Process-Based Accounting
Business Process Management Uses Process-based Accounting
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James Brimson in his book "The Handbook of Process-based Accounting, Leveraging Processes to Predict Results published by American Institute of Certified Public Accountants,  process based accounting

  • "The concepts that form the foundation  of ....are very simple....
    • measures value created by the process...
    • projects upcoming activities...
    • projects cost using a  process resource consumption rate
    • constantly reduce process variation
    • adjust costs of performance of projections based on compatibility of work to an organization's existing processes
    • measures process performance
    • update process (activity) standard with each significant process improvement...
    • uses control charts to measure whether a process in in control."

Most of accounting is focused on what happened last month, lat quarter, or last year. Auditors help ensure that organizations have followed generally accepted accounting procedures (GAAP).  As a management tool, this historical information is perceived as useful because of the theory that history repeats itself. However, this may be true in some businesses, but not in many.

If you are selling stable products like milk and bread, most households don't substantially change their buying and eating habits for these stable products.  However,  most products and  services are not that stable. Even perceived stable products like dental visits, oil changes on your car, purchases of pharmaceutical drugs, etc. can be very unstable.

The environment can change dramatically making historical information irrelevant.

  • extreme weather
  • major competitor goes out of business or obtains new financing
  • clothing fads come and go
  • technology changes and improvements (e.g. electric cars)
  • government regulations
  • changes in pricing by competitors
  • complementary goods reduce your product sales (e.g. bottled water, energy drinks, juices versus soda)
  • interest rates and availability of credit
  • government tax incentives come and go
  • styles change
  •  consumer priorities change

Also your industry changes on how it performs its processes

  • call centers: have you tried talking with a person at a call center without several computer menus?
  • self-plane reservations and check-in
  • self-checking out at stores
  • new manufacturing equipment and processes
  • measures value created by the process...Executives need to understand how much value is created by each of their processes and whether or not they should continue to perform that process internally or externally or stop performing that process. Value can measured by the net cash flow generated from a process or by benchmarking that process
  • projects upcoming activities...what activities will be performed as a result of this activity. If errors are created or poor quality is shipped what future activities will need to be performed.
  • projects cost using a  process resource consumption rate. every process needs certain resources in order to produce output. Resources consumed include wages, computer, technology, materials, etc. Based on the number of units of output, I can begin to determine the resources that will be consumed including both fixed and variable expenses.
  • constantly reduce process variation...some variation is normal, but if a process is not in control (process output not within a target range, then process costs will in most cases increase. If an organization completes financial statements in 6 days instead of 4 days, then extra resources are used. If they complete the monthly financial statements in 3 days instead of 4 days, that extra day is not always effectively used for other value creating processes.
  • adjust costs of performance of projections based on compatibility of work to an organization's existing processes
    An organization must understand the capability of its processes. If their equipment can not hold tolerances to hundredths of an inch, then they may be better off buying new equipment, negotiating different tolerances with their customers, or stop selling that product which requires such tight tolerances.
    1. Understand your customer requirements.
    2. Review your process capabilities
    3. Redesign your processes to meet customer requirements
    4. Negotiate new customer requirements
  • measures process performance: performance is measured at the cross functional process level rather than at the department level. This approach helps to ensure that process optimization is achieved rather than just department or cost center optimization.
  • update process (activity) standard with each significant process improvement...As improvements are made to cross functional processes the process performance target is updated with a corresponding change in resources

  • uses control charts to measure whether a process in in control. a process that is not in control is more difficult to forecast and more expensive to perform because of constant tweaking to make the out of control process stay on target. . Therefore, organizations need to use either mathematical control charts using statistical process control or simple control charts (e.g. prepare monthly financial statement in 4 days with a range of 3 to 5 days)


Call John Antos, Jim Brimson or Pat Dowdle at 972-980-7407 to find out more about Process Management.

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