Business Communication: Money Speaks The Language Of Activity-Based Cost
Of all the activities of modern business, communication is the most basic. Communication is essential between businesses, between stakeholders, and between employees whether managers or front-line workers. However, there are many barriers to effective communication.
One of the most significant barriers is that different portions of a business communicate very differently than others. Just as different nations speak different languages; it sees at times, that different functions within the same business also speak different languages. Materials management uses different terms and has different priorities than engineering. Similarly, sales, marketing, and customer service also speak seemingly different languages. To complicate matters further, upper management speaks a different language than front line workers.
How do we encourage better communication especially within the walls of the business? Of course, we want to encourage listening and understanding, and empathy. But often, we need more! For spoken languages we use people who speak and understand both languages to facilitate communication between nations. What can we use to facilitate communication within a business?
Money talks. Or, so I've been told. How does money talk? It does not actually talk. However, everyone uses money in their daily lives and thereby has some understanding of its value. Modern society functions because money has been standardized as a medium of exchange. There is no need to barter farm produce for gasoline. Even if money is nominated in a different currency such as the Euro or Yen, there are established means to exchange Euros for Dollars, or Yen for Euros, or whatever.
We use money to communicate within a business. We convert our functional languages of units produced, or number of worker hours, or tons of raw materials, etc. to monetary terms. In the end, the ultimate measure of business success is ongoing profitability measured, or course, in monetary terms.
How do we use money to communicate inside business operations? How about letting Finance & Accounting handle internal communications? We often think of Finance & Accounting as the keepers of the business's money. However, handing all monetary communication over to them is an abdication of management responsibility. Why not? Do not they use money in their reports?
Yes, they do! But, Finance & Accounting has the same barriers to communication that inhibit all other functional groups. Within Finance & Accounting, there are two primary disciplines: financial accounting and managerial accounting. Over the past century, financial accounting has had, by far, the most emphasis. Over this time, standards and principles have been developed to facilitate financial accounting. And, over the same period of time, these standards and principles have also been applied to administrative accounting. However, these standards and principles serve a different set of stakeholders, namely those external to the business. They do horrible job of servicing the internal stakeholders or the functional groups and managerial levels.
Instead, we need a different set of standards and principles for internal communication. Activity-Based Cost or ABC is a set of principles and standards whose prime purpose is to facilitate communication within the business. In this case, rather than relying on external bodies to form standards, we are free to create those that will serve our own business. In this case, common definitions or templates are established between functional groups of the business and between front line workers and upper management. The lowest common denominator is the activities performed within the various functional groups. Then from these activities, we link them together into cross functional processes. We trace the cost incurred by the business functions to the activities to provide their monetary perspective. Aggregating these by the various processes provide process cost perspective. Using common sense and cause and effect principles, activity cost is assigned to products, services, and customers to provide their monetary view. When compared to revenue, we have the profit perspective.
Now that we have a monetary means to communicate within the business, we can leave this to accounting to manage this communication medium. NOT! Given the importance of communication, it can not be left exclusively to accounting or any one functional group. This communication is the responsibility of each and every function. As is the nature of any communication between human beings, communication barriers continuously reappear. Ongoing diplomacy and attention is required to knock them down as fast as they appear. This is everyone's duty.