SOURCE: Kay Sever | February 1, 2024
The Renaissance Period was rooted in a desire to explore and discover new knowledge. Renaissance thinking focused on discovering “what was unknown, overlooked, missing or misunderstood”. In 2024, we will be using Renaissance Thinking to understand what’s missing from an optimization scope and how to broaden that scope to capture millions of additional dollars with no additional capital.
Why Renaissance Thinking is Linked to Optimization Success
Executives and management teams use the data they see to make great operating/financial decisions for the company. Dollars come from the financial system, the budget and feeder systems (revenues, costs, purchasing). With this information, most business leaders believe they have all the financial data they need to make those decisions, even if performance optimization is the goal.
Here’s the problem with that assumption: optimization (i.e., “best possible” performance) requires data for dollars that you don’t see… dollars linked to:
- Hidden operating/financial asset potential (your “upside”, dollars left on the table)
- Organizational weaknesses that create hidden losses
- Management system barriers that unintentionally steal profit or prevent/hinder change
These dollars are either NOT included in financial systems or are BURIED due to financial system design. This fact raises some immediate questions:
- Why do financial systems NOT INCLUDE operating/financial potential?
- Why are costs linked to organizational weaknesses “buried” and never reported?
- What and who influenced the design of today’s accounting systems?
- What is the history of accounting?
I decided to use “Renaissance Thinking” to explore the past for the answers to these questions. I had no idea what I would find when I started. What I discovered was a fascinating timeline going back hundreds of years that involves places, people and inventions you have heard of… Venice, Fibonacci, Da Vinci and the printing press to name a few. My references for this timeline are listed at the bottom of this article. The following historical summary will
- Change what you believe about financial data used for decision-making and
- Reveal why the financial system is missing some of the dollars you need to see, measure and monitor when optimization is the goal.
The Hidden History of Accounting – A Story of Merchants, Mathematicians, Artists and Inventors
We had to have numbers before we could have accounting…
Roman Numerals vs. Hindu-Arabic Numbers
The Etruscan culture in western Italy preceded the Roman Empire (900 BC-27BC) by hundreds of years. The Etruscans developed rudimentary letters used for represent quantities. The Romans (500BC-500AD) refined those letters and created the Roman Numeral System that used sequenced groups of the letters MDCLXVI for quantities (trade) and dates. Roman numerals COULD NOT be used for addition, subtraction, multiplication or division.
Hindu mathematicians in India developed the Hindu numbering system (1-9) and developed formulae for adding, subtracting, multiplying and dividing around 100AD. By 600AD Persian mathematicians had adopted the Hindu system and added 0 as a placeholder, which enabled more complex calculations and the development of algebra.
Al-Khwarizmi: (aka the Father of Algebra): A famous Persian mathematician, astronomer and geographer who documented the Hindu-Arabic number system and its use in addition, subtraction, multiplication, and division operations, as well as algebraic equations in 830AD.
From 800AD forward, trade expanded between the Mediterranean, the Middle East and India due to explorers and the Crusades. By 1200AD, Venice was the trading and international financial center of the known world. It remained so for the next 300 years.
Venetian merchants owned their own ships and regularly traveled to Constantinople where they learned about the Hindu-Arabic number system and brought it to Venice. They could see a great opportunity for using it to account for buy-sell activities and money exchange.
Fibonacci was the son of a Venetian merchant; He grew up in Algeria and learned about the Hindu-Arabic number system from merchants in the markets there. He became a famous mathematician and wrote Liber Abaci in 1202AD, which documented the history of mathematics up to that year. It included the “Fibonacci Numbers” and the Golden Ratio (traced back to Euclid, an ancient Greek mathematician, in his treatise Elements in 300BC)
Abbaco Schools were private schools that were started in Italy and France in the 1300s. Abacco schools taught Hindu-Arabic math to the sons of merchants starting at age 11.
Luca Pacioli, known as the Father of Accounting, was the son of a Venetian merchant. Luca was born in the mid-1400s and grew up near Florence. He attended an Abbaco school and was an apprentice for merchants, where he learned the merchant accounting system that had been in use since the 1200s in Venice. He taught math at universities in Florence and Rome.
Luca wrote his first book, Summa de arithmetica, geometria…, which was published in Venice in 1494. One chapter in Summa included the Rules for Double-Entry Bookkeeping, a 27 page compendium of the Venetian accounting system in use since the 1200s.
- Debits, credits, inventory lists, trial balance, balance sheet, profit/loss calculations, income statement.
- Rules for managing inventories, stores, banking transactions, money exchange, insurance on goods.
Leonardo DaVinci (engineer, inventor, artist, sculptor) was commissioned to paint for Duke Sforza in Milan in 1496. That same year the Duke invited Luca to Milan to teach math at a university. Luca and Leonardo met when Leonardo attended one of Luca’s math classes. They became friends and worked together for seven years. Two classic works came out of this meeting:
- Luca taught Leonardo the mathematics for perspective painting, which enabled The Last Supper to have a three-dimensional depth of field (1496-1498). This technique was adopted by all Renaissance artists for their paintings.
- Leonardo illustrated Luca’s next book, Divina Proportione, finished in 1498. A 600-page compilation of all mathematical knowledge plus Leonardo’s drawings (1500+ pages if printed today).
The Gutenberg printing press (invented in Germany in 1440) made it possible for quantities of a single book to be printed quickly. By the late 1400s, Venice had become the “center for publishing” because merchants viewed books as commodities for trade. As a result, they distributed copies of books all over the western world. Rules for Double-Entry Bookkeeping quickly spread throughout Europe and was translated into many European languages.
Accounting Rules for Merchants Changed the World
Pacioli’s rules for accounting became the accounting standard in many countries by the 1600s. They were used to account for railways, electric light systems, and the shift from merchants to factories and mass production. They facilitated the Industrial Revolution, Stock Market accounting, and the creation of corporations. As accounting became more complex, professions for accountants and accounting certifications were created. With a few enhancements over time, the basic accounting rules created 800 years ago by merchants and documented by Pacioli in 1494, are still serving us well 500 years later.
The Optimization Dis-Connection
So… by exploring the history of accounting, we learned that the 800-year-old accounting system we use today still works great to track “buy and sell” transactions.
- All dollars received from customers and all dollars spent for operating costs are tracked there. Every company needs a system designed for that purpose.
- When you budget for future dollars to be collected and spent, you use the actual dollars from the current year as a guide.
If your goal shifts to achieving optimization (i.e., “best possible” performance), the financial system lacks data needed to achieve that goal because it was NEVER DESIGNED for that purpose.
- Buying and Selling metrics are NOT THE SAME as metrics for “best possible” performance. Optimization requires the tracking of hidden operating/financial potential to generate profit (i.e., the pool of dollars available to convert to profit). A portion of those dollars are NOT in the financial system.
- Achieving budget is NOT THE SAME activity or goal as achieving optimization.
- Budgeting is linked to “buy and sell” activities/transactions and the profit that results from those transactions.
- Optimization is linked to the potential profit dollars that have not been tapped. There are NO transactions linked to this pool of dollars.
- Measures of success: Budget vs. Optimization
- You achieve budget if your budget variance = 0.
- You achieve optimization if your hidden potential to generate profit = 0.
Now we know that the financial system does not contain all the dollars/data you need to optimize performance. One more dataset is required. We will talk more that topic next month.
Thought for the year: Connecting history and process mismatches to optimization initiatives gives your executives and management teams a huge advantage when pushing the boundaries on what’s possible to achieve. Fostering and nurturing the desire to explore for hidden profit potential is THE MOST IMPORTANT STEP in defining what it means to “be the best” in your industry and “achieving and sustaining your best performance” at your site or company.
Historical References for this article:
- “The Rules of Double-Entry Bookkeeping” by Luca Pacioli, 1494 (English translation edited by Michael Schemmann, 2010)
- “Double Entry – How the Merchants of Venice Created Modern Finance” by Jane Gleeson-White, 2011
Kay Sever is a Performance Optimization Expert and Optimization Management Strategist/Coach. Kay helps executive and management teams tap their hidden profit potential and reach their optimization goals. Kay has developed a LIVESTREAM management training system for Optimization Management called MiningOpportunity – NO TRAVEL REQUIRED. See MiningOpportunity.com for her contact information and training information.
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