When Scientists Think Like Accountants

Scientists and technologists in industry complain about being subjected to accountants, but, as Mark Twain would point out, they do nothing about it. In self-defense they learn to read balance sheets and to use the jargon of accountants, but they regard these as being trivial matters not worthy of serious thought. They therefore pay little or no attention to the assumptions that are buried deep below practice and of which accountants themselves seldom are conscious—assumptions that, to a scientist or technologist, are grossly out of date. These assumptions are based on a model of a company that is set up to manufacture or supply a product that remains unchanged both in itself and in the method by which it is manufactured for an indefinite (presumably infinite) life. Yet companies that want to stay in business must continually introduce new products and constantly update the methods by which they produce and market them. They must, in short, innovate to survive. Innovation is an integral part of modern company operations. Even to remain the same size, companies must introduce new and improved products and processes for developing those products. Innovation costs money which, for companies trying to maintain the size of their operations, must come from revenues to avoid depleting cash reserves. Borrowing may legitimately be used to fund company growth, but not the maintenance of business volume. It follows that expenditure on innovation should be deducted from revenues before the year’s profit is calculated, as is the value of capital equipment consumed during the year. Both are expenses necessary to keep the company in business, and the money cannot be diverted to other uses without endangering the future of the company. Current accounting practices do not see things this way. Expenditures for market research, orthodox R&D, training and retraining of employees at all levels, and the extra production costs of introducing new products are indeed allowable as business expenses and are deducted from receipts before the profit is determined. But these costs are treated as overhead, as are those of providing flowers in the reception area and other desirable—but hardly vital—items. In times of economic stress when profit is at risk, management comes under strong pressure to reduce expenditures, and vital innovation gets treated the same as less-important budget items. That’s particularly true in Britain and the United States with their active stock markets and daily threats of company takeovers. Scientists and technologists should therefore do more than just learn the jargon of accountants. They should insist that all expenditures on innovation—not just R&D costs—be treated separately. The funds necessary to innovate should be a priority in a budget and should not be subject to arbitrary cuts in times of an economic crunch. It should be possible to estimate the amount a firm should spend on innovation each year by figuring the costs of introducing new products, the products’ expected lifetimes before they become outdated, and the financial contribution they will make to the business before that happens. In Growth, Innovation and Employment: An Anglo-German Comparison (Anglo-German Foundation, London, 1980), my colleague Joan Cox showed from historical data that even in well-established industries, this can amount to 10 percent or more of sales revenue in any given period—hardly a negligible sum for any business. Only technical people in industry can make this type of calculation. By thus putting their perspectives on the future of the company into the language of conventional accounts, they can communicate with boards of directors and with shareholders to the ultimate benefit of all parties. But at the end of the day they must deliver the goods. They must produce saleable products and not be content to produce only ideas and knowledge. Budworth is the author of “Rewinding the Mainspring—A Discussion Paper on Innovation Expenditure in Company Accounts” (The Technical Change Centre, 1987). His address at the center is do Policy Studies Institute, 100 Park Village East, London NW1 3SR, UK

When Scientists Think Like Accountants

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