Martin Quinn's management and financial accounting blog

Thinking about labour costs

martinjquinn — Fri, 25 May 2012 09:00:59 +0000

Paul Downs is a US business owner who writes on the NY Times Small Business blog. Here is a nice post in a series he wrote on “the numbers I track”. In this post, he focuses on the importance of tracking labour costs. This quote from the post gives a good summary of Paul’s thinking:

“I’m not sure what to think about my labor costs. I have two conflicting theories running through my head. The first: pay people what they deserve. The second: pay people just enough so that they don’t leave. In reality I’m somewhere in between the two. Payroll is our biggest single expense, and it’s easy to let it get out of control and suck up all of the profit in the company”

I’m sure many small businesses experience this same sentiment. Read the full post for more.

Facebook price earnings

martinjquinn — Mon, 21 May 2012 21:25:41 +0000

I have written before about key financial ratios which can be used to analyse a business. Here is a great current example – the price earnings ratio for Facebook. The post is from a New York Times blog.

What is iXRBL

martinjquinn — Fri, 18 May 2012 09:00:46 +0000

At end of last year (December 2011), Ireland’s tax collection authority (Revenue Commissioners) issued a consultation document on iXBRL. I have written a post of two on XRBL previously. XBRL is mark-up language (like XML or HTML) which has been specifically designed to assist in the electronic filing of financial reporting documents. If agreed as a global standard, XBRL would present great advantages for state agencies like tax authorities, company registries and statistical bodies. This is simply due to the fact that XBRL presents a common a relatively easy to use electronic way for businesses to file financial statements, without the need for any form of manual interference and without the need to send files more than once.

So what is iXBRL and how is it different from XBRL? iXRBL stands for “inline” XBRL. It is more or less the same as XBRL in that it uses tags to identify data within a file. For example, a tag would identify the figure for same in the statement of financial position. Using tags means that data can be intelligibly read using software, which makes data manipulation a whole lot easier. The only problem with tagged data is that is typically not human readable. Where iXBRL differs is that all the tagged data is “hidden” within a human readable document. For example, a PDF file of a company’s financial statements might include all the necessary tagged data. The major advantage of this is there no need to produce a separate special XBRL file. You can read lots more about XBRL and iXBRL here.

Fair value accounting – a brief summary

martinjquinn — Fri, 11 May 2012 09:00:19 +0000

I read an article from the Guardian website last January, where a Bank of England official was suggesting that banks need to have separate accounting standards from other types of business. Some of the concerns mentioned were around the notion of fair value. This an extremely complex area, but I’ll try to summarise it here.

The basic idea of fair value is that certain types of assets and liabilities should be measured in the financial statements at a value which reflects what they could be sold for or settled for. In the main, the types of assets/liabilities concerned are referred to as financial instruments – e.g. debt, equities. There are two complex accounting standards which deal with how such instruments are measured according to fair value. IFRS 9 defines the what happens to the difference arising on fair value adjustment. Without going into too much detail, the fair value adjustment goes through the income statement/profit & loss account. As mentioned in the Guardian article, this is normally fine when markets are causing the value of the assets to increase, but it perhaps less popular when markets are falling. And, of course there is the problem of ascertaining what exactly is “fair value”. IFRS13 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. It also describes a hierarchy of how to measure fair value and outlines detailed disclosures which must be made in the financial statements. Of course, all this presupposes there is a reasonable way to ascertain fair value based on a market price or equivalent market price. And, as we know from recent years, there have been plenty of media reports about the complex nature of some financial instruments. I’m sure the debate on whether or not fair value is right for the banking sector will continue.

Driverless cars?

martinjquinn — Tue, 08 May 2012 18:52:00 +0000

Not my normal topic, but have a read of this news piece on the BBC

Now driverless cars have been around for a while, but what will Google do, pop up ads to make money as you drive by somewhere ??

Can social data change markets?

martinjquinn — Fri, 04 May 2012 08:10:28 +0000

In recent years, we have heard so much about the (financial) markets, their reactions, lack of confidence and so on. I often feel like asking who or what exactly is “the markets” and will they ever just leave us alone. The economist Adam Smith used the analogy of the invisible hand, a self correction mechanism the markets may have. More recently Chandler alone of the visible hand – the firm – which could be influenced and changes perhaps easier than something like an invisible market hand.

I’m no economist, but I do find this stuff interesting. Especially nowadays when you think if the amount of information a firm could have – social data for example. I read an article in a Forbes blog last year some time, which suggested the prevalence and increasing availability of social data might be the invisible hand that could change markets, or at least help us to understand the markets. Seems like an interesting thought – click here to read the post.

Peer-to-peer lending – a source of finance for small business?

martinjquinn — Fri, 27 Apr 2012 10:00:22 +0000

I read an interesting article in the November 2011 issue of Financial Management, CIMA’s monthly journal. The topic was peer-to-peer finance, which was something I had only heard a little about. Given the combination currently of low deposit interest rates and high lending rates for small business, peer networks have formed and are seemingly growing fast. The basic idea is relatively simple: some business have cash surpluses and others need finance – but not at 19% (which was a rate quoted to one business mentioned in the article). Those with spare cash can group together and lend to those that need it. The risk may be lower for the provider of finance as only a small amount can be contributed, and for the borrower the rate is lower (8.9% in the case of the business the bank wanted 19% from). Two peer-to-peer lending networks are mentioned in the article – Thincats and Funding Circle. In effect such networks are like mini-money markets. They do, of course, undetake some credit checks and crediting rating, but for small business this seems to be a very sensible way to bring borrowers and lenders together.

What is a parntership? How does it change financial statements prepared?

martinjquinn — Fri, 20 Apr 2012 09:00:46 +0000

In business, a partnership refers to the coming together of two or more persons to conduct a business. Normally, there is a maximum number of partners with exceptions made in cases like accounting practices and legal practices. A partnership is usually formed to take advantage of the combining of skills and resources. The objective is normally to make a profit, and this profit is shared out in some agreed way among partners. Losses too are borne by the partners.

As essential element in the formation of a partnership is the Partnership Agreement. This is a legal agreement (which ideally should be written) which contains items such as the following:

the capital to be contributed by each partner
how profits are to be divided
any interest to be paid on capital contributions
any interest to be paid by the partners on monies withdrawn
salaries to be paid to partners
arrangements for admission of new partners
arrangements to dissolve the partnership, and procedures on the retirement/death of a partner.

In the absence of a partnership agreement, in the UK and Ireland, the Partnership Act 1890 applies (see here).

In terms of preparing financial statements, there are some differences. First, any adjustments to profit are made in a profit and loss appropriation account – which is in effect an addendum to the income statement/profit and loss a/c. For example, any interest due to or to be paid by partners, salaries etc are made here. The resulting adjusted profit is then shared among the partners as agreed. In the statement of financial position (balance sheet), each partner will have their own separate capital account. Some partnerships used a combination of capital and current accounts. The former shows only the fixed capital contributions, the latter shows profits, drawings, interest, salaries etc. This approach is probably better as the any negative balances on the current account will signify that perhaps a partner is taking out more from the business than they should.

John Teeling, founder of Cooley Distillery talks about his business

martinjquinn — Fri, 13 Apr 2012 09:00:48 +0000

John Teeling founded Cooley Distillery in 1987. In January this year, he signed off on a deal to sell the business to global spirits firm Beam (see here) US firm to buy Cooley Distillery – The Irish Times – Fri, Dec 16, 2011. On January 14th 2012, Dr Teeling gave a very useful radio interview on his life is business. Have a listen to the podcast here (January 14th, 2012). There are a few things of interest. For example he tells the story of why Irish whiskey sales declined from 60% to 2% of the world market in the past. And how in 1960, he was one a few people in Ireland you could do Discounted Cash Flows – something we take for granted nowadays.

Pricing tips for small business

martinjquinn — Fri, 06 Apr 2012 09:00:20 +0000

I’m a bit lazy today, sorry, so I’m directing you to a nice post on setting prices in small online business: Top 5 pricing tips for small business