Cause and effect relationship management accounting

Cause and effect in management | Eight to Late

cause and effect relationship management accounting

Jul 20, How to establish a clear cause and effect relationship between . The objective of your opportunity management process is to convert sales . (Even accounting for a particularly conservative unsubscribe rate of 42 a month.). Oct 17, The 'cause and effect' relationship is discussed in management accounting. If there is a loss, the reasons for the loss are probed. If there is a. Jan 14, This lesson explores the relationship between cause and effect and teaches you about the criteria for establishing a causal relationship, the.

cause and effect relationship management accounting

A singular focus on either maximising sales or minimising promotional costs is likely to sub-optimise the performance of your sales process. The key is to determine the optimal relationship between promotional expenditure and sales. Accordingly, you now need to determine the optimal figures for each of your global KPIs.

Client acquisition rate is easy. Obviously, your optimal figure is determined by the capacity of your production and distribution processes. However, your client acquisition cost requires a little more thought.

As the graph below illustrates, as your promotional expenditure increases, the number of clients you acquire should also increase. However, with the increased promotional expenditure, the profitability of each client relationship suffers.

In theory, your optimal client acquisition cost is the point where these two lines intersect. In practice, it will take some experimentation and careful measurement to calculate your optimal acquisition cost.

The starting point for this calculation is the determination of the lifetime value of a client. Your optimal client acquisition cost will be a percentage of this figure. It is difficult to overemphasise the importance of performing this calculation.

Without an understanding of the dollar value of a client, it is simply impossible to effectively manage your sales process. In our experience, because most organisations have no way to value a client relationship, most grossly underestimate the amount that they are prepared to invest in client acquisition. This under-investment in client acquisition seriously retards the growth of many organisations. The publishing industry is one industry that does understand the concept of lifetime value.

Valuing a client relationship In financial terms, a client relationship is simply an annuity income stream. It follows that you can value a client relationship, just as you can value any other kind of annuity income-producing investment. You value an annuity using a net present value calculation.

cause and effect relationship management accounting

Net present value is the sum of a series of future payments, discounted for the cost of capital. To calculate the lifetime value of a client, determine the gross profit you earn in an average year from an average client, then multiply this by the figure in the annuity table below that corresponds to the number of years you retain this average client. Well, for the following reasons: The particular customer may differ in important ways from those used in estimating the probability.

This is a manifestation of the reference class problem. Most statistical studies of the kind used in marketing or management studies are enumerative, not analytical — i. Therefore it is incorrect to attribute the outcome to a single factor such as farsighted managerial action.

cause and effect relationship management accounting

She uses the somewhat dated and therefore incorrect example of the relationship between smoking and heart disease. But this fact may not show up in the probabilities if other causes are at work.

Cause-and-effect allocation - Oxford Reference

Background correlations between the purported cause and other causal factors may conceal the increase in probability which would otherwise appear. A simple example will illustrate. It is generally supposed that smoking causes heart disease. This expectation is mistaken, however. Even if it is true that smoking causes heart disease, the expected increase in probability will not appear if smoking is correlated with a sufficiently strong preventative, say exercising.

To see why this is so, imagine that exercising is more effective at preventing heart disease than smoking at causing it.

For the population of smokers also contains a good many exercisers, and when the two are in combination, the exercising tends to dominate…. In the case of strategic outcomes, it is impossible to know all the factors involved. Moreover, the factors are often interdependent and subject to positive feedback see my previous post for more on this. Conclusions The implications of the above can be summarised as follows: We have been trained to calculate the product costs.

The same information was then started for pricing the products. Good old days when the price was typically calculated as Cost plus Profit. In a typical product costing method we take all the expenses in the financial accounting to the products.

cause-and-effect allocation

Various regulatory bodies ask specifically the FAC for various products or services. Nothing is wrong in this calculation when you get this for the first time. When the Business Head starts getting this information on a regular interval and she does not see the relation between business changes and the product costs then she starts worrying about the product cost report that is received.

If we take a simple example that in an organization there are three products A, B, C. The product manager defends for her product saying today it is making losses but it has got future potential and we should continue with the product. After a year the company introduces another product D.

Correlation vs. Cause and Effect

Surprisingly with the new calculations product B starts looking profitable. Because the same amount of overheads that were distributed over 3 products are now distributed over 4 products. Now the product manager for product B is confused. She says I have not done anything different for my product. Now the questions arises that which is product is correct?