I recently published a paper in Accounting History Review about a company called Bennett’s and their accounting in the early 1900s. This company provided malt, mainly to Guinness in Dublin. In the research for the article, it became apparent that producers of malt did not do very much management accounting. Bennett’s, for example, seemed not to cost their production process very often and seemed to accept the market price offered by breweries like Guinness.
One would thus think Guinness may have been in a strong position to dictate the price of malt, but this seemed not to be so. In an official corporate history of Guinness, a note is made of the fact that the malt providers should make a “living profit”. What this means is not defined, but when I read this I could only think of the contemporary idea of a “living wage”. This latter concept is to pay staff more than the minimum legal rates of pay (if there is one) and give them enough income to live – but not too much. I did a Google search for the term “living profit” and surprisingly – at least to me – there are no explanations or mentions. I cannot help but think that today the idea of a living profit could be applied in many supply chains, and indeed companies (and their shareholders) could ask themselves do they really need to make so much profit – think Apple, for example. I firmly believe history can teach us a lot, and this is one good example where some altered thinking might benefit society as a whole.
As you may know, many businesses incorporate – which means they are formed as a limited company. The are various types of company, but by far the most common is a private company. One of the key advantages of a company is that it is a separate legal entity, meaning it can sue and be sued in its own right. This means that individual shareholders and managers are protected in some ways and need not always bear the risks associated with the business.
However, you may also have heard the phrase “lifting the veil of incorporation”. Let me give you a recent example from personal experience. Where I live, a new residential development is proposed, and like all developments, it must go through a planning process with the local council. While looking at the development files, I noticed that the builder was a company and the designing architect another company. By coincidence, I noticed that the two companies were owned by the same person. This, as you can imagine, creates a bit of a problem in my mind. Then the owner of these two companies as a person submitted a document favourable to the proposed development. So, in eyes of the law, this is three people/bodies, but if we lift the veil of incorporation, we can see it is all the same people behind the entities.
Have a look at a new book I joint edited – here is the link
The book is a collection of 22 chapters on many aspects of Accounting Information Systems. It gives an excellent summary of current research and thought on AIS. Enjoy
Okay, it’s been a while, as I have been ill. But normal service is resumed 🙂
From previous posts, you’ll know I am a fan of cloud products and technology in general. I also study and write on change, so a recent experience with QuickBooks software (UK version) is great material for me.
I have been a QuickBooks (QB) customer since 2006 – before the cloud was widespread. I have had four desktop versions which in total earned about €1100 for Intuit. So at the end of December, I decide, let’s put this online. I signed up as an Irish customer (as I am based in Ireland, obvious one would think), created my company, and then went back to the desktop product (QB 2015 on my laptop) and ran an export to online company menu option. The end result was not as expected, I had two companies. As I signed on as an Irish customer, my data cannot be transferred from QB 2015 UK desktop version. So, I would have to subscribe in £ for a UK online account if I wish to have my data transferred.
So, what’s my point other than bad service – as I had no indication of what to do correctly online. Well:
- I am a very small business – what if I had a few thousand transactions a year I do not want to lose
- The change to online cloud accounting, while I like it, results in fewer features that accountants or clever managers like to use – for example, more detailed reporting. So would I want to then have a double sacrifice – lose my data and less reporting
Don’t get me wrong, the cloud is the way to go, but surely Intuit (and others) can do better!
Just a short post today – I will get back to more regular posts soon.
I have written before about several aspects of cloud accounting – see here for example. But we can also think about what cloud accounting providers can do for their clients.
Simply, these providers have lots of data and insights on their clients. The Intuit group seem to have been quite clever in recent years with such data – mainly in the US market though as far as I am aware. Here is their latest offering, offering loans to small business. If we assume the potential market is users of Intuit’s Quckbooks, then I could easily surmise that data – even aggregated – from the software could be used to assess the ability to repay and so on. If you are thinking there may be privacy concerns on the data, well I think any bank or lender would ask for financial statements regardless.
I’ve been quiet recently on here due to some illness. While I’ll and having some time on my hands I began to ponder the cost of medicine and where I live ( Ireland ). I know we are one of the more expensive places to buy medicine in Europe, but here I’m not going to refer to any price indices or similar. Instead I’m going to try to quickly break down the costs of doing business in two countries – Ireland and Spain – to explain price differences. A business manager might do this regularly to gauge the competition. To give an example of the price difference, I know that a common prescription pain killer costs €26 in Spain versus €42 in Ireland. Some medicine I use myself costs about €12, versus €23 in Spain. And just tonne clear, these two examples are for identical nongeneric medicines.
The first is taxes. I found that most medicines in Spain have 4% VAT, whereas most in Ireland are at 0%. So we can rule this out. Second, a tax consultant in Spain told me that to purchase a pharmacy in the city I stayed in would cost about €2 million. This is due to limits on how many pharmacy licences there are. This cost results in high depreciation from an accounting perspective, and is similar to Ireland. Third, by my guess, all other costs like labour, rent, light etc are cheaper in Spain, probably 10-50% less. So this leads me to one remaining thing – profit margins. The profit margin would be spit between the pharmaceutical company, a distributor and the pharmacy itself. Without insider information, it is very hard to know what these margins are. Having said that, they must be a large explanatory factor for the price difference.
And for the fun, to give a more marked price difference. I recently saw a TV programme on the cost of medicine in the US. It not the cost of a monthly supply of insulin at $900. This was quite unaffordable for pensioners on a low income. Many who are near the Canadian borders drive across to Canada, where the price of the same product is CAD$ 120.
Of course, I’m doing a quick and dirty, non- scientific analysis here. But business is full of gut instinct and similar, and my experience and gut tells me profit margins are a huge explainer for medicine price differences between countries.
When I teach accounting to students with no prior accounting knowledge, I usually cover some of the regulatory framework around financial reporting. One commonly adopted set of regulations are the International Financial Reporting Standards, or IFRS.
One question often posed to me in class is what countries use IFRS? The quickest answer is lots of countries, and I often mention the big economies that don’t require the use of IFRS for public companies- the US, India and China. Recently then IFRS organisation has created an interactive map showing which countries use IFRS. The link is here, and its a very useful resource.
In my daily work as an accounting academic, income across many papers and articles which explore the broader role of accounting in society and out daily lives. Lisa Jack from the University of Portsmouth writes about the role of accounting in the food supply chain. This is a very interesting area, as information on costs and margins is crucial in the food sector. She has just published an article on the recent contamination of eggs in some
European countries – you can read it here. It gives a good overview of how accounting is entwined in this and other food issues, and how it could help.
So, I was looking through Google News search to find something to quickly write for this post.
I found this article about the differences between IFRS and GAAP. I don't know much about the website, but the article has two incorrect statements. First IFRS does classify assets as current and non-current. Second, the term GAAP is more widely used that just referring to US rules. So, we could say UK GAAP or German GAAP.
Okay, so it's not fake news, but it's incorrect 🙂
I probably don’t need to explain the title of this short post, it’s quite obvious. Any business needs to appreciate all costs of the products or services it delivers.
- In past years, manufacturing has shifted to some degree to lower cost locations such as China, and the Foxconn relationship with Apple is a classic case. In the case of a product like an iPhone or iPad, it’s quite easy to see how the assembly costs are probably the higher component, and as they are small, distribution costs are low. But as a recent article in Forbes shows, transport costs are often a reason for manufacturing being close to market. In the article, there is mention of Foxconn planning to $10 billion plant in the US to build larger displays – for say 60 inch TVs. The article notes that the cost of capital in the US is similar to anywhere else, and labour costs and relatively low, although higher than China. However, the transportation costs would be much lower for such larger displays and thus it makes sense to build a new plant in the US.
As you may know, we can use ratio analysis of financial statements to form a view of how a business is doing. One area worth looking at is liquidity and solvency, which we can for example assess using the current ratio or other working capital ratios.
I came across a great example of a “technically” insolvent organisation recently – none less than the professional body I am a member of, CIMA. Below is an extract from their financial statements of 2016 , but first let me briefly explain what insolvency means. Solvency means a business can pay its debts as they fall due, and technically, if current liabilities exceed current assets, a business is insolvent.
If we take a look at the current assets, the total value of current assets is £18,760,000, whereas current liabilities equals £22,564,000. Thus, technically CIMA is insolvent. What makes this example even more interesting is that if we look at the current liabilities, about £13m is deferred income, the subs in advance. These are already included within the cash balance, or the cash has been spent already, so they are not really a liability per se. However, if CIMA were to close tomorrow, it would have to repay these subs to members. So the cash in the bank more or less could cover this, but then if all receivables were paid they would not cover the payables.
Have a look at the full accounts at the link above if you want to see more.