This is a summary of chapter 8 in our book, written by Julie Bower. The chapter explores accounting history in and around the Scotch whisky industry, looking at managing consumption, production and maturation. As the author notes, the whisky industry has some peculiarities around inventory management, financial management and even tax planning.
On the tax planning side, the author notes that “traditionally, the producers of spirits brands have shipped their products from their own, or shared, home market bonded warehouses to overseas distributors on fixed terms, splitting the profit between them on an ‘arm’s-length’ buyer–seller transaction basis”. Of course, this does not always apply, with the tax regime in Ireland for example, offering advantages to Irish whiskey (as opposed to whisky). With inventory, the time spent to mature creates issues too. The Immature Spirits (Restriction) Act 1915 stated whiskey must mature for a minimum of
two years, extending to three years in 1916. This three-year bonding (maturation) rule has remained in place ever since, meaning the industry’s stock maturity profile is significantly longer than other sectors. Finally, the chapter notes the chapter notes the issue of being able to finance the required inventory levels – the author cites the example of the value of maturing stock in Diageo as being around £4 billion – which of course has to be financed somehow.
This is a summary of the next chapter in our Accounting for Alcohol book, which was written by Peter Cleary. The chapter reviews the accounting information produced between 1792 and 1864 by the Watercourse Distillery and how it was used and reported upon by the firm. The distillery was co-founded by Thomas Hewitt, John Teulon and Richard Blunt, with Hewitt (along with his cousin) eventually assuming full control of the business and re-naming it Hewitt & Co. While accounting books were not generally available in the archival records, a reasonable overview of accounting was obtained from other letters and journals.
During the 17th and 18th centuries, the city of Cork expanded, driven by an increase in trade via its port and in the number of buildings within its boundary. As with all cities at this time, Cork’s merchants possessed most of the wealth and were therefore at the forefront of these developments, facilitating further increases in their wealth and influence. As a result, they became known locally as the “Merchant Princes”. The Hewitt’s were among these “Princes”. Increased investment from Cork’s “Merchant Princes” invariably required additional accounting-based information to allow them to determine if, at the end of a particular time period, their commercial exploits had resulted in a financial gain. But, at this time, regular and systematic book-keeping was still rare. As revealed by the archival records, although no accounting books survived, certainly a profit account was maintained for each partner of the distillery. Letters and journals also reveal monthly “closing of the books”. Letter and correspondence also reveal issues with giving credit to customers. From about 1850 onwards, the letters reveal loss being made, and the eventual demise of the distillery.
This post #4 in my summary of a recent edited book. Chapter 4 is written by Kazuhisa Kinoshita, and details the role of the Orion Brewery in the economy of the Okinawa region post the Second World War.
The Orion Brewery, while small in terms of the overall Japanese market, helped rebuild Okinawa and the dreams of the young. Okinawa was home to a large US air force base from the 1950s through to the 1970s, and the base became part of the local economy. Supplies to the base were a large source of income to the local economy, and in this environment, a “local” product to generate a sense of identity belonging for local people. This product came in the form of beer from Orion.
From an accounting perspective, the chapter looks at costs and output – in essence, cost volume profit analysis. The remote location of the Okinawa islands increased the cost of building a brewery, and limited the market size affected sales. There was also the effect of beer duties to be included in the decision, and the regional government were favourably disposed towards a lower beer duty. The end result was the construction of the Orion brewery in 1957, and it is still active to this day.
Okay, from my previous posts now you know a little about cryptography. And, you also know that bitcoin (and other cryptocurrencies) is managed decentrally. In the bitcoin system, transactions are verified as genuine (among other things) by cryptography – you can imagine how useless the system might be otherwise. This is achieved through a blockchain, which I will now explain briefly.
A block is essentially a transaction or group of transactions – in bitcoin, each block contains a megabyte of data (presently). When a block is full, a new block is added – hence the term blockchain. As blocks are added, the cryptography used links a block to the previous block. This means that the transactions can be verified all the way back to the original block, and it cannot be tampered with.
Also, I already wrote a little about bitcoin mining, and from that post, you can see that the blockchain for bitcoin is public – in effect a public distributed ledger of every bitcoin transaction that has ever happened.
What does blockchain mean or accountants then? Well to start, blockchain is a technology which is separable from things like bitcoin. It is the verifiable ledger that may be most appealing to business and the world of accounting. Businesses may soon be using blockchain in a less public way than bitcoin, using some form of private blockchain. Let me try to give an example of how accounting is done today, versus how it could be done with a blockchain.
I formerly worked in the paper business, in the cardboard packing part. Back then and still I would imagine, pharmaceutical companies would not allows recycled paper, due to the risk of contamination. The company I worked for had to maintain records to show the sources of all materials in an order for a pharmaceutical company. Just focusing on the accounting, there are four ledgers at play – the paper supplier, the cardboard manufacturer, the pharmaceutical company and the end vendor. All while four may have quite integrated systems within their own company, all four are likely not linked. And if they were linked, how can the truth and verifiability of the transactions be maintained. Here is where blockchain can help. Using a blockchain and its encrypted data, one single transaction can in theory flow through all four ledgers – and remain unchanged and verifiable. Also, the pharmaceutical company in this example can be sure that records are intact and full traceability of materials used maintained. This is just one example, and anything that involves traceability could benefit – I am sure auditors would have many uses for blockchain technology.
So where is the catch? If blockchain is used privately within a firm, then we can trust the hardware involved – no bitcoin miners needed. The catch at present is the energy usage. To solve the cryptography used in blockchain takes a lot of computing power and thus energy. At present, the energy used for bitcoin processing alone in a year is similar to the power consumption of a small country like Ireland. Less energy guzzling ideas are being worked on.
If you have been in business, or work as an accountant, you’ll know cash is king. Of course, cash does not necessarily mean notes and coins, but cash in the bank. In my experience, getting cash from customers is not as easy and automated as one might think. There are always reasons why customers won’t pay – be it a quality issue, problems with services received or just being stubborn. But regardless of the reason, a business needs to get the cash in, otherwise, it WILL fail.
In my career, I have had the (dis)pleasure of sitting down once a month or so with a list of customers owing money. It’s great fun sometimes, and you get the “dog ate my homework type excuse”. One of the great excuses was ” we never got your invoice”, and today this would be retorted with “well it’s in your inbox now, so please pay”. And there may be some genuine excuses, like a family bereavement or lack of action on something like taking back returned goods or issuing a credit note. Or it may be as simple as your credit checks were not up to scratch. Regardless, whatever the reason or excuse, the best attitude is to be friendly but firm – or maybe professional is a good word. A guide from CPA Ireland equates getting paid by customers to getting your salary paid. This is a great analogy. The guide also emphasises the importance of communication, and this means not just with customers, but also with internal staff like sales people to try to determine why customer and not paying – unfortunately, the accounts receivable functions on most software I have ever seen never have the full story on why customers won’t pay.
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.
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.
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.
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.
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.
I don’t not normally do political views and similar on my blog, but read this article by Bloomberg which makes for very poor reading on accountants, auditors and bankers. And here’s the political thing, Germany’s political elite have been scorning Ireland and other countries in Europe about things like tax policy. After reading the above article you might be thinking about the old saying on throwing stones in a glasshouse.
In recent years, I have become interested in the broader role and use of accounting in society. In particular, accounting for water has caught my eye and in Ireland it’s been great fun in the past two years or so.
As you may know, one of the things we need in accounting is measurement. In business accounting, it’s relatively easy, as the unit of measurement is rather simple – it’s the unit of currency normally. Currencies are broken into various units – euro and cent for example – and we can use the decimal system easily communicate and measure larger numbers.
In accounting for water, the measurement unit is normally cubic metres, or 1000 litres. To measure (or account) for our water usage, we need a measurement device – a meter. Once a meter is in place, we can see how much water we use and take measures to reduce it if necessary – as water is a precious resource.
In Ireland, there has been much debate about billing for water. A recent (December 2016) expert commission report on domestic water billing has within its remit to explore if metering should occur. This, in my view, was/is a completely daft request. The report itself is full of statistics on water usage – none of which are possible with a meter. For example, it suggests usage on average of 111 litres per person per day or 20.8 cubic metres per person per year. In my own house, we have used on average 11 cubic metres per month for 4 people. Annually this is 33 cubic meters, so we are quite above average. And like any management accounting scenario, now that I have some information (on water usage) I can now take corrective action, or pay extra for my somewhat excessive usage. The latter is the subject of much debate in Ireland of course.
I can remember my time working in a manufacturing company as a financial controller and later a systems manager like it was yesterday. One of the great experiences I had was working with and configuring SAP.
One thing it changed in the company was the Accounts Payable (AP) process. My company at that time was quite good at ensuring only genuine suppliers were created. But that’s been newly 15 years ago now and I know the AP processes have become even more automated.
So this article in the Journal of Accountancy really interested me. It seems proper AP controls evade some companies still, but when managed well add to the bottom line. Have a read of the full article