The key points on Key Performance Indicators
Robin Tidd wrote a very concise article in Accountancy Plus recently (see the December 2010 issue here) on the subject of key performance indicators (KPI) in a business. According to Tidd, while around 90% of Fortune 500 companies utilise tools like the Balanced Scorecard to report on KPI, 70% are not happy with their reports. Tidd, rightly points out that this is not a problem with the tools used – such as a Balanced Scorecard – but more likely the application of the tools. He makes a few key points which I summarise below.
1. Don’t mix up KPI with key reporting indicators.
The best example of this is profit, which is a result or outcome.
Of course these results are essential, but tell nothing about what
caused the result. For example, have profits increased due to
improved productivity or customer satisfaction.
2. Use maps of your organisations processes to help find the best KPI.
3. Be careful to look at all processes and not just departmental ones. This avoids choosing KPI which may be sub-optimal.
4. Compare KPI on a regular basis, keeping the reporting interval short. This allows for faster corrective action.
5. Use the KPI on the front-line on a regular and routine basis. This fosters continuous improvement in all processes.
You can read the full article here http://is.gd/jLEn2
How to prepare an annual Budget
I’m a bit stuck for time just now, so here’s a useful post I found on inc.com recently. It give good advice on setting an annual budget, a cash budget and tips on your first budget if you’re a start-up. Here’s the link: How to Set an Annual Budget.
Management control in NGO’s
Non-governmental organisations (NGO) are increasingly being held to account for their performance and uses of funding. Indeed, the funding they obtain is more likely to be based on having sufficient competencies to use the funds in the best possible way. Sounds like a business doesn’t it? But NGO’s are not businesses you might say, and they usually have a non-profit (and often very worthy) objective.
However, NGO’s are increasingly becoming like businesses. For example, the Charities Act (2009) in Ireland requires all charities to be formally registered and (in most cases) submit annual audited financial reports to a Registrar. From a management accounting view, NGO’s can of course adopt budgetary control and other performance measures as normally used in a business. A recent report from CIMA suggests “evidence shows that developing formal management controls can help NGOs to develop networks with government departments, funding agencies, other service providers and clients”. It goes on to say that management accounting can contribute in several ways to the success of an NGO:
- Planning and control when formulating proposals for funding, often involving networks of partner agencies.
- Clarifying within the NGO the importance of including economic efficiency as an organisational value alongside traditional welfare values.
- Linking non-financial operational performance to financial concerns.
An innovative business idea from a big company
Here’s something I read in The Economist last October. It’s a great example of innovation from the car giant Daimler-Benz
http://www.economist.com/node/17311897?fsrc=fb/wl/ar/daimler
Normally we think as smaller businesses as the innovator type!
Why do we need a code of ethics?
CIMA’s Insight e-zine (October) reported on a new version of CIMA’s code of ethics. According to CIMA, upholding an ethical code can most simply be understood as “doing the right thing when no one is looking.” As an accountants, are you sure you know your right from wrong in the workplace? (corporate fraud profiling shows culprits are most likely to be senior male executives in the finance function).
CIMA’s ethical code (and other professional body codes) is a tool to help guide ethical practice and is revised periodically to reflect changes in the external environment and reinforce the ideal of professional duty. Most codes are principals-based, meaning there are no absolute rules. They are rather a roadmap of a journey. So how is it applied in practice? Management (and other) accountants have a position in society as trusted experts. They have a duty to maintain the highest standards of professionalism in their work, while acting in the public interest, by upholding the code and fundamental principles: in CIMA’s case these are: integrity; objectivity; professional competence and due care; confidentiality and professional behaviour. By not doing so, members can lose their professional standing.
With recent turbulence in the economy and financial markets, the failures of many companies can be traced to ethical breaches. It is no surprise that business ethics are very high in the minds of the public, regulators and governments, and that trust in professionals is at a low point.
As long as people work, ethical dilemmas in the workplace will always be present. Ethical grey areas and demands from misguided, or outright corrupt, peers and bosses remain a challenge to deal with.
The Economist on Germany, the Ireland bailout, the Euro and all that.
I don’t normally deal with economics on my blog, but I could not resist this . I should first say that my better half is German, so we have German TV in the house. I seen the news report live on ZDF (a German state channel) a few weeks ago when Angela Merkel suggest that bond-holders must suffer and pay. While my heart agreed, my head (and I’m no finance/economics expert) oh feck, that’s Ireland in the deep stuff. Two weeks later, a ‘German’ bailout. And Merkel and her French counter-part still want some bond-holders to suffer. Fair enough, but as the piece in The Economist says domestic politics needs to be put to one side for the greater good of Europe as a whole – just because Merkel is under pressure at home does not mean the whole of Europe should suffer from the onslaught of the markets. One final point, back in the 1990’s when I was in college, the whole EMU thing was a big part if our economics course. Our lecturer at the time was suspicious of the whole thing. He thought economic and monetary union without political union would fail. I now hear lots in the media about the need for fiscal union. Have the chickens come home to roost!
Reading a balance sheet
A balance sheet (or statement of financial position) is an accounting report that provides a snapshot of a business’s position at a given point in time, including its assets, its liabilities and its total or net worth (assets less liabilities). “A balance sheet does not aim to depict ongoing company activities,” wrote Joseph Simini in Balance Sheet Basics for Nonfinancial Managers. “It is not a movie but a freeze-frame. Its purpose is to depict the dollar value of various components of a business at a moment in time.”
Balance sheets are typically presented in a vertical report form. Asset accounts are listed first, with the liability and owners’ equity accounts listed in sequential order directly below the assets. The term “balance sheet” originates from the the fact that the balance sheet is a representation of the accounting equation (assets=liabilities + capital), thus the two totals should balance.
Contents of a balance sheet
Most of the contents of a business’s balance sheet are classified under one of three categories: assets, liabilities, and (owners) equity.
Assets
Assets are items owned by the business, whether fully paid for or not. These items can range from cash to inventories, equipment, patents, and deposits held by other businesses. Assets are further categorized into current assets and non-current assets.
Current assets include cash, accounts receivable, inventories, prepaid expenses, and any other item that could be converted to cash in the normal course of business within one year.
Non-current assets include property,equipment (from office equipment to heavy operating machinery), vehicles, fixtures, and other assets that can reasonably be assumed to have a life expectancy of several years. In practice most non-current assets—excluding land—will lose value over time. This is reflected in accounts through a a process called depreciation. Non-current assets are reported net of depreciation in the balance sheet.
Non-current assets also include intangibles like the value of trademarks, copyrights, and a difficult category known as “goodwill.” When someone buys a company and pays more for it than the worth of its assets, the difference is written into the books of the acquired entity as “goodwill.”
Liabilities
Liabilities are the business’s obligations to other entities as a result of past transactions. Liabilities may be due to employees (salaries), investors ( for loans) or to other companies (who have supplied goods or services). Liabilities are typically divided into two categories: current liabilities and non-current liabilities.
Current Liabilities are due to be paid within a year. These include payments to suppliers, payable taxes and accrued expenses (like wages and salaries). Current liabilities also include the “current” portion of long-term debt payable within the coming year. Non-current liabilities are amounts owed to lenders, mortgage holders, and other creditors payable over more than one year
Equity
Once a business has determined its assets and liabilities, it can then determine (owners’) equity i.e. the book value of the business. Owners’ equity, Or shareholders equity in the case of a limited company, is in essence the company’s net worth.
A balance sheet, if studied closely, can tell the any business owner much about the enterprise’s health. In Balance Sheet for Nonfinancial Managers, for instance, Simini points out that “in a well-run company current assets should be approximately double current liabilities.” He goes on: “By analyzing a succession of balance sheets and income statements, managers and owners can spot both problems and opportunities. Could the company make more profitable use of its assets? Does inventory turnover indicate the most efficient possible use of inventory in sales? How does the company’s administrative expense compare to that of its competition? For the experienced and well-informed reader, then, the balance sheet can be an immensely useful aid in an analysis of the company’s overall financial picture.”
(Some of the material in this post has been adapted from inc.com, the original post can be found here http://www.inc.com/guides/2010/06/how-to-read-a-balance-sheet.html)
Reading an income statement
This is the first of three posts which give you a quick guide to reading the three key financial statements – the income statement, balance sheet and statement of cash flows. This post deals with the income statement, with the other two coming over the next few weeks.
The Income Statement
An income statement presents the results of a company’s operations for a given period—usually a year. The income statement presents a summary of the revenues, expenses, profit or loss of an entity for the period. This statement is similar to a moving picture of the entity’s operations during the time period specified. Along with the balance sheet and the statement of cash flows, the income statement is one of the primary means of reporting financial performance. The key item listed on the income statement is the profit or loss.
Within the income statement there’s a good bit of information. If you’re knowledgeable about reading financial statements, in a company’s income statement you’ll find information about return on investment, risk, financial flexibility, and operating capabilities.
The current view of the income statement (in line with International Financial Reporting Standards (IFRS)) is that income should reflect all items of profit and loss recognised during the accounting period. The following summary income statement illustrates the format under IAS 1 – Presentation of Financial Statements (image from http://www.accaglobal.com):
This example above is fairly typical of the income statement of a large public company. I’ll explain some items below.
Some terms on the income statement explained
Revenue
According to the IASB’s IAS 18, revenue is defined as “the gross inflow of economic benefits (cash, receivables, other assets) arising from the ordinary operating activities of an entity (such as sales of goods, sales of services, interest, royalties, and dividends)”. This means that revenue is typically the figure for sales of goods or provision of services for the period of the income statement.
Cost of sales.
The cost of sales figure includes all expenses incurred in buying to making the product or service which generates revenue.
Other Income
This is income from sources like interest or investment income.
Expenses
Expenses are classified as either distribution cost, administrative expenses, other expenses or finance costs. No further detail is needed.
Share of profit of associates
This figure is the share of the profits made in an associate company – one where 20-49% is owned by the company (or group of companies) the income statement is prepared for.
The final item in the example above represents a loss made in a section of a business which is discontinued. This separate disclosure is required by accounting standards. Additionally, IAS1 also requires a short statement of comprehensive income, which shows unrealised gains (like unrealised asset revaluations, or currency gains/loses on translation). I don’t include it here, but it is usually no more than a few lines.
Routine activities – a source of waste and additional cost?
I don’t write too much on my blog about my research interests, but this one I just have to share. To be honest, I have been putting it off for a while too. Brian Plowman (a consultant specialising in productivity management) wrote a short, but to me really inspiring piece in Financial Management in May of this year (pp. 29-30 if you have access to a copy).
Institutional and organisational theory would define a routine along the lines of; a routine is a repetitive, recognisable patter of interdependent actions involving multiple actors (see an article by Feldman & Pentland 2003, in Administrative Science Quarterly). The article from Financial Management takes a more practical approach to routines. It mentions the term “interfacing activities” which become routine. These interfacing activities are links between the tasks carried out by individuals in organisations. In themselves, these interfacing activities are not a problem, but what tends to happen is that lots of informal interfacing activities creep into organisations. These may be quite wasteful. For example, the article mentions a hospital worker looking for a particular piece of equipment. It is not where it should be or where a computer systems says it should be. So the employee has developed a whole series of interfacing activities to find it. This is turn have become so common place that they are now a routine and accepted activity. Wasteful? Yes of course it is. The article proposed that up to 50% of an organisations interfacing activities may in fact be wasteful (as in the hospital example). Can this be remedied. Finding these informal and potentially wasteful activities is difficult, but it could reap huge benefits.
Economic progress reaches the roof of the world
This caught my eye the other day in the Economist :Nepalese telcoms: High-fi | The Economist.
New business ideas: renting a car by the hour
I read this article in The Economist recently about businesses renting out cars by the hour. It’s a good story from many angles – threatening car manufacturers; reducing emissions; new business ideas. Have a read and see what you think.
Frugal living: transferable to a business?
Okay, this might be a bit of a laugh but here are 10 tips to live frugally I found on a blog recently. Could any of these be transferred to your business? Enjoy
Audit exemption for Irish companies
If your business is a limited company, one of the most difficult tasks is dealing with the annual audit of the company and its financial statements. However, most small Irish companies can avoid an audit by availing of an Audit Exemption under Irish company law.
What’s an audit?
An audit is a comprehensive examination of a company’s accounts and financial statements/records by an external auditor. It involves a detailed examination of the company books and records, a review of the estimates, policies, and judgements used in preparing the accounts. The output of an audit is a formal ‘audit report’ setting out the findings. In recent years, audits have become more stringent. Auditing standards apply equally to small and large companies. As a result, owners of small companies can find the audit to be a bit of a nightmare.
Does my company qualify for an Audit Exemption?
A limited company can enjoy an exemption from an annual audit if:
- Turnover is below €7.3 million
- The total value of Non-Current and Current Assets on its balance sheet is less than €3.65 million
- The average number of its staff in a year is 50 or less
- The company’s Companies Office filing record is fully up to date
- The company is any of:
- a company “limited by guarantee”, nor
- a holding or subsidiary company, nor
- a bank, insurance, management or investment company.
All these conditions must be met, both for the current financial year and the previous year.
For eligible companies, annual accounts must still be prepared and filed with the Companies Office, Revenue Commissioners etc. However these accounts need not be subjected to a formal audit – although they might be if banks or lenders require audited accounts.
Can the Exemption be lost?
Yes, if any of the above conditions are broken.
Even with an exemption, directors of audit-exempt companies must still comply with company law, including the keeping of proper books and records, and the preparation of annual accounts that comply with accounting standards and the requirements of the Companies Acts.
So what is the accountant’s role?
Although audit-exempt companies no longer need an auditor, most such companies still choose to have their accounts and annual returns prepared by a firm of practising accountants. This ensures all is keep in full compliance with accounting standards and relevant company law. If your company meets the conditions as set-out above, you might at least be able to reduce your annual accounting fee as a full audit is not required. However, I’d recommend that if you’re in doubt about anything to ask your accountant.
What exactly is a Social Entrepreneur?
There term ‘social entrepreneur’ has come into my radar in several places lately. My curiosity got the better of me, but I’m not going to write about it as here’s a well written explanation from an NY Times Blog: What Exactly Is a Social Entrepreneur? – You’re the Boss Blog – NYTimes.com.
Controlling your cash flow
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.
Martin's accounting blog 