The are many examples of how Covid 19 is affecting business. An article in the Irish Times of 18/11/2020 provides a nice example, from Dublin Zoo. We all love a visit to the Zoo – well, I certainly do – but we probably never stop to think about the costs of running a zoo.
According to the Irish Times article, Covid 19 has left a €10 million hole in the finances of Dublin Zoo, and it costs €500,000 per month to feed and care for the animals. Looking at recent annual reports, the annual income of Dublin Zoo is about €20m. That would mean about 30% of the the income is used to cover feeding costs (500000 x 12 = €6m). This is a fixed cost, as the animals must be feed and cared for. If income has fallen to zero in recent months due to Covid 19, it is easy to see how Dublin Zoo – or any zoo – could get into financial trouble quite quickly.
I hope a local distillery near my home does not mind me using their graphic above. As we are all dealing with the effects of the Covid 19 pandemic, I was really impressed to see how small local distilleries in Ireland (and indeed elsewhere and some large ones too) have changed to producing alcohol based hand sanitiser.
Many businesses cannot adapt their products to the current scenario, but the example of distilleries is a really good one. The Listoke Distillery is manufacturing and selling hand sanitiser at cost. Not only is this a good thing for society, it also in my view makes business sense. As the header of this post suggests, it is better to be “ticking over” and covering costs than losing money and not covering fixed costs. I would also bet that many of us (and certainly yours truly) will remember these local small businesses that helped us out in these strange times and, hopefully, they will see increased revenues and growth. Meanwhile, with costs covered, at least they have a good chance of surviving.
By the way, I’ve just bought my second bottle of sanitiser – accompanied by a bottle of gin of course.
Telecommunication services in Ireland used to be provided by the State, through various entities. The most recent entity is eircom, now a private firm. eircom were one of the earlier providers of free email accounts, but that is about to change as the company now wish to charge €5.99 per month for email accounts. Well, there is no such thing as a free lunch as the saying goes.
But let’s put on our accounting hats for a minute. There is of course a cost involved in hosting email accounts – servers, cooling, power, buildings. This may have been okay when eircom was a state company and there was less of a profit motive. Gmail is free I hear you say; it is not, you give your data to them to make money from. So eircom probably need to recoup some of their costs, and that seems like a good accounting decision, The price does seem a bit high though – about €4.86 next of VAT will be earned by eircom. To me, it seem more like a prohibitive price, and the real objective to force email account holders to move to other providers.
Being an accountant is sometimes portrayed as being a boring path in life, but like all professions and jobs, it has its moments when you feel like you may have helped someone. It is great to see a business take your advice and see them grow and become a success. Of course, as you deal with businesses or clients, quite often you may give general advice which may also yield some fruit. At the end of July, The Guardian had a great little feature on Mick Jagger, and it seems he heeded advice from his accountant when he was younger. Seemingly, Laurence Myers was his accountant – and the accountant of many other famous rock stars of the era – and in a new book written by Myers, he outlines the business sense the young Rolling Stones had. This sense would, of course, be nurtured by a good accountant. And indeed, the Rolling Stones have been a financial and business success (see more here), certainly thanks in some part to the advice and partnering of a good accountant over the years.
In recent years in Ireland, business insurance costs have been increased dramatically due to increasing volumes of claims against them. In some cases, the costs have increased so much that the businesses have simply closed. This post is more about the smaller claims, claims for refunds or costs incurred because a product or service was not up to scratch.
I will use Ryanair as the example here. Despite all the criticisms levelled against it, it remains one of my favourite airlines. They run a tight operation and keep costs to a minimum. They also do not payout refunds or claims unless they have to, this is the fun part for me. In a recent Irish Times article, there are details of a customer claiming €222 for taxi fares incurred due to a Ryanair mistake. The company fought it, but the passenger pursued through a small claims court and got their money refunded. Fair play to the passenger.
Recently I was subject to a delay on a Ryanair flight from Bristol. Some passengers, those who were UK citizens I later found out, were offered £5 refreshment vouchers. I was not, and followed up. To be fair to Ryanair they said if I could produce a receipt, they would refund me.
Now the accounting part. In both examples above there are a lot of costs already incurred in having a customer service function to deal with such issues. Let’s deem these as sunk costs. Once a claim is initiated, then I think we could see the situation as an instance of activity based costing perhaps. In my own case, I sent three emails and I can guarantee the cost of dealing with me was way more that the price of a cup of coffee I was seeking to claim. In the case of the passenger taxi fares, costs of engaging solicitors by Ryanair would have far exceeded the cost of the refund had they simply paid it based on the passengers receipts.
The point I am trying to make is that while I fully agree that firms should not just pay refunds without any basis, there is likely some value at which it costs more to defend a refund claim than simply pay it – with vouched receipts of course, not like me and my coffee. But, if you are not getting satisfaction from a company if you feel you should get a refund, apart from legal options, you can always waste their time a little and get some satisfaction that way.
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.
Regulation of charities in Ireland is not as good as it could be – we have some legislation waiting to be enacted since 2009 as far as I know. But laws cannot prevent what happens within an organisation from happening; they can only penalise after the event.
So what bugs me? Well, the title of this post really – it is something I picked up from the print media in recent weeks. I am sure I have said somewhere on this blog that accounting is the language of business, so what about accounting for charities? My own opinion is that charities must have proper accounting, and there are accounting standards already in place for charities. But I often wonder should we be careful and not allow charities to become too much like a business? For example, we should be using accounting in charities to drive efficiencies, not necessarily monitor revenue and costs like in a business. Nor should we be using accounting just to get funding for a charity. In short, what I am trying to say is that we need to be careful and try to not let accounting (and other commercial sector notions) detract from what a charity should be.
In recent years many operations – both business and public sector – have been closed or reduced in capacity to save costs. Closing an operation is one of the topics I often teach too. When I teach, the basic message is to focus on the fixed costs, and how much can be reduced or eliminated. Of course, some labour costs are increasingly seen as fixed – and this may be a more certain feature in the public sector.There may also be some hidden or unforeseen costs, which are often not included in the analysis. Let me give you two recent examples, both of which are from the public sector.
In Ireland, the government closed down 139 Garda (police) stations due to economic woes. Most of these closures were in rural areas. The total annual cost saving is estimated at just over €500,000 – see here. This is likely due to the fact that only the only savings were operating costs of the stations e.g. light and heat were the only real costs saved. Police staff and equipment simply moved to another station – where costs may have been incurred to accommodate them. There is a big hidden cost though, which is increased rural crime. While there was probably no money value on this cost in any cost estimates prepared, I’d be quite sure it is higher than closing stations. Recently, the decision to close has been reversed.
A second example comes from Lambeth council in London who closed two libraries – see here . According to a report in the Guardian, the daily security cost is higher than the cost of keeping the libraries open. There seems to have been some protests against the closure of one library in particular, which drove up the costs. This unforeseen cost, if included in the closure decision might have changed things.
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.
Big data has been the feature of many articles in professional accounting journals such as CIMA’s Financial Management. But what exactly is big data? Originally it referred to more data than information systems could process. But today we have systems capable of processing and analysing millions of transactions in seconds . So what does it mean now? Well, I think the answer to this question will depend a lot on who you ask. To me big data is still data analytics, with maybe some external or social data sources thrown in., with a defined purpose of adding value or saving resources (such as cash or time). This is of course a very broad understanding of what big data is, as value will not mean the same thing to all organisations.
I read an article on Forbes recently which has a similar approach to big data as that I suggest above. The key point the author notes is not to care too much about defining things like big data, but to remember “who cares”. To quote directly from the article “the goal should be to solve a business problem by using new analytics, not to worry about defining a term. That’s because definitions are a distraction from the simple question of “Does this data contain information that is valuable for my business?”
Image from Tesco.ie
A few weeks ago, a news story broke about an accounting scandal at Tesco – see here for example.
So how can this happen? It’s very simple actually. Now, we don’t know if it’s an error or something deliberate, but from an accounting view the entries in the books are the same.
When I was in college 20 years ago, one of our accounting lecturers asked is how would we account for this “hello money” as he called it. Within a decade I was calculating and accounting for what were termed “long term agreements” in my role.
For the likes of Tesco, the amount involved are large and I would guess they account for hello money as a separate income stream – although it’s not shown in the published accounts. Another way would be to reduce purchase cost, but this would probably be for smaller amounts. But how can Tesco make such an error you ask? Simple, just ” over accrue”. This means recording future hello monies now. Of course, I have no idea this is what actually happened, but it does show how easy errors or manipulation can happen by using the good old accruals concept.
As an accountant, when we think of the costs of letting staff go, we probably think redundancy costs and so on. These can be quite substantial. But maybe these short run costs are better than longer term damage costs. I know the example I give here may be less likely to work in Europe for employment law reasons, but I’m just trying to think about costs, not the HR side.
I read recently that Amazon (and others) are offerings employees a cash sum of up to $5000 if they wish to leave. Maybe this is a bit strange, but there may be an argument which suggests such a payment actually saves money longer term – employees who are not engaged with their company are probably less productive. I don’t know if companies like Amazon have done a cost analysis on this, but it seems to make sense.
To give another example, a few tears ago an employer told me that a substantial redundancy payment made to an employee probably was a good deal. The employee in question was creating a poor image with customers, which was starting to effect turnover. Again, maybe no cost analysis was done, but the short term cost of redundancy was compared with unknown longer term effects.