Organizations often focus on cost accounting data but don’t look at all the factors that influence that data. As a result, vast sums are spent to allocate costs that have nothing to do with cash. Instead, start with value, determine price, then justify costs that can incur profits. Since you can calculate different costs using the same data, it’s evident that costs do not represent cash. Cost accounting confuses metrics with measurements. There are three primary reasons cost accounting is a bad practice: You have to create and force math and relationships that do not exist. By doing this, you lose touch with your operations. You make meaningless numbers that people consider as gospel when in reality, they are nothing but opinions. A company needs to start with value, then determine price, which justifies the costs that can be profitably incurred to produce a good or service. It seems obvious to constrain a company with a final price before you incur any costs, yet this practice has yet to be widely followed, despite its proven successes. Costs are undoubtedly essential, but the crucial distinction is when they are viewed and what measures to use.
• Identify why modeling cash flow and capacity is superior to cost accounting.
• Recognize the Adaptive Capacity Model.
• Determine the difference between metrics and measurements.
• Recognize Segall's Law: A person with one watch knows what time it is; a person with two watches is never quite sure.
• Modeling cash flow and capacity
• Adaptive Capacity Model
• Segall's Law