Activity Based Costing

I had my very first meeting with an investee yesterday, an exciting experience despite the early hour (we met at 7:30AM, perhaps before many of my dear readers were even in bed on the east coast).

After spending days upon days buried in multiple iterations of the same business plan, pulling my hair out over technical medical terminology, and trying to reconcile various inconsistencies in projections and strategies, I was thrilled for the opportunity to ask my questions (a multiple-page, outline-bulleted list that somehow morphed into an animated powerpoint deck while I wasn’t paying attention) to a live human.

Walking through the facility and hearing from the entrepreneur the very same words I had read written, and even some of the same words that my portfolio associate had spoken, suddenly made all the difference. It was as if I had been in one of those community Halloween haunted houses for the very first time with cold spaghetti playing brains and peeled grapes posing as eyes -- and while you know that they aren’t actual eyes, you can’t quite work out what they are until someone flips on the lights.

I’m left wondering why seeing something for yourself and hearing a message directly from the source has so much more impact and coherence than when you read the words or hear a second-hand account. Especially because when you look back you realize that most of the information was actually there.

It is, of course, sensible. There’s a natural skepticism at other people’s assessments; what does someone else mean by such subjective standards as “high quality” or “affordable” … and if I had an idea of what it meant in America, what does it mean in Kenya? Visiting a site in-person changes fundamentally the information in my mind from an imprecise description "state-of-the-art" to a mental image of a white piece of medical equipment complete with context and knowledge of what it does, how it works, and where it is located.

The intangibles certainly matter as well. It was almost instantly clear that the potential entrepreneur possesses an incredibly sharp mind and has a knack for business. He certainly seemed to find various business concepts more intuitive than I did even after two years of an MBA. I did feel somewhat comforted at the hundreds of thousands of dollars of b-school debt I’ve amassed when he asked me this question:

“How can I account for direct cost of my service – the equipment is just there!”

Activity Based Costing.

Or more specficially, Time Driven Activity Based Costing.

Thank you Robert S. Kaplan for creating the concept. Thank you V.G. Narayanan and Francisco Asis Martinez-Jerez because apparently I actually internalized some of what you tried to teach me in accounting, even though it didn't feel like it at the time.

Imagine my surprise when I offered to build a costing model for him and felt quite excited at the prospect! (I mean, I've always known I was a bit of a nerd, but this seems a little over the top.) So, here I sit anxiously awaiting the price list for the equipment in question and imagining how I’ll account for the floor space.