Accounting for sustainability
A piece in this months Financial Management (March, 2010), the monthly journal of the Chartered Institute of Management Accountants (CIMA) in London, reports on a research report which asks the basic question why are financial managers (i.e. accountants) not getting more involved in important business issues like climate change strategy. Gillian Lees writes that businesses can be proactive or be pushed in relation to issues like climate change. Proactive seems like a much better approach for a business to be sustainable in the long-term, both economically and environmentally. Take energy costs as an example – these have and will increase as time goes on, so it makes sound business and environmental sense to control and reduce energy usage. The research reported in this piece suggests that when accountant are involved in climate-change work, the results were potentially better. As a manager at Asda ( a large UK retailer) says, “the finance team brings the right rigour to ensure that we aren’t simply doing it because it feels like the right thing to do”. Put another way, the numeric and commercial acumen of accountants can mean that climate-change can be the right business thing to do also. The full CIMA research report on Accounting for Climate Change can be found at this link.
Accounting and Innovation
Innovation is the life-blood of any business. New products, services and ways of doing business all lead to sustainable longer-term profits. Sometimes innovation comes at a substantial cost, for example in research and development costs. In these recessionary times, budgets for things like product research and development are often slashed. Of course accountants are blamed for this. But can accountants play a role in injecting innovation into businesses in these tough times. According to Richard Young, writing in Financial Management (September, 2009), accountants can inject a dose of realism in to innovative ideas and projects. They can be a ‘wet blanket’, which although has a negative tone, may actually be exactly what is needed in lean times. With a smaller pot of money to be spent on product innovation, accountants can help determine the longer-term profitability of new products or services, preventing great ideas becoming poor sellers. Accountants also bring structure, based on their expertise of the many business processes involved in getting innovative ideas afloat. For example, accountants can ensure that the costs of any new product are minimised – production costs, marketing and distribution costs etc. They can thus help take the innovation to something which is based on costs and profits, something which investors and managers readily understand. Innovative and creative people are often uncomfortable with such language.
Tracking costs in an engineering contract business
In business sectors such as engineering, ship-building or construction, costs are often incurred over many years. Also, as contracts rather than products are the mainstay of such sectors, costs are accumulated for each contract separately. For managers and accountants who want to track costs for each contract there are a number of things to watch out for. The first thing is that many more costs can be attributed to a particular contract. For example, materials and equipment used on contracts might be specific to a contract. Also, materials might be left over and used on other contracts, or even be moved around between contracts. In some cases, equipment is often useless at the end of a contract e.g. tunnel boring machines are often left in the ground as it’s too expensive to remove them. Labour costs are probably the easiest to allocate to contracts. You just need to get the costs of all employees working on the contract. Many other costs which might be considered as overheads are often easily apportioned to a contract. For example, a large contract might have an office on-site. All costs of running the office, which would normally be an overhead cost, would become a direct cost of the contract. And this is the key feature of contracting type businesses – that more costs are classified as direct. Even plant and equipment might be a direct cost, as in the case of the Channel Tunnel where the tunnel boring machines were buried beneath the seabed (see http://en.wikipedia.org/wiki/Channel_Tunnel). A high cost no doubt, but the salvage cost would have been greater.
To manage a contracting type business, you need to capture costs for each contract. This is usually simple enough, as most costs are direct costs and easily identifiable. The key thing is to keep an account of each contracts costs and revenues. This means profitability of a contract can be easily assessed. Costs will usually be approved by an architect or engineer before being used to calculate profits. Even then, accounting rules suggest that profits should not be recorded in the financial statements until the outcome of a contract is reasonably certain. In practice, this means that as a contract gets nearer completion, a higher proportion of profit is recorded. If a loss is predicted, this is recorded immediately in the books of account.
Breaking even in your business
It’s always a good to know the costs of your business. But how can you be sure you sell enough to cover costs. The answer is relatively simple, using the notion of breakeven.
First, you need to know the fixed costs of your business. These are the one you incur even if you business is not selling e.g. rent. Then, you need to know the cost of one of your products or one delivery of your service. This might not be as easy as it sounds, but try you best. Now you can deduct these costs from you selling price and work out a profit per unit. You can then work out the sales level at this profit which is needed to cover the fixed costs. Anything beyond this and you’re making a profit. You can apply this same principle to new products too. Being a relatively simple technique, been able to calculate a breakeven point is a very useful tool for any entrepreneur.
Child friendly business?
I really need to turn off the accounting brain – at least sometimes!
As an accountant, when confronted with business situations my brain turns to costs and revenues. It’s a typical accountant’s problem. In my other life as a parent, there are many hills to climb as you do your best to ensure your child gets the best possible upbringing. And boy can it cost you! Sorry, there’s the accountant again.
After a recent visit to Finland the accounting brain and the parenting brain came together – cost conscious Dad, a dangerous phenomenon for my kids. That’s not how the two came together actually. During our week as a family in Finland, it became apparent that the country is very child-friendly. Restaurants typically have a small play area for kids equipped with table and chairs, colouring books, soft toys, wheeled toys etc. Even mainline trains have play areas on board. While in a restaurant, I observed one such play are. It probably took up the space of one normal dining table. What a great relief for Mum and Dad, as the kids can play with other kids and we can eat in some peace. Now the accountant’s brain kicks in. How much would this play area cost? Maybe £100 for the toys and equipment I’m thinking. But a table could be there, so how much profit is lost each (busy) night by not having a table. I’m not even trying to guess. Nor am I a marketing expert, but I think happy long-term customers is very important. Would this balance against the lost revenue?
The point in this example is that sometimes business decisions can be made which are at a minimal cost (yes, accountants love this) and provide long-term benefits which cannot easily be expressed in monetary terms (danger zone for accountants). So, sometimes it is good for accountants to switch off their well-trained accounting sense and see the broader picture.
If you’re a Dad like me, take a look at this website for some ideas to keep them occupied!
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