The accounting essence for the business administration　― Pricing is everything, Max revenue, Min cost―

This time, Inamori* spoke about the above motto in his book : Practical Accounting -Business Administration and Accounting -. What Inamori said is quoted with “”.

Mr. Inamori demonstrated the below four points as the principles which fundamentally impact profits and losses, in the chapter of “My Accounting and Management.”

Maximum sales, minimum expenses
Pricing is everything
Noodle stall test ―appropriate pricing and minimizing cost－
4 Management based on financial statements

I will explain them one by one.

１．Maximum sales, minimum expenses

“ Every leader pursues profits, but many leaders think that to increase sales, their expenses will naturally increase. This is the so-called common sense of management. If this is the starting point of management, then instead of increasing sales while increasing expenses, expenses should remain the same or, if possible, should be reduced. I found out this is the key to pursue profit. “

→ To realize larger sales, we naturally think of adding more investment, which means increasing the number of people. However, as the time given to each person is limited, I think it is important to consider how to allocate these limited resources. Inamori also mentioned reducing expenses or maintaining the same expenses. This is the hint for me to consider resource allocation.

２．Pricing is everything

” In the business, anyone can make sales if we reduce the sales price. That’s not the way that I have been seeking in running our business. The price must be the maximum price that the customer is satisfied with and also willing to pay. I repeatedly emphasized to the sales department that we must take orders at this highest point, above which the potential customer never buys the product from us but below which they are willing to buy our product. The pricing is an important task that should be handled by the top leader. In other words, to maximize sales, the unit price of a product and its sales volume should carefully be determined. The sales strategy changes greatly depending on whether to sell a small amount with a large profit margin or sell a large amount with a low profit margin. ”

→ An assignment that I took shortly after our company was founded has recently been completed. On the accounting side, that assignment ended up with losses. After I had agreed on our service fee with the client, I found out that our competitors charged for the same service at nearly double. I thought that I didn’t understand the management. When I was working for a company, I had never analyzed the pricing. I realized that no matter how brilliant track records I made in my previous career as an employee, it never helps my career as the business leader . I also learned how to keep myself humble and also found out how important the pricing is. I think I must sharpen my sensibility so that I can always explore this marginal and ultimate pricing point.

３．Noodle stall test ―appropriate pricing and minimizing cost－

Mr. Inamori says that to train business leaders, it is an effective practice to run a “Noodle stall ” and see how much he/she can make this business profitable.

“ As you can see, even a single noodle stall brings you a variety of options. Even if the profit difference that emerges in one day between the performing stand and not performing one is quite small, over the course of the year it can become a huge difference. Therefore, there are people who create the franchise food stall chain on the other hand, there are people who have been running stalls for decades without making any fortune. I believe there is no good business or bad business in the world. However, the profitability totally depends on whether or not you can lead it to success. The right pricing is necessary to maximize sales. If you can maximize your sales, all that is left to do is to thoroughly ‘minimize expenses’. “

→ I wonder if I can manage this noodle stall. Accurately estimating potential demand, repeating simulations many times so that one point of price setting can be realized and reducing costs thoroughly by accumulating small but daily improvements in cost saving. I think this is something that we must experience steadily. I would like to take a serious look at business from a new perspective apart from the common senses.

４．Management based on financial statements

“ To do so, managers themselves must first understand what accounting is. Unless you can understand how to read the numbers displayed on the instrument panel, you cannot be a real manager. You must improve your analytical skills until those accounts tell you as if they were real humans. You must become a manager who can hear the groans of sluggish earnings and the cries of thin equity capital when looking at financial statements prepared by accounting. At Kyocera, since the company was still small, monthly financial statements have been prepared by each department. Whether I was at the office or on a business trip, I made sure to read through the detailed departmental report immediately. Looking at the details of the sales and expenses of the department, I was able to understand what happened last month in that department. That was like a story telling. While imagining the person in charge of that department, problems spontaneously were reported to me. I thought, ‘Oh, you were wasting so much money’ or `That material cost was too much for the actual sales volume.’ By carefully looking at the monthly financial statement in this way, when I went to the factory and passed by a site , which was reported with a problem, I was able to recall the issue and immediately point out what the problem was. If the person in charge of the site had taken the right measures according to my advice, that appeared immediately in the monthly accounting statement in the following month. In this way, the performance of the company as a whole has always been improved. ”

→We manage labor costs for each project. We review income and expenses on a monthly basis and on each project basis, but there are some projects that are difficult to improve in terms of profitability. I thought it was important to look at the financial statements from a third party’s point of view as if I looked at financial statements of a completely different company. By doing this, I would be able to analyze the company’s issues and hits for improvements more professionally.

To sum up, accounting is the principle of maximizing sales and minimizing expenses. The pricing is the key to conduct this principle. From the monthly report that comes out in real time, I reflected on the importance of finding areas for improvement and making steady improvements.

* Mr. Kazuo Inamori, the founder of Kyocera, KDDI (one of the top tele communication companies in Japan) and the top of revitalization project of JAL. As a well-known Japanese entrepreneur, he has been sharing his experiences and management know-how with managements of small to middle companies in Japan.