The Health Service Executive (HSE) is responsible for Ireland’s public health service. It has been the subject to criticism over the years for being inefficient and it is one of the largest items of public expenditure.
Thankfully, I have not been a frequent user of HSE services – that is, I have been generally healthy. My son had a mild concussion recently, so we had to attend the A &E department in our local hospital. On attending A & E, every patient is charged €100. The idea of this fee is two-fold 1) to stop the use of A & E by people with non-urgent issues and 2) to help reduce budgetary cost pressures. Both of these are fine in my view.
So, good law-abiding citizens as we are, we asked to pay as we entered. We were told “come back when you leave”. So we did, and were told “we’ll post the invoice”. So now, reflecting on this as an accountant, that’s two opportunities missed to collect payment. Then we get the invoice. There is no bank account details on it, and I cannot pay online. I have to call a number which was always busy. I could pay at a Post Office – fine if I am not working or have one close to work – I do work and I don’t have one close. Eventually we paid! If I do a quick media search I can find one hospital owed €600,000, and some reports from a few years back suggest the HSE are owed €200m . Apparently, people who do not pay are pursued, but how much does this cost? A lot more than the amount collected perhaps, which is not good for a cost stretched organisation.
To me, the process of payment should be much easier. Twice we asked at the hospital. I did not check if they had a credit card machine there, but why would they not. Why can I not pay online or to a bank account, or by PayPal? I shared my story with some friends, and they tell me some hospitals accept online payment. This made me even more annoyed, not even a common system! The lesson here is, and it applies to all businesses and organisations, you have to collect monies owed. The first thing then is to make it easy to pay, and to me the HSE fails badly in this regard.
My colleague Michael Farrell has written a nice post explaining the dodgy accounting transactions at Anglo Irish Bank – the bank that was a big part of the Irish financial crisis in recent years.
Former executives from Anglo Irish Bank (“Anglo”) and Irish Life and Permanent (“ILP”) are alleged to have conspired to mislead investors by setting up a €7.2bn circular transaction scheme to bolster Anglo’s balance sheet in 2008.
The simplified debits and credits (from Anglo’s perspective) for the “circular transaction” as it’s being called are as follows:
1) Amount put on deposit with Anglo by ILP:
Dr Cash €7.2bn
Cr Customer Deposits €7.2bn (shown as a liability)
2) Amount “lent” to ILP by Anglo:
Dr Loans and Advances to Banks €7.2bn (shown as an asset)
Cr Cash €7.2bn
Per the above, the transaction is cash neutral, so what’s the big deal? The issue is that the €7.2bn recorded as a customer deposit with the bank would be (and was) incorrectly interpreted by the bank’s wider stakeholders as a measure of customer confidence in the bank.
So where do the accounting rules stand on…
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To this audience I ask two questions
- do you understand short-term versus long-term? If you do, which applies to your decision-making?
- are there any trained management accountants working in banks? I know there are, so read below if you are one of them.
While driving back from Cork recently, I heard a decent sounding lady with six kids telling a story about how a bank was repossessing the house her family rented – it was the Joe Duffy show on RTE Radio 1. The landlord could not afford the loan repayments it seemed and the bank wanted to sell the house. The family worked, and had sufficient income to pay rent into the future. The husband worked in a state-job, so as secure as you could get. She tried to communicate with the bank, but got a “computer says no” type response from the bank. To me, and I am just a management accountant, not a banking expert I could not see the logic in selling the house. Something instinctively told me taking a longer term view is a better choice.
Based on the information she gave during the radio show, when I reach my home I opened an Excel sheet. I checked the rent the lady might be paying – from daft.ie – and then I started to use the simple PMT function in Excel. I made assumptions that the landlord stopped paying the bank loan based on the original house value in 2010; that the bank would allow the lady to take over the mortgage at the present market value of the house and at the present interest rate. I did not adjust for the time value of money. You can see all my workings at this link:
The total time to do the above calculations was about 20 mins. I admit, Excel is not perfect, and I do not adjust for the time value of money – I don’t think it will make things vastly different. To keep it short, if the bank allowed the lady to take over the house as described above, they would gain to the tune of just under €86,000. Based on my simple calculations, the lady could afford to pay this. So, taking a longer term view, the bank (and by definition it’s shareholders) would benefit compared to ditching the house now.
Some further points on costs. I ignore legal costs, as the bank would have to suffer legal costs on either a sale or re-mortgage. But there is a bigger elephant in the room on costs. The lady would be homeless, someone would have to pay this cost – directly or indirectly, and ultimately the state. If I extrapolate the social costs, what is the family (who seemed decent) became homeless, the family fabric was disturbed and the kids turn to crime in the future. How much would this cost in money terms ?
So back to my questions. The scenario I describe above is being repeat all across Ireland. As a person, and an accountant this annoys me. The view of banks seems to be short-term only, driven by profit only. Now don’t get me wrong, profit is good, it creates jobs and investment. But we must not view profit from a short-term perspective. So, to the bankers, give me an answer to the above questions. If you are a trained management accountant, you should be thinking long-term, and if not, don’t think you cannot fail by taking short-term views. As you know banks have failed, as the leading image here should remind you.
Working capital is defined as current assets less current liabilities. Current assets are inventory, receivables and cash, while current liabilities are amounts owed to suppliers, bank overdraft and other short term liabilities such as taxes due.
Managing working capital is very important. Tie up too much money in inventory and the business is in trouble. A recent report by PWC suggests companies are still not managing working capital as best they can. Read about it and some suggestions to improve working capital here.
In December 2014, the media (see here for example) noted how millions for euro were “off-balance” sheet. According to reports from the Vatican “some hundreds of millions of Euros were tucked away in particular sectional accounts and did not appear on the balance sheet”. So how can this happen, and what does off-balance sheet actually mean?
Let’s go back to basics first. A balance sheet shows assets, liabilities and equity. Assets are essentially something an organisation own’s or has use of like a owner; a liability is a claim against the business. Both must be measurable in monetary terms. So for example, many large firm’s brands have values in $billions put on them, but these are off-balance sheet assets which are off-balance sheet because the value cannot be measured accurately in money terms.
In other cases, such a the Vatican example, assets can be seemingly omitted from the balance sheet. This is of course not a recommended practice. How is this done? Well, it is a little bit more complex than this, but essentially something is omitted from the books of the organization. Remember, now matter how complex an organization is, underneath its accounting system is the good old double entry system of accounting. If a transaction (e.g. bank account) is omitted from the double entry accounts, that’s it, it does not appear on the balance sheet.
As I drove through France and Spain on my holiday, I thought about the tolls one must pay (on most) motorways. I was thinking how do they set the prices of these tolls? Of course, public infrastructure like motorways is often now financed by a combination of public and private investment. Regardless of the investment type, can you imagine how tricky it is to pitch a price for a motorway toll. If it’s too high, less will use it (M6 Toll in the UK) and costs take much longer to be recouped. Set it too cheap and it floods with traffic, which in turn eventually results in less users, and that equals less money. Should the price be set with future investment and on-going maintenance in mind. Should it be a social good with a very low price – but then where will the money come from for re-investment? Lots of questions here, but I hope you can see a lot of management accounting is behind these decisions. I would imagine getting the initial price correct is the toughest part. Nowadays though, I am sure there are plenty of modelling tools to help toll operators and governments.
When I was in secondary school, I took a subject called Business Organisations (or biz org as we called it). It was a bit of law, general business and finance all rolled into one. At that time a lot of it did not make sense, but when I started to work I encountered many of the things I had learned about – shareholders, annual general meeting, debt financing and so on.
I recently read an article in CIMA’s Financial Management (Sept 2012, pp. 32-34) on a topic which I have never encountered in my working life in Ireland/UK – trade finance. I do remember learning about it biz org though – not bad after 25 years almost. So what is trade finance? It is simply using the materials/supplies as a security for finance. It works as follows.
- a company needs to buy materials to complete a sales order, but does not have the free cash to pay.
- a trade finance company (or bank) agrees to buy the goods, and issues a letter of credit to guarantee the payment to the supplier.
- The customers order (often from a large well-known business) is security for the trade finance provider.
According to the article, trade finance is becoming more popular as many firms are finding it difficult to obtain or maintain a bank overdraft. You can read the full article here
Back in February this year I wrote a short post about how Tesco were increasing their use of rail travel to reduce CO2 emissions. It was a good example of how to change your business to both deliver cost savings and be more environmentally friendly. In the February 2012 edition of CIMA’s Financial Management (pp 26.30), there is a great article written by Ben Schiller which provides a number of examples of firms which are seeking ways to reduce transport costs and CO2 emissions. One quote from the article sums up the problems around transport costs “many ships operating today were built to run on $150 a tonne bunker fuel, not a price four times that”. Of course, it is not only ships but all forms of transport which are facing these price increases, such as road haulage and even company cars (for example, when I bought my first diesel car just over 3 years ago, diesel was 99 cent per litre at my local station, now it’s over €1.50). As a result of these increasing costs, we can see more sleek looking fuel-efficient trucks for example on our motorways.
I found Ben Schiller’s article really great less for some examples we might know about – chip fat being converted to biodiesel, electric vehicles – but more for some real examples from firms we all probably know well. The first way firms can save on transport costs (and green up) is to bring production closer to the market – L’Oreal for example have brought some of their supply chain in-house, by producing thinks like packaging on-site. A second way, is to change the modes of transport. For example, both Philips and Tesco use canals to transport bulky product. Phillips use barges to transport goods to Rotterdam port, while Tesco ship wine between Liverpool and Manchester. In Spain, SEAT rebuilt a short rail line to Barcelona port, carrying 80,000 cars annually using 2 trains a day. Even large shipping companies like Maersk are doing things like “slow-steaming ” (or sailing slower) to reduce CO2 emissions and fuel costs.
There are more examples in the article itself. You can read an online summary here.
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.
I read a new report on the BBC iPhone app this morning and just had to write about it. Over the coming months I will be writing a series of posts on analysing businesses. One area I’ll cover is liquidity and solvency. Liquidity is the ability to turn assets into cash, while solvency is the ability to pay debts as they fall due. Now, we have been hearing quite a lot about some European countries and the US having debt problems. Things really come to a head when those debts cannot be repaid, and to repay them, you need cash. According to the report by the BBC, Apple Inc had $76 billion in liquid resources (cash and other assets easily converted to cash) according to its most recent accounts. The report puts the liquid resources of the US $73 billion. When I read this I started to understand why it is so important for the US to raise more cash – hence the need to raise it’s borrowing limit. If the US were a small business, there’s a good chance it would be gone by now, as it would have little cash and no way to raise more. Watch out for more posts on business analysis soon. In these posts I’ll write about some common ways to evaluate and analyse how a business is doing.
Here’s a nice article from inc.com on way to finance your business 10 Ways to Finance Your Business. Yes, it’s aimed at a US audience but is good summary for any start-up. Item 3 refers to getting money back from you taxes as an employee. This is also possible in Ireland (see here) under the Seed Capital Scheme. Not all options may be relevant to you, but it’s worth a read.
I’m in holidays at the moment, so I am taking a short cut by referring to another blog! SmallBusinessCan is a website set up by an Irish bank and other sponsors to help small business by giving practical advice through its network of users and sponsors and through regular postings. Here is a recent post from the websites blog. Controlling your cash flow provides 15 suggestions to help control your cash flow.
All businesses are finding it hard manage cash flow in the current economic environment. Even harder is trying to raise finance for a new business venture, for working capital or for expansion. Media reports seem to indicate that bank lending to small business is particularly difficult.
Let’s assume you do get a hearing with your local bank manager. You’d probably plan on being bombarded with questions and maybe even grovel to get the money your business needs. Why not turn this on it’s head? Why not approach a bank with a list of questions to ask? The first question would be “is your bank suited to my business needs?”. A simple question, but some banks just don’t deal with small business or particular sectors (even in good times). Christine Lagorio (Inc magazine) writes eight more questions like this (9 Questions to Ask a Small Business Lender) with the help of Bob Seiwert, a senior figure in the American Bankers Association. The questions are (click the link above to read the answers):
Does the bank have any questions about your character?
Does the bank understand your reason for borrowing?
Is the amount you’re asking for reasonable?
What’s your cash position?
What are the risks to loan repayment?
Can these risks be mitigated without adding tough terms to your loan?
Do you think my company’s financials are strong?
Do you trust me?
Read the full piece, it’s really good advice.