RCA provides actionable information for internal decision support that clearly reflects operational causal relationships and economic reality……That’s a mouthful. What does it really mean?
Financial accounting and financial statements create financial information in accordance with financial reporting standards and generally accepted accounting practices. The focus of financial reporting standards is on creating “general” financial statements for investors and creditors. That is required. They do not need to produce information that is useable for internal users; but they do produce some information that is accurate along with some that is quite distorting.
It is widely known that financial statement information on its own is not particularly useable in its original form for investment decisions or predicting long term capital market value. Every investment firm or rating firm substantially adjusts financial statement information for their decision-making. Consider EVA, Earned Value Analysis, it adjusts R&D, advertising/promotional expenses, capital investments, and other intangibles to treat them as value creating investments over an appropriate time period. Detailed EVA analytics look at financial statement categories and provide estimates of the impact on the market value of the company from making changes to them. Companies that sell major capital improvements such as digital manufacturing equipment, systems, and software often use EVA to show the return to companies of making these investments.
Why to into EVA so deeply? RCA picks up where EVA stops. EVA may show that a company’s SG&A is higher than a comparison group of companies and that investing in reducing it could create a positive return on the capital markets, but EVA cannot identify the resources and work activities included by a company’s SG&A or the causal impact on process, products, and customers the SG&A supports. RCA models provide that detail in both resource quantities and monetary metrics. RCA operates free from financial statement standards and generally accepted accounting principles to create information that reflect the causal relationships of resources and processes on products/services and customers. Information from an RCA model looks like the resources and process in your company. For example, RCA shows capacity information and clearly shows the fixed and proportional amounts of resource use including the monetary implications which means visibility of incremental and marginal cost. Not limited by GAAP, RCA can include any resource with a causal relationship in product/service or customer cost. Items such as sales commissions, collection cost for receivables, or amortization of R&D can be included if they have a logical and actionable causal relationship for an organization.
Many companies are seeking a clearer or more economically relevant view of their performance. RCA is part of that solution for consistent value creation with high quality internal decision support information.