Great story over on Bloomberg about how Josiah Wedgwood created the modern accounting system for the factory era: “How a Potter Took Accounting Into the Industrial Age”.
Wedgwood’s products became so popular that he could charge high prices and the profits rolled in. But during an economic downturn in 1772, demand for the vases slackened. With serious cash-flow problems and an accumulation of stock, Wedgwood turned to his accounting books to solve this dilemma: Should he cut production or reduce prices?
And so he made a “price book of workmanship,” which included “every expence of Vase making” from the crude materials to the cost of the retail counter in London. This led him to discover the distinction between fixed and variable costs. The greatest manufacturing costs were modelling and molds, rent, fuel, bookkeepers, and wages. “Consider that these expences move like clockwork, & are much the same whether the quantity of goods made be large or small,” he told [his business partner Thomas] Bentley. “You will see the vast consequence in most manufactures of making the greatest quantity possible in a given time.”
Wedgwood used the findings of his cost analysis to make management decisions. He revised his policy of soliciting special commissions and made-to-order sales; lengthened his production runs for certain products; varied his usual high- price policy; reduced his stock in market downturns; and kept a careful eye on sales and marketing costs.
Many successful businesses failed during the financial crisis of 1772 — but Wedgwood’s survived, thanks to his innovation.
Now we have to create a new accounting system that differentiates between tangible and intangible assets – and, more importantly, among the various types of intangibles. Each industry and company has its own set of drivers. The accounting system needs to help management understand and manage those specific set of value drivers.