Do You Really Want The Sherriff Of Nottingham Setting Your Business Model?

 

I’m of the opinion that the seminal double-entry bookkeeping body of knowledge (get it?) came about due to two drivers:

• A mostly mathematical exercise by Luca Pacioli, in the 15^th century,[i] and
• A method to fairly extract taxes from a rapidly expanding and more sophisticated business sector at that time.

Prior to double-entry bookkeeping, taxes were generally collected on a rather subjective basis. Unless one was a member of a feudal court, the display of personal wealth made for a natural target of the tax collector(s). As the wealthy sought to downplay conspicuous displays of affluence, tax collectors would have a more difficult time differentiating between those who ought to pay more, and those who had already paid their “fair share,” and then some. If you think about it, this entire dichotomy is the basis for the Robin Hood legends, where King John I of England was forced to raise taxes in order to meet the ransom demands for retrieving King Richard I from the Austrians. Since the actual collection of revenue was performed by the constabulary, this duty fell to the fictional Sherriff of Nottingham, the villain in the Robin Hood legends. Lacking a solid basis for such assessments, it would have been next to impossible to fairly and even-handedly perform this function. Notably, King John reigned from 1199 until his death in 1216, whereas Luca Pacioli didn’t publish his treatise until 1494.[ii]

But, once double-entry bookkeeping became common, specific laws targeting particular types of transactions or holdings could be passed, and evenly enforced. No more tax booths by the side of the road, demanding of passerby a percentage of their possessions based on superficial appearances. From a legal and financial point of view, it was brilliant, but it does raise the question: if not for the obligation to pay taxes, or to provide a consistent standard for valuing economic entities, would businesses today predicate almost all of their budget or money-related Management Information Systems (MISs) on the general ledger? My point is that I’m rather dubious that it got to that position based exclusively on its management utility, as opposed to its use for governments to raise money. It’s also easy for me to believe that, since every business had to use double-entry bookkeeping anyway, it was a relatively small management science/narrative step to assert that the point of all management was to “maximize shareholder wealth,” a bit of information that can only be derived from – you guessed it – the general ledger. And from there the expansion of the codex asserting double-entry bookkeeping as the ultimate authority when it comes to informed management decision-making just seemed to make sense.

I can almost hear rookie members of GTIM Nation saying “But Michael! There’s a vast difference between the knavery of the fictional Sherriff of Nottingham and modern-day Chief Financial Officers! For example, the Sherriff of Nottingham would make decisions about the collection and distribution of funds based on insufficient information and/or his own personal prejudices, leaving some interests overburdened and bitter, while others were unfairly and almost arbitrarily rewarded. Conversely, the modern-day CFO makes decisions or bases advice about the collection and distribution of funds based on the data in the general ledger, perhaps influenced his own personal prejudices. It’s completely different.”

Adding to the dynamic that provides the information from the general ledger appearing to be more valuable than its counterparts from the Project or Strategic Management realms is the immediacy of its apparent payoff. A generic employee approaching a generic manager and demonstrating that they had saved the company X amount of money appears to have made a strong case for their own personal contribution’s value. Not as clear is the immediate value of the Project Team member who informs their PM that they have averted a cost overrun in a specific Work Package. Success in the PM realm is often not realized until the project is actually finished, sort of like the way some colleges will award grades exclusively on the final exam. And, about that generic employee with their “savings.” Eliminating, say, a salesperson from the floor will “save” the company that person’s salary. It is also likely to frustrate customers who can’t get help during peak traffic hours with their purchase decisions, meaning that, in the mid-to-long term, such “savings” may actually hurt the organization in both the PM (customer-focus) and Strategic Management (market share) arenas.

Of course, I don’t anticipate the content of the GTIM blog to overturn the commonly-held notion of the supremacy of the general ledger in generating management information streams. I’m just posing some long-overdue questions about it. Please don’t send the Sherriff of Nottingham to take all my stuff.

[i] Retrieved from https://en.wikipedia.org/wiki/Double-entry_bookkeeping on June 4, 2023, 19:47 MDT.

[ii] Ibid.