Business, Customer Value, Cost and Management Accounting

19 June 2008 |

This is a guest post by CMA Devarajan Swaminathan. He has over 10 years post qualification experience in Accounting, Auditing, Finance as well as Management Accounting. He is the proprietor of Devarajan Swaminathan & Co - Cost Accountants.
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My understanding of a BUSINESS: Back to basics
There is a customer: He has money
I am the supplier: I have the product.
The aim is to sell him my product in return for his money.
A business is not and cannot be more complicated than this. Everything revolves around this.
To do the above I have spent resources like financial, technical, physical, human to bring the product first at my doorstep and then to the customers doorstep. My aim is to sell my product and in turn take his money. The difference what we call PROFIT, is actually my earnings for (a) the efforts I have put (b) the risk I have taken.
How well I do the above is what holds the key to the success or failure of a business ?
The above is true when my product will sell. How about a scenario where my product does not sell? Not because there is no demand but because some one else sells the same or better product better than me and at a better price. I stand to loose the customer. This brings out the question what is the true value of my product and what is the true value of my customer.

PROFIT: Determined by the complex interplay of value, price and cost and its maximization are what every business tries to achieve. In other words maximization of the shareholders wealth, ROI and so on and so forth. The issue how does one go about doing this?
The reason for so much importance to the compliance is because of more and more weightage given to enhancing shareholder value rather than enhancing customer value. Although the irony its customer value that's creating shareholder value. The sales value declared in the financial are taken for granted without any thought on how and why the sales value has been arrived at.


  • What is driving the sales?

  • We have a measurement of the shareholder value with all those EBIDTA, EPS, PV, ROI ratios. All these are meaningless unless we measure customer.

  • Do we have a measurement of CUSTOMER VALUE?

  • Cost based pricing and price based costing in my opinion are both insufficient.It should be customer value based costing and pricing.

In my opinion Customer value comes into play not when they are there but when they are not there. Most of the time the customer is taken for granted. Ask Dunlop tyres where they goofed up? Ask Mukand Steel where they goofed up? In fact we need to ask all those companies that were either closed down or are in the verge of closing down and the reason for the same. As the scale of operations increase the customer value increases significantly. E.g. I put a plant and mobilize resources to take my product to my customer for Rs. 10 billion. Tomorrow another player enters the market with a better product and better delivery capability due to which I loose my customers and my business, what is my loss, is my customer value.


Customer value is not the PROFIT per customer that I WOULD have earned but the LOSS per customer that I WILL incur if they are not there/ i loose them. How do I come down to a unit value is based on the capacity built up to serve customers. How well (efficiently and effectively) I either structure the Rs.10 billion or the customer base or both is what determines the cost, the premium that the customer is willing to pay for my product (which is based on his perception of the product value i.e. brand, quality, service, performance, resale value etc) is what sets my premium / margin and the addition of the two is my Price. This significantly varies between market segments. The day the business goofs up on cost structuring (which is a good quality product taken to the customer in the best possible manner and quickest possible time) and customer perception it's got to loose both the customer and value.

The shareholders expectations is taken care by the generalists and compliance oriented accounting. In terms of money received, deployed and returns generated and reported. We as management accountants need to shift our focus from shareholders and bring it to customers for the sake of shareholders because business revolves around customers and not shareholders. Interests of shareholders are taken care automatically when the interests of the customers are taken care of. Vice versa is not true.

Management accountants as bean growers need to be customer/ business centric and focused. Strategy is how best I can add and create value to my customers and thereby my shareholders using management accounting tools and techniques. To do all that I have said above one needs to focus on management accounting, customer measurement, cost measurement, cost management and cost control. Once the focus shifts to customer value and cost, other things revolving what determines cost (i.e. financial, physical, technical and human resources) are automatically addressed to, managed and maximized. It thus adds value to the needs of the customer which in turn adds value to the shareholders.

Just a thought.

Your value additional thoughts, opinions, perspective solicited.

Regards,

CMA.Devarajan Swaminathan
Devarajan Swaminathan & Co.
Cost and Management Accountants



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