part of business owners and shareholders who have the most to gain or lose, professional bodies who establish business management principles and standards, and governments who are responsible for economic management. Most corporate executives will not try to identify their real problems and improve their management, unless put under pressure from their shareholders or their government.

The current financial and management crisis is caused by failure to organize and manage the business

The fundamental unsolvable problems are present in all banks, financial institutions, and other enterprises because the enterprise is managed by structures laid over the business, and 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 never managed.  Enterprises today are unable to measure or manage the following important capital measures, performance indicators, and result metrics that describe the actual business:

• Investment costs incurred in the acquisition and development of specific capital solutions, be they solutions implemented to produce business revenue results or financial facility solutions utilized to produce direct income and growth results
• Actual capital solution worth in the potential to contribute to future result value-added creation
• Actual performance costs that amortize investments as solution worth declines in the consumption and utilization of capital or in reduction in solution disposal worth
• Added solution investment costs and potentially added-worth in solution improvement and replenishment
• Economic output result value created from the utilization of capital in performance
• Value added in result value greater or less than performance costs for all solutions utilized to produce a volume of full or partial results
• Result value-added across result chains within the final result value-added, to identify and rectify low-value results and ineffective solutions
• The return on solution investments in attributable contribution to result value-added to date
• The changing ongoing solution worth in future contribution to result value or income added over the remaining solution life, plus the solution disposal result value less the cost of capital invested in the solution
• The projected gain or loss on capital solution investments in the current solution worth less the unamortized investment balance
• The qualifications of specific capital solutions to perform effectively to produce specific high-quality results
• The potential of solution utilization in performance to meet expectations and reach result goals
• The managed reliability of solutions to reduce performance uncertainty and result risk
• The inadequate or deficient capital solutions causing performance problems that produce symptoms in late or low value-quality results and the elimination of result symptoms by solving performance problems through improved capital solutions
• The strategic result value-added and shareholder value to be created by managed strategic results
• The itemized result value-added planned to justify result research and capital acquisition and development projects

None of these important measures, indicators, and metrics produced by the actual or planned business are known or managed by management today, because the actual business is not planned, organized, or managed.

Instead, enterprises employ archaic 20^th century management to manage structures laid over the business producing well-known unsolvable problems with reorganization, alignment, “business complexity”, “business change”, unknown costs and value, unknown capital worth and returns, intangible assets, IT and business conflicts, investments, projects, accounting limitations, inaccurate information, corporate governance, quality, risk, collaboration, outsourcing, IT overheads, and on and on. 20^th century management is a dead-end. New 20^th century structures can never solve these problems, but just increase business complexity and escalate IT and other costs.

We will continue to lack the information needed for proper business management and continue to face unsolvable problems, until we employ Result-performance Management (R-pM) to organize and manage the actual business of every enterprise and base accounting, industry regulations, auditing, and compliance reporting on the actual organized and managed business.

20^th century organization structures used today do not organize the business

20^th century management lays a contrived enterprise organization structure over the business, instead of organizing the business. This is the fatal error of 20^th century management. [more...].

20^th century management lays structures over the business to control the enterprise

The operations and development of the enterprise today are controlled by structures laid over the business for:

• Financial and statistical accounting through a chart of accounts structure
• Cost accounting through activity, center, and product structures
• Capital development control through project structures and asset registers
• Quality control through TQM, six sigma, and other quality structures

The control provided by each of these structures is limited to known entities and certain elements. Financial control covers capital for tangible assets and finances for cash receipts and expenditures, cost control is limited to known costs against selected elements like activity or project, non-financial control is sporadic depending on individual management, and quality focuses on performance producing selected end-product results.

Accounts record accrued and actual receipts and expenditures from point money comes in to the point money is spent. There is no control of the business cycle from the point money is spent until value is created to enable money to come in. Accounting control is enforcement of rules and principles rather than providing accurate information for business control.

Capital development lumps costs together as a project or tangible asset. The range or performance solutions developed are not controlled and may be classified as intangible assets. No method or information is provided to plan and control return on specific capital investments in performance solutions. Projects are not organized to capture development costs for implemented solutions and plan value-added to the business from solution utilization. Capital worth numbers are sporadic for some asset and liability solutions, but real capital worth in the capability to produce future business value is unknown.

Each structure is separate from other structures and uses its own terminology and definitions to describe the enterprise. Each structure introduces high costs and much effort to collect and report information. But, none of these overlaid structures can control the actual business.

The actual business must be controlled for each component of the current and planned business

In order to control the business the actual business must be organized, planned, and directed as explained in previous articles. [more...].

Corporate Governance is one of the top 10 problems of 20^th century management!

Corporate Governance problems are “solved” my more imposed governance

We have all heard of the recurring crisis in cooperate governance. Governing the corporation is a big problem because we cannot manage the corporate business. We overlay a myriad of contrived structures on the business to organize and manage various entities like units, functions, activities, processes, objects, jobs, etc. Corporate governance itself may be through a contrived corporate governance structure laid over the business to extract and reconcile information from other overlaid structures.

Corporate governances problems are “solved” by adding to the problems with more stringent and costly requirements for outdated 20^th century accounting, auditing, and compliance reporting.

Corporate governance problems must be solved through governance of the actual corporate business

Corporations will be governed effectively only after corporation businesses are organized and managed. The strategic corporate business must be defined as strategic results and the new and improved performance solutions to produce the strategic results. Result goals and performance expectations must be established period by period to the strategic horizon. Corporate governance can then manage actual result value creation against goals and strategic estimates, corporate responsibility for actual business practices, and corporate information capital as part the actual business. The solution to the corporate governance problem is Result-performance Management (R-pM) to organize the corporate business for 21^st Century Management. Review the article “Seeking Good Corporate Governance by strengthening Bad Governance” at Result-performance-Management.com.

Corporate Governance Problem

We overlay structures on the corporate business, and fail to organize the business

We do not organize the business. Instead, we lay many structures over the business for organization, strategy, planning and budgeting, business processes, information systems, performance management, accounts, administration, etc. We gather data on all the entities used and compile a wide variety of management and statutory reporting, but we cannot capture actual business data. Each overlaid structure creates business and information complexity, obscures the view of the business, and compounds the problem of corporate governance. [more...].

20^th century management cannot capture and report essential business management information

20^th century management lays separate structures over the business for management organization, planning, direction, control, and reporting, such as:

• Organization charts, reporting relationships, and job descriptions for organization
• Strategy, corporate plan, investment, and budget structures for planning
• Work flow, function, project, process, and system structures for direction
• Financial and statistical accounting, activity and project costing, and quality structures for control
• Financial statements, performance management, and strategic enterprise management structures for reporting

Each structure defines inconsistent and conflicting entities like business unit, department, center, function, activity, project, responsibility, etc. The overlaid structures can produce enormous amounts of information producing business and information complexity. But 20^th century management cannot capture and report essential business management information.

20^th century management does not define the entities that contain cost, value, worth, and return

In order to capture data and report information about an entity, the entity must be defined and recorded. 20^th century management attempts to report cost, value, worth, and return without defining the entities that contain cost, value, worth, and return.

Costs are attributed to some known tangible assets and collected against contrived entities like activity, project, and accounts that were not produced by the costs. Numbers for value are produced by certain contrived methods and formulas to lay value chains over the business, without defining and managing the entity that contains value. Worth is defined by arbitrary depreciation formulas for fixed assets, but ignored for human and other capital. Much high-worth capital is labeled as “intangible assets” and not accounted for or managed. Capital development does not identify the precise capital items that are being acquired and developed or the planned utilization of the capital in the business to provide return on investments. [more...].

Capital Development Project Management is one of the top 10 problems of 20^th century management

20^th century management cannot plan, manage, or repay capital development projects

We have unsolvable problems in 20^th century capital development project planning, management, and return on the project investment, so we cannot:

• Plan and manage operations and development as an integrated continuum that is part of the business
• Itemize, plan, and achieve specific benefits from development projects
• Clearly and systemically understand what we must be implementing from projects as part of the business for ongoing management and return on investment
• Planning the output results to be produced from the project in specific capital items to be implemented and utilized by the business
• Utilizing users and administrative staff in proper roles in the project
• Utilizing contractors and consultants as solutions in an enterprise-managed project
• Documenting and recording the project so that all capital developed is fully documented and that knowledge required for use is created
• Managing the capital to be consumed in the project
• Managing the capital development project as part of the business
• Recording accurate development costs by capital item developed
• Implementing project results as capital items for direct utilization by the business
• Measuring the actual return of capital development investments

The unsolvable 20^th century management problems hamper project management, particularly for enterprise internal capital development and management improvement.

R-pM plans, manages, and repays projects by separate management of results and performance

Result-performance Management (R-pM) provides new breakthroughs for planning and managing enterprise capital development and planning and managing the capital development project.

Capital development develops two things:

• The capital to be utilized as performance solutions that incur costs
• The results to be produced by the developed capital to provide benefit and return

When we plan and manage a capital development project, we must plan and manage two things:

• The results to be produced by project performance
• The capital to be consumed and performance solutions to be utilized to perform the project

R-pM provides the methods to do both. [more...]

Financial Management is one of the top 10 problems of 20^th century management

Financial Management manages money separate from other tangible assets

The early 20^th century enterprise was concerned about managing and protecting cash. Financial management fundamentals were established to manage actual and accrued cash from the point received until the point that it is invested or spent. Financial management problems such as unknown capital worth, unknown costs, unknown value creation, and unknown return on capital investments have never been solved by traditional financial management. Financial management tends to be equated with capital management. This allows non-financial capital to be administered, rather than managed, or to be labeled as “intangible assets” and not accounted for or managed. Today, financial capital is managed largely by computers. Non-financial capital and intangible assets are an increasing percentage of enterprise worth and must be managed properly.

R-pm manages financial capital with other tangible facility capital to create value in results

Result-performance Management (R-pM) utilizes conventional financial management capabilities to manage all tangible facility assets in the 21^st century. Financial assets and facilities are a sub-set of reusable facility equipment, cash is a sub-set of consumable facility supply, and accounts are sub-set of facility financial records.

All facility capital requires similar application of expertise to operate and maintain, to supply, and to record. R-pM ensures that all facility capital is supported for operation and development and for utilization to produce value in results.

R-pM also integrates financial parts of other results that have been separated out. Management strategy capital includes financial strategies as an integral part of management strategy solutions. Investment management results manage shareholder funds for investment, capital development, and shareholder value results.

The Financial Management Problem

20^th century financial management gives us intangible assets, unknown costs, unknown value, and unknown worth

Now, as we go into the 21^st century, there is a growing need to go beyond financial management fundamentals and change the way enterprise capital is managed: [more...]

Accounting, today, does not maintain accurate business records

20^th century management does not organize or manage the business. This makes it impossible to keep records on output results of value produced by the business and the consumption of capital in costs to produce each result. Instead of recording the actual business, a chart of accounts is laid over the business to record income and expenses and the worth of certain known assets. 20^th century accounting records the cash generated and spent by the business, rather than recording the complete development and utilization of capital and the complete economic output results produced by the business.

Accounting, today, contains many unsolvable 20^th century problems

Accounting is one of the main unsolvable problems of 20^th century management. Accounting is separate from the actual business, keeps only a sub-set of needed financial and non-financial business records, keeps records against a contrived chart of accounts and not the actual business, sees it role as control rather than capital management and business support, allows financial management problems such as intangible assets and unknown costs to persist, does not provide complete and accurate business information needed for corporate management and governance, and on and on.

R-pM accurately records and accounts for the actual business for 21^st Century Management

21^st century management uses Result-performance Management (R-pM) to organize the actual business as one integrated business structure. The business structure replaces all organization, accounting, planning, performance, costing, reporting, and administration structures laid over the business. R-pM employs professional records management to manage facility records as capital, to maintain complete and accurate financial and non-financial records on the actual business, and to provide information performance solutions from records for good corporate management and governance. Records management is integrated within the business to be utilized to make decisions at all levels and to record accurately actual business decisions made.

The business is the only valid account structure

The business structure organizes the economic output results of value produced to give revenues and income, the capital in performance solutions utilized to incur costs, and the positive worth of capital as assets and the negative worth as liabilities; to provide the only valid account structure. The business structure is professionally maintained as a business organization solution to represent the actual business accurately. Accounts are maintained by professional facility records management to maintain full financial, statistical, and qualitative records on the complete business. The actual business provides the chart of accounts and records are updated from actual business data on result value produced, performance costs incurred, result value-added, and capital worth. Complete and accurate records are maintained on the full business cycle and the full business scope across the enterprise.

This is explained further in the article “Your Business is your only valid Account Structure” in 21^st Century Management Magazine. The guidance needed to organize, manage, and account for your actual business is provided in the R-pM Toolkit, your 21^st Century Management Manual, which can be downloaded from Result-performance-Management.com. .

20^th century management cannot manage the components of profits

20^th century management does not manage contribution to profits from the line business and profits from complete enterprise operation. 20^th century management accounts for profits by adding up cash income and cash expenses, independent from enterprise operations and management.

21^st century management manages the components of profits to manage profits

The business consists of economic output results of value that must be managed to manage revenues and income. The business also consists of capital utilized or consumed in the business in the form of performance solutions that must be managed to manage performance costs and expenditures. Result-performance Management (R-pM) organizes the business in the output results produced to create value and the performance solutions utilized to incur costs to determine result value-added, the most important management metric for 21^st Century Management.

Contribution and profits are not just lines that happen to appear on an income statement. Contributions and profits are results produced by the business that should be planned and managed on a daily basis with result goals. Contribution and profits are derived from result value added over performance costs for all the economic output results from the business. Therefore, the value of every economic output result and the performance costs producing the result must be managed to manage the result value-added that goes to contribution and profits.

20^th century management does not manage result value or performance costs

20^th century management does not define or manage results as one set of economic outputs produced by the business. [more...].

We are all familiar with the capital administered today in the buildings, land, infrastructure, communication systems, computer hardware and networks, fixed assets, financial assets, consumable supplies, cash, and accounting records. These traditional tangible assets provide the facilities utilized by the business. R-pM organizes this capital as facility capital.

Logically all capital must be defined as performance solutions to be deployed and utilized to produce a specific result. The post on August 6, 2007, The Logic of Capital Management, provides the background.

Capital utilized by the business is organized into four categories

Capital utilized by the business requires different professional capabilities to be professionally managed, which organizes four categories of capital:

• Business organization, process, and data capital to manage capital that directly produces a result and cannot, generally, produce another result. Business capital requires business knowledge and analytical capability
• Human personnel, capability, and knowledge capital to support and develop the worth of human capital. Human capital requires human handling, development, and coaching capabilities
• Facility equipment, supply, and record capital to manage reusable and consumable tangible assets and records. Facility capital requires expertise with the specific capital and administrative ability
• Management strategy, tactics, and intelligence capital to plan results and performance investments, to keep on course, and to know opportunities and ward off threats. Management capital requires management analysis and research capabilities

All capital must be professionally managed as capital utilized to produce results.< [more...]

There has never been a workable cost-accounting method

Knowing and managing costs has been a major management concern, since the beginning of business. We have faced two major problems in managing costs:

• We do not have one entity that generates costs, and includes all costs incurred
• We do not have one entity that meaningfully absorbs costs for good management

One entity must generate all costs

Many methods have been contrived for costing and cost accounting. The methods try to gather “known” costs for separate entities like employees, fixed assets, cash, and supplies. The other capital utilized has never been defined and produces “unknown costs” or is labeled “intangible assets”. All costs come from consumption of tangible and intangible capital. This is performance and all capital utilized must be organized and defined as one entity “performance solution”.

One entity must absorb all costs

Costing methods charge costs against entities like center, station, activity, and product. Product is the only entity actually produced by the cost. However, many other outputs also are produced by costs. Products and other outputs produced by costs are part of one entity “result”. The result is the entity that contains the value created by the costs and is the only entity that can absorb costs to show the value added by performance.

Performance Solutions generate costs and Results absorb costs against Result value to manage value-added

The only way to know all of our costs and to charge costs properly to manage value added is Result-performance Costing. By establishing result value-quality chains, we can know the cost and value of each result in the chain leading to the final product or service result that leaves the enterprise to produce our revenue and profit results. This is explained in the article “Know Unknown Costs through Result-performance Costing” in the 21^st Century Management magazine. Result-performance Management (R-pM) organizes the business for 21^st century management and to employ Result-performance Costing.

21^st Century Management eliminates 20^th century problems

Result-performance Management (R-pM) eliminates the costing problem and other costly 20^th century problems. Slash costs, simplify business management, and boost your competitive advantage through R-pM, the conventional method for 21^st century management.

Download your 21^st Century Management Manual today

Your 21^st Century Management Manual, The R-pM Toolkit, is available today and is under continual development to expand and refine 21^st Century Management. Get your R-pM Toolkit, and future updates, at result-performance-management.com. .