Executive Summary: Accounting in Internal Market Economics

applying principles of market economics inside organizations adds a new and powerful twist to financial reporting

by N. Dean Meyer

The final piece of the puzzle (after Planning and demand management) is the accounting systems that report actual financial data, after the fact.

These produce conventional financial reports. They can also produce reports that reinforce internal market economics.

One internal-market-economics report is invoices for products/services delivered.

In the case of fee-for-service chargebacks, invoices are essential. They collect revenues, transfering money among general-ledger accounts.

Without chargebacks, these invoices decrement clients' checkbooks (the pre-paid revenues), just as if it were a fee-for-service transaction.

Invoices multiply actual consumption by rates which were determined in the Planning process and published at the beginning of the year.

Since rates have already been calculated, there's no need for another cost model within the accounting systems.

Another example of internal-market-economics reports is profit/loss statements for each manager, service, and client.

Accounting and reporting systems add the following incremental benefits:

In the demand-management process, pursers have a more accurate view of their checkbooks.
Performance metrics can be designed to encourage both frugality and entrepreneurship.

For example, a breakeven target for profits/losses is appropriate for internal service providers. This metric can replace the conventional budget variance reports which discourage entrepreneurial growth (spending over plan to earn additional revenues).
Managers have dashboards that help them run their businesses.

For example, reports give them early warning when spending exceeds revenues; and they can see the profit/loss of various services.
In the case of fee-for-service chargebacks, invoicing systems are necessary to accurately collect revenues.