Personally, as someone who has implemented and worked with several accounting and business information systems, I would say information systems are vital to accountants. Without them, financial accountants and auditors get no financial statements; without them, managers get no information to make business decisions. But that is the practical me. And I suppose the academic me too. However, if the recent European Accounting Association (EAA) annual conference is anything to go by, the academic community does not share my view. The EAA is a great conference, and brings together about 1,500 academics from all over Europe and beyond. Now, what I am about to say is not at all intended to be negative against the EAA, rather a reflection on the possible lack of focus by accounting academics on the ongoing effects of information systems on accounting and accountants. Of about 900 papers at the 2013 EAA conference in Paris, only 9 were presented under the title “information systems”. I did a quick check to see if papers were not categorised correctly and I only found 2 or 3 papers which I personally might classify as information systems papers.
So what does this mean? I don’t know to be honest. Maybe it’s a temporary blip. Having said that, the previous conferences were not teeming with papers on the things that drive accounting work on a daily basis i.e. information systems. The only thing I can say to my fellow academics is that information systems and technology is not a “black box” any more, it really does affect how we behave and how we do things – think of a smart phone for a moment. Technology does more now that just automate what we as accountants do – it can analyse data better and faster than us and deliver results directly to managers. I don’t think accountants are a redundant commodity yet, but as academics we need more detailed inside the box research to figure out what the accountants of the future will actually do. Well, that’s what I think at least?
The previous two posts have hopefully given you a very brief insight into what big data is and how it can help even small organisations. Now let’s briefly consider larger organisations. Nowadays, even if a company like amazon can process a few million orders a day, the amount of accounting data associated with this (i.e. a few million invoice and a few million payments) seems insignificant if we start to think about other data that might be collected at the same time. For example – and these are just a guess on my part – the age, sex, location of the purchaser, the type of device they searched and bought on, what the looked at before buying etc. The amount of data starts to get really, really big.
A report by Deloitte includes two quotes that capture the perceptions of big data really well:
“Big data is the new oil. The companies, governments, and organizations that are able to mine this resource will have an enormous advantage over those that don’t.”
“Big data will generate misinformation and will be manipulated by people or institutions to display the findings they want.”
(Source: The insight economy Big data matters— except when it doesn’t, Deloitte, 2012, available at link above)
As the report says, both the above perceptions are right. The key things about big data is getting information out of it and transforming that information into business knowledge. In other words, like many other things organisations encounter on a regular basis, big data needs to support the organisation’s strategy. This may mean being more competitive, gaining some market knowledge before others or opening up new business channels. Whatever big data might mean for larger (and smaller) organisations, I believe management accountants in particular have a key role in making in useful information/knowledge – after all, we are good at analysing information and filtering out what is relevant.
- The future of big data (infographic) (siliconrepublic.com)
Last week I wrote about big data in general. Now I will try to give an example of how accounting software used in small business can be a source of big data, which can ultimately help those same businesses.
Quickbooks is a common accounting software product used in many smaller and medium-sized businesses. Traditionally, Quickbooks was installed on a computer in the organisation, but nowadays it is also available as an online product. In other words, there is a cloud version. According to an article in Forbes in April 2012, as much as 35 million of Intuit (the owners of Quickbooks) customers use online software for accounting and tax returns. With anonymous data on 35 million small businesses, Intuit can obtain quite a lot of information for their own purposes in terms of capturing user needs and developing their products. But they are also using this information to assist their customers. One great example cited in the Forbes article is a Trends feature. With this feature, a business owner can compare their business to average performance trends in the same sector, and even with similarly sized businesses. A comparison of sales, operating margins and payroll cost is possible. This kind of information would be really useful for any small business and typically such a business would have neither the time or resources to obtain such data.
This summer, customers of the Irish based Ulster Bank faced 3-4 weeks of problems getting paid and paying bills as the banks payment system failed. Customers had to queue to get cash from their accounts and go to other banks to pay bills- see my post 2 weeks ago about how some countries are limiting the amount that can be paid in cash; these limits would be too low to pay a mortgage in Ireland for most.
When I worked in a paper firm, I was involved in the decision to set up a simple business recovery plan. At the time, I was IT manager at a plant with about €30m turnover and 150 staff. The whole place was more or less run by a single system which managed sales orders, production planning and invoicing. We had a server onsite which done all this. This was not always so, so once I realised we were so dependent on a single piece of hardware/software I initiated a discussion with the plant management board to get a recovery plan in place. To keep it brief the cost of having a server available to us at any location within 4 hours was €7000 per annum. As part of the contract we could also do a free trial run once a year to test how long it would take to recover our systems. I always remember the production manager saying this was a cheap deal as if we had no systems we would basically loose wall customers within a week. And all we did was made cardboard boxes. Surely a bank should have a much better system in place. The cost does not really matter in the decision, it’s much more about the list revenue and lost customers.
The photo by the way comes from a friends Facebook page .
The fact that many businesses capture vast amounts if data is not brand new (see this article from The Economist in 2010), but the focus of collecting and analysing what marketing people call big data is now beginning to come firmly under the radar of management accountants too. Before looking briefly at what big data means, we need to define. First, back to basics. Data is simply facts, numbers, statistics etc. For example, 175,80,40 are just numbers. They are in fact my approximate height, weight and age. This is information, as you now know some facts about something i.e. me. The problem with big data is getting the information value from it.
Here is where a management accountant can help – assuming of course (s)he has some technical proficiency. Here is an extract from an item on CNET back in May of this year (bold is added by me):
Put simply, the analysis that big science brings to the table makes big data relevant. I envision big science combining with big data to create big opportunities in three significant ways: real-time relevant content, data visualization, and predictive analytics.
When I read the above, I immediately thought isn’t this what management accountants have been doing for years now? If you remember the basis definition of what management accounting is, you’ll remember it is about providing decision-relevant information to managers. This includes real-time data, forecasts and predictions and is often aggregated (or visualised). Personally, I believe management accountants, IT people and marketeers (who might be responsible for collecting all this big data) can all work together to make big data work as information. In particular, management accountants are well placed to assist as they know what information drives a business.
Some time ago, I read a blog post on the Zoho website about double entry accounting. Zoho provide a number of business related applications. The essence of the Zoho blog post is conveyed in the title of this post. Double entry accounting has been around for the last six centuries and has been embedded in the most simple and most complex accounting software. And there are no signs of it disappearing. The have been some proposed alternatives, such as the Resources, Events, Agents model (which is sometimes used in teaching). But like the DVORAK keyboard, even if some alternatives may be an improvement on the double entry system, they are likely never to catch on. Why you might ask? Well, in my institutional theory thinking the answer is probably because the practices around double-entry accounting have been repeated so many times by so many people, that they have become the accepted way of doing things in business. In other words, the double entry system of accounting is a routine. And, not only that, there are also rules about double entry. I regard rules as written, and there are plenty of written rules of the double entry system – in text books, in software for example. If a practice has both been repeatedly performed for 600 years or so, and it has been written as a rule, the as the Zoho blog post says ” the traditional double-entry model was deeply ingrained in the business person’s and accountant’s psyches, and it was never going to be easily changed”. And it will probably remain so.
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.
The October 2011 issue of CIMA’s Financial Management had a good article summarising the development to date of iphone/ipad/android apps for financial reporting. Since the advent of the internet, most public companies (and many other organisations) now publish their financial statements on their websites. Some just provide a static PDF file, while others offer more dynamic PDF files, Excel downloads and even XBRL formats. I suppose it is only logical that some firms are now providing a corporate reporting app, which not only make financial information more readily available, but also available in an offline format. According to the article, only a few companies have taken the “ground-breaking” step to develop and provide an app solely for financial information. Nestle launched the first such app (30,000 downloads), which incorporates news, financial reports, presentations and share prices. The article also mentions (just) two other firms, Shell (3,000 downloads) and Cemex – i think Tesco also have an app. There are obvious benefits of an app – reducing distribution and print costs, faster information dissemination – but the objective according to the article is to make the user’s experience far more interactive than web pages currently do. At present, given the infancy of such apps, interaction is their biggest downfall too. According to the author, only increased interactivity and a more user-friendly approach will increase the use of financial reporting apps. But, no matter what way these apps develop over the coming years, one thing is for sure – mobile communication will increase. Perhaps these early adopters of financial reporting apps may become the leaders in the field soon – only time will tell.
I recently have been lucky enough to study accounting records at a company over a period spanning from about 1870 to today. It was a truly great experience, and history is not really one of my favourite topics. But having seen accounting techniques that we still apply today develop over time, it really gave me an appreciation for where present day accounting came from. The other thing that struck me was the level of detailed communication that went on between the accountants and various other parts of the organisation in the past. At the particular archive I was working in, volumes of typed-out reports and many hand-written ledgers, memos and other reports provided a wonderful picture of accounting over more than a century. What really struck though was how bad we are today at leaving a similar trail of history. Most accounting information is now electronically stored, which may be a problem in itself for any future researchers of accounting history. But a bigger problem is more likely to be the dispersal of information across modern organisations. While the main accounting records may be stored in an electronic, but archivable format, there’s normally vast amounts of related information stored in emails, documents and spreadsheets all across a company. This may make it impossible for any future business/accounting historians to follow the story of accounting within organisations today. So if you are an accountant, future accountant or a manager, why not think about how centralised your important accounting information is. It not only makes sense that important information be available to all now (and thus centralised), but it also leaves a more complete picture for the business itself to look over historic records – and of course makes it easier for future story-tellers/researchers.
In this post, I’ll detail some ratios which can helps a business manage its working capital (working capital is current assets less current liabilities). A business can calculate a ratio for each of inventory, trade receivables, and trade payables which help interpret how well working capital is managed. In my previous post, I showed some ratios which help determine liquidity and solvency; with the ratios below, we have all elements of working capital covered (including cash) .
The first ratio is inventory turnover, which is calculated as follows:
Inventory turnover: Cost of sales
This ratio tells us how many times a year inventory is sold. You’ll notice the bottom line says “average inventory”, which might be a simple average of the inventory at the start of the year and the end of the year, or a rolling average. The reason for using an average is to try to remove seasonal variations.
The next ratio reflects how well trade receivables are managed:
Average period of credit given: Trade receivables x 365
This ratio tells how many days credit, on average, is given to customers. The top line is multiplied by 365 to give the answer in days. If you want it in months, multiply by 12 instead. If the period of credit given is getting longer, this could be problematic, as cash is not collected as fast by the business.
Now let’s see the average period of credit taken. This is very like the previous one, except it relates to suppliers. It is calculated as follows:
Average period of credit taken: Trade payables x 365
One thing to note about this ratio is that it may not always be possible to obtain the credit purchases figure from published financial statements. The period of credit taken should not be too long either. If it is getting longer, it may be a sign of cash flow problems.
As in my previous posts, I’ll now calculate the above ratios using the figures from the 2010 annual report of Diageo plc.
The inventory turnover is: 4099 (3281+3078)/2 = (data from p.106/108) =1.2 times per annum. This means the company sells its inventory just over once per year. This probably seem really low if you think about how quickly beer and other alcohol sells in a retail sense. However, if we look at the detailed notes on inventory in the annual report, we can see that about 2/3 of the inventory is deemed “maturing” inventory.
The average period of credit given is: 1495 x365/9780 = 56 days (data from p.106/140). This seems a reasonable period of credit.
The average period of credit taken is: 843 X 365/4099 ) =75 days (data from p.106/148). Note that I am using the cost of sales figure as a substitute for the credit purchases figure – which is typically not available in published accounts. Again this figure seems reasonable and is longer than the period of credit given, which makes logical sense.
In summary from the figures above, the working capital of Diageo plc seems well managed.
If you have studied management accounting, you may remember the long-winded formulae to estimate values to put in a linear equation. Well, it’s a lot easier using MS Excel. Take a look at this video I have put together.
Like most accountants, I have to resort to Microsoft Excel quite a lot. No accounting software can ever give you all the information you need to make business decisions. Similarly, some ad-hoc decisions just use estimated figures and any calculations can be easily done in a spreadsheet. The more you use software, the more you realise that keyboard shortcuts are often the fastest way to do things. The typical Windows Ctrl+C is very handy to copy something you have just selected with the mouse.
Excel to has lots of keyboard shortcuts. Here’s a great webpage with a long (if not full) list of Excel’s shortcuts.
Yes, there are a few good iPad accounting apps. Most have been available for the iPhone too, but the iPad makes such apps far more suitable for use in real business. Here’s a web report on 3 of the most common accounting apps:
According to CIMA Insight (December 2010), XBRL (the html-type languages used to electronically transmit financial reports) is becoming very common place. XBRL is an XML type language (used on web pages and e-business) used specifically for financial reporting. The increasing use of IFRS, and a XBRL file which encompasses IFRS is undoubtedly helping the rise of XBRL. It is also a free to use language, which helps too. So does XBRL do or offer?
The key advantage is that is provides a common and agreed method to file financial reports in all kinds of places. Using the main statements required under IFRS for example, anyone with a web-browser can make sense of the data in the financial statements and manipulate the data as required. The US stock exchange and the UK tax authorities are just two who already use XBRL. Indeed many authorities are likely to make it mandatory in the near future. By filing financial reports in XBRL format, many agencies could in theory use the one filing for multiple purposes – simply because the filing is electronic.
Although XBRL is being driven by regulators and external financial reporting, it could also streamline internal accounting processes. For example, a large organisation may have non-standardised financial reports, which could be standardised used XBRL – assuming of course a standard reporting mechanism/format could be agreed.
For more detailed information, check out http://xbrl.org/
I read a post on the “Your the boss” blog on the NYTimes recently [see here] which gave some details about some software called inDinero. It’s one of a number of software solutions out in “the cloud” at the moment. The company got off to a really good start, recently receiving $1m in funding which is not bad for a start-up founded by a 20-year old graduate.
I read a little about the software on the website and was surprised by one of its logos “no more accounting”. I suppose this true to an extent in that inDinero does away with the drudgery of enterjng transactions like sale invoices and so on. How you ask? Well it concentrates on the key thing in any business – cash. The software connects with the business bank accounts and credit card accounts online [US banks only at present it seems] and automatically updates all cash inflows and outflows. So, for an entrepreneur, reports are available daily on the cash situation of a business. Any cash flow issues can be seen pretty quick and managed.
I don’t think it’s true to say that inDinero equals no accounting, as financial accounting is of course still needed for tax authorities and so on. It can export data to MS Excel and common accounting applications like Quickbooks, so this can help with the dull but necessary accounting. But, where the real advantage lies is the simplicity with which information on the cash flows of a business is gathered and reported – and this is just what entrepreneurs need. Remember, CASH IS KING. Let’s hope this or similar products make their way this side of the globe too.