Martin Quinn's management and financial accounting blog

Does accounting prevent creativity and innovation?

martinjquinn — Thu, 23 Feb 2012 08:30:12 +0000

Photo (techlabs.com)

Accounting is often criticised, and one of the common criticisms is that too much focus on money in a business causes a short-term focus which may not be good for a business. I would agree to an extend, probably because I am more into management accounting and have seen businesses take bold decisions which eventually paid off. Of course, financial accounting (the external reporting of results basically) is less helpful (or “completely useless” as one business owner told me a few weeks ago) in situations where decisions need to be made. And sometimes, these decisions involve a lot of brave and bold creativity and innovation which accountants seen to have a reputation of pouring cold water on.

I read two articles recently which made me think about accountants and creativity/innovation. The first one was a few months back on Forbes. The piece by Eric Savitz mentioned how creative type toys (like Lego) can be crucial to later creativity. Here’s a quote from him:

Lego, loosely translated, means “to put together” in Latin. But “to put together” doesn’t fully encompass the value – and purpose – of those buckets of colorful bricks. Legos are about putting together, then taking apart, then reassembling in new ways. That’s why I got so upset recently when a friend told me that she and her daughter had built a pirate ship out of Legos, arranged the pieces until they were just right, and then glued the whole thing together. That, I exclaimed, is not the point.

Legos unleashed my creativity when I was growing up. They drew out the part of me that had to know what things looked like from the inside out, how they worked, how they might work better. The hours I spent with them — sprawled on the floor, building and rebuilding, puzzling and visualizing — became my first lessons in engineering. There was magic in those little bricks. There still is.

Reading this I wondered how what Savitz be as an accountant. I think he would have a good chance of being creative, but not in a bad way. I think, like the Lego, he might be throwing away the rule book and creating accounting information which might meet the needs of the organisation he was working. This of course is what good management accountants should do, but do they all? I don’t know, perhaps its partially our fault (i.e. educators) and we need to encourage lateral (but always ethical and proper) thinking about accounting.

The second article I read was in this weeks Time, “What would Steve do?”. Steve Jobs was an obviously brilliant innovator – and eventually made Apple one of the richest firms in the world. In the article the author (Rana Foroohar) makes a strong claim, but she is probably fairly correct. She states ” Jobs stands out as an exceptional leader not so much because of his in-your-face style, but because American business has become dominated by bean-counters focusing on hyper-efficiency rather than by innovators focused on real growth”. I suppose this is a classic case of too much focus on short-term financial goals over longer-term business development and growth. I don’t have a quick-fix solution for such a problem, but certainly an open mind by accountants towards innovators would help.

What is a “business model”?

martinjquinn — Mon, 20 Feb 2012 10:00:53 +0000

Often, when I teach about types and classifications of cost in my management accounting classes, I use the term business model. For example, I might say “whether a cost is fixed or variable, can depend on the particular business model”. But, I am assuming the term business model is well understood. Perhaps it is not, and even when I asked myself what the term means, I had to do a bit of thinking. So here’s a simplified explanation.

An article in the Harvard Business Review from 2002 describes a business model as “the story which explains how an enterprise works”. This is a deceptively simple definition, but it does capture exactly what a business model is. If I were to ask you what are the essential elements of a story such a Cinderella or The Frog Prince, you would probably says things like characters, what the characters do, when the characters do things, and of course the (moss likely) happy outcome. Using the story analogy, a business needs to ask itself, what is that we do, who are our customers, how much does what we do cost, and will we make money (the happy outcome!). In other words, “what’s our story” in an economic sense (Read the full HBR article for more detail and examples).

Nowadays, business models have become a bit blurred though. For example, there are so many web-based “businesses” out there who, to be honest, do not immediately show a story which makes economic sense. For example, we now know how Google and Facebook can make money on a business model which changed the advertising world. But, what about for example Twitter or off-shoots like paper.li. I love the latter, as I can bundle all the twitter users I follow into a daily newspaper, but how can this make money. I am guessing they will introduce advertising, but has this business model already been over-cooked?

I hope this helps you understand what a business model is. To conclude, I suppose the story of what it is a business does has to be infused with accounting concepts. For example, there is not point being the world’s best at something, but costing a fortune to do it.

Balanced scorecards – a bit of humour

martinjquinn — Mon, 13 Feb 2012 10:00:22 +0000

As you many know, many scorecard type systems used to report on business performance often use some form of traffic-light system to display whether or not targets have been met (see one of my previous posts). While looking for examples of scorecards, I came across a German blog post, which equated the use of scorecards to Formula 1 (F1) flags – well taking the mick a bit really on the use of ideas such as traffic light type reporting. You can see the original post here, but below is a brief translation. It’s a bit funny, the idea being that the management accountant can be signalled by the security guard on whether or not to drive past the main gate.

Green – all is clear. Drive to the bank and plan to take over the competition.

Blue – a competitor is about to outperform us. The security guard has the phone number of a recruitment agency.

Yellow – not sure if there is real danger. The management accountant has not yet received a recent consultants report. Meet colleagues in the car park first.

Red – the business has been taken over or merged. The accounting department has been centralised. Go home

Red/Yellow stripes – danger of slippage. The board has discovered a good Business Intelligence software suite. Time for a training course

Protected: TurnItIn and your dissertation

martinjquinn — Tue, 07 Feb 2012 18:20:34 +0000

This post is password protected. You must visit the website and enter the password to continue reading.

Using rail freight to reduce CO2 emissions

martinjquinn — Mon, 06 Feb 2012 10:00:53 +0000

A year or two ago I set a hypothetical assignment for some of my students on a comparison of CO2 emissions on road freight versus rail freight. I based on the assumption that a CO2 charge would have to be paid by firms, and they could in fact save money by using rail freight. Of course the problem with rail freight is that is does not go door-to-door, but it might still be an option for transporting between cities or depots – depending on volume. At the time when I set the assignment, I did not find many examples (at least in the UK/Ireland), but I came across a Tesco press release in November last. According to the release, Tesco are expanding their use of rail services, which will mean 24,000 tons less CO2 and 72,000 less road journeys. Yes, this is a great thing for the environment, but the management accountant in me really wants to know the cost savings generated by this.

Institutionalised practices – a simple example

martinjquinn — Tue, 31 Jan 2012 09:50:02 +0000

In my research work, I write and read a lot about how accounting practices become taken-for-granted within organisations. This taken-for-grantedness might be equated with the term “institutionalised”, based on theories from economics and sociology. When we think of the term institutionalised, we often associate with things like being in jail for too long, or something that’s more physical like the an Institute of Engineers. But, it can be something far more fluffy. While driving to work in early December, a useful example came to mind as I listened to the radio. It was December 1st, and an Irish radio DJ called Larry Gogan is typically accepted as the person to play the first Christmas song on the Irish airwaves – it was Fairytale of New York for Christmas 2011 just in case you’re interested. It is not written down anywhere that Larry does this, and to be honest I don’t know how this practice came about. But radio listeners know that Larry is expected to play the first Christmas song each year. In other words, it is an institutionalised practice. And what happens is something tries to change this? After a quick search I found some comments from 2006 on a boards site:

Every year on 2fm Larry Gogan plays the first christmas song on the radio, usually in the first week of december, Apparently Gerry Ryan went and broke the tradition thats nearly 25 years old, i’m a little bit pissed off about that, larry is like a national treasure, you shouldn’t mess with him, boo gerry boo i say

I hope he gets a rap on the knuckles / kick in the balls for stealing Larry’s thunder. If he wants to do it after Larry has gone to the Great Microphone in the Sky (not for many years yet, I hope, I hasten to add), fair enough, but he shouldn’t have upstaged Larry like that

These quotes/posts above show that some people did not like the fact that another DJ broke the accepted practice. This is quite typical when change to any institutional practices is attempted. Similarly, in the world of accounting, there may be practices which are just accepted as how things should be done. Trying to change these can be tricky, but if we can understand why such practices became institutionalised, then we might be able to foster some change.

Dealing with a currency crisis/hyperinflation – a quick historical note and IAS29

martinjquinn — Tue, 24 Jan 2012 10:30:39 +0000

Over the years, economies have suffered many currency crises, soaring interest rates and hyper-inflation. Luckily, in my time as an accountant I have not had to deal with financial statements or other accounting information where the value of money became, well worthless. Runaway inflation for example occurred in Germany in the 1920′s and today it is still present in countries like Zimbabwe. In times of hyper-inflation, accounting standards do give us some guidance. IAS 29 suggests hyperinflation may have several characteristics

1) the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power;

2) the general population regards monetary amounts not in terms of the local
currency but in terms of a relatively stable foreign currency. Prices may be quoted in that currency;

3) sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is short;
4) interest rates, wages and prices are linked to a price index; and
5) the cumulative inflation rate over three years is approaching, or exceeds, 100%.

Without going into too much detail on IAS 29, when such hyperinflation exists, the financial statements have to be restated to a monetary value using some form of price index.

I recently had the good luck to see real financial statements prepared during a hyperinflation period. The accounts were if a German brewery and dated back to 31/12/1923 – long before IAS 29 was even thought about. The inventory figure had 18 digits, which I think is called a quintillion. I cannot imagine what it must have been like to deal with figures like this. Mind you the kinds of figures being thrown around nowadays on sovereign debt are getting close to these kind of numbers. Just out of interest the accounts on 1/1/1924, showed a figure of about 2 million marks – a new mark was issued and pegged to gold I think.

Thanks!

martinjquinn — Tue, 17 Jan 2012 22:43:14 +0000

Hi all, just passed 20,000 hits on my blog! Not much in the grand scheme of the internet, but it’s not a bad start.

The balanced scorecard – making it public??

martinjquinn — Tue, 17 Jan 2012 10:00:31 +0000

If you have studied management accounting, you’ll have heard the term balanced scorecard. A scorecard is a report of key performance indicators – both financial and non-financial – of an organisation. Many organisations not only use some form of scorecard, but also publish it on their websites or display it in a public place within the organisation.

Take for example London’s Heathrow airport. As you can see on the graphic here, they produce a monthly report (see here) which looks at many areas of performance for each terminal. Like many firms, they use a colour-coded system, where red usually means a target has not been achieved – for example, seat availability seems to be an issue in Terminal 3 on the example here.

This scorecard is a great example – if you click the link above you’ll see it has much more than I show here. I have only one negative thing to say about it – and this falls from a recent trip through Terminal 1. I discovered this wonderful colourful (and positive) scorecard on my way to the gents – on the corridor into the toilets to be specific. Surely there’s a better place to display results? Or maybe it does not matter as only us management accountants take any notice of such things.

What is a manufacturing execution system (MES)?

martinjquinn — Tue, 10 Jan 2012 10:00:42 +0000

In my former life as a management accountant in industry, I worked in a number of projects which automated either production itself, production planning, or both. A term I was use to at that time was Manufacturing Execution System or MES. So what is an MES and why should management accountants know about them? Well, an advertisement in the November 2011 edition of Financial Management (CIMA’s monthly magazine) prompted me to write about it. AN MES is a system which basically communicates from sales through to the actual making of a product or a the start of a process. An MES may include a sales order module, which would gather customer orders and pass these on to planning modules or directly to process equipment. Typically, an MES will improve a production process as production is scheduled more efficiently and can be monitored for back-logs and jams. Also, an MES will also typically integrate with an ERP system, which means that a businesses systems are fully integrated. According to the advert in the CIMA magazine, Carlsberg (yes the brewer) improved performance in several areas once it used an MES; sales increased bu 1.5%, gross margins up 1.2%, downtime decreased from 28% to 13%, material loss decreased by 1%. All of these translate into increased profitability, which of course is of interest to managers and management accountants. I would argue that understanding how an MES works in a business is a vital piece of kit for any management accountant, particularly if such performance improvements can be made. If you are interested in reading some more, here are two websites I am familiar with which offer MES systems; Kiwiplan and ATS.