The problems with big data?
Big Data (Photo credit: Kevin Krejci)
The previous two posts have hopefully given you a very brief insight into what big data is and how it can help even small organisations. Now let’s briefly consider larger organisations. Nowadays, even if a company like amazon can process a few million orders a day, the amount of accounting data associated with this (i.e. a few million invoice and a few million payments) seems insignificant if we start to think about other data that might be collected at the same time. For example – and these are just a guess on my part – the age, sex, location of the purchaser, the type of device they searched and bought on, what the looked at before buying etc. The amount of data starts to get really, really big.
A report by Deloitte includes two quotes that capture the perceptions of big data really well:
“Big data is the new oil. The companies, governments, and organizations that are able to mine this resource will have an enormous advantage over those that don’t.”
“Big data will generate misinformation and will be manipulated by people or institutions to display the findings they want.”
(Source: The insight economy Big data matters— except when it doesn’t, Deloitte, 2012, available at link above)
As the report says, both the above perceptions are right. The key things about big data is getting information out of it and transforming that information into business knowledge. In other words, like many other things organisations encounter on a regular basis, big data needs to support the organisation’s strategy. This may mean being more competitive, gaining some market knowledge before others or opening up new business channels. Whatever big data might mean for larger (and smaller) organisations, I believe management accountants in particular have a key role in making in useful information/knowledge – after all, we are good at analysing information and filtering out what is relevant.
Related articles
- The future of big data (infographic) (siliconrepublic.com)
Big data and (small) accounting software
Last week I wrote about big data in general. Now I will try to give an example of how accounting software used in small business can be a source of big data, which can ultimately help those same businesses.
Quickbooks is a common accounting software product used in many smaller and medium-sized businesses. Traditionally, Quickbooks was installed on a computer in the organisation, but nowadays it is also available as an online product. In other words, there is a cloud version. According to an article in Forbes in April 2012, as much as 35 million of Intuit (the owners of Quickbooks) customers use online software for accounting and tax returns. With anonymous data on 35 million small businesses, Intuit can obtain quite a lot of information for their own purposes in terms of capturing user needs and developing their products. But they are also using this information to assist their customers. One great example cited in the Forbes article is a Trends feature. With this feature, a business owner can compare their business to average performance trends in the same sector, and even with similarly sized businesses. A comparison of sales, operating margins and payroll cost is possible. This kind of information would be really useful for any small business and typically such a business would have neither the time or resources to obtain such data.
What is big data?
Big Data: water wordscape (Photo credit: Marius B)
This post gives you a brief introduction to “big data”, a term used in many circles and in many businesses. The following posts will then give some examples from real business to help you understand the effects this might have on accounting and accountants.
Although the term big data has become mainstream in recent years, it has been used for a decade or more by scientists to simply describe very large amounts of data. Diebold (2003) defines big data as follows:
Big data refers to the explosion of quantity (and sometimes, quality) of available and potentially relevant data, largely the result of recent and unprecedented advances in data recording and storage technology.
It is hard to believe that this definition although only a decade or so old, bears little resemblance to what can be achieved today in terms of data collection. Devices such as smartphones and tablets in a cloud-computing environment allow users to use cloud-based services (such as software or social networks) and, in turn, data can be collected through these devices and stored elsewhere in the cloud. The result is vast potentially vast amount of data, which can be analysed for many purposes, including business decisions. Facebook has about a billion users, there are about 500 million tweets per day sent on Twitter and Google handles about 3 billion search queries per day. These vast uses of each of the mentioned websites/network generates hitherto unknown amounts of data, some of which may be useful, some of which may not. In an article for Forbes, Feinleib notes three issues with big data, which give a good insight into what it is, and the problems facing business:
1) big-data is ill-defined.. We are not sure what exactly big data is, but a Jevons Paradox seems to exist in the world of big data. As technology evolved to allow the storage and analysis of large volumes of data, more data is being stored and analysed by organisations.
2) big data is intimidating. He asks “how do we make big data approachable” from perspectives such as having tools to analyse data, to getting the right insights and information from the data.
3) big data is immediate. Huge volumes of data are generated, but the analytical value of this data can decay rapidly. For example, in the near future companies like Google and Groupon may display adverts on mobile devices for businesses in the immediate proximity of a consumer – the time to analyse and act on this data could be a matter of minutes, or even seconds.
References:
Diebold, F. 2003, “ ‘Big Data’ Dynamic Factor Models for Macroeconomic Measurement and Forecasting” (Discussion of Reichlin and Watson papers), in M. Dewatripont, L.P. Hansen and S.Turnovsky (eds.), Advances in Economics and Econometrics, Eighth World Congress of the Econometric Society. Cambridge: Cambridge University Press, 115-122.
Are languages important for accountants?
(Photo credit: Wikipedia)
If you are a native English speaker like me, then to some extent you’re probably like me and not all that great at foreign languages. I do speak pretty good German, but that’s it. I’d bet many of you reading this you are not native English speakers probably speak 2 or 3 languages quite well. So how important is it for accountants to speak a foreign language?
Some of you might say accountants already speak a foreign language – debit, credit, journal and so on. However, remember that accounting is a social practice. We need to talk to people and if we can speak in their native language, that will improve our ability to get things across. A second (or third) language for an accountant is probably a must if you work in a multi-national. To quote a recent piece from CPA Ireland’s newsletter (Dec 21st, 2012)
” The August Morgan McKinley Employment Monitor highlighted that employers are looking for part qualified and qualified accountants with a second European language, so knowing a language such as French, German or Spanish could increase your employability dramatically. The most recent report for October showed that the majority of hiring continues to be among multilingual professionals in the accountancy sector”
So why not learn or perfect that second language. Do a business specific course if you already know the language. As an accountant, you might be surprised by much you already know. For example, I was teaching in Spain last year and while flicking through a local newspaper I came across this term:
Beneficios antes de intereses, impuestos, depreciaciones y amortizaciones
It didn’t take me very long to figure out this was EBITDA. I speak no Spanish by the way. Don’t you just love the word “impuestos” – it really capture how tax is”imposed” on us. Have a read of the article in Scientifc American below – apparently we are even sharper with our reasoning in foreign languages.
Related articles
- Foreign languages: the 10 easiest to learn (telegraph.co.uk)
- Reasoning Is Sharper in a Foreign Language (scientificamerican.com)
What does ‘cost’ mean?
If we look at a management accounting text book such as the one by Burns et al (self promotion, sorry), the term cost is defined as follows:
“the monetary value of the resources forgone or sacrificed in order to achieve a specific objective such as acquiring a good or service”
And, if we continue to read their chapter on costs (or indeed a similar chapter in any other management accounting text) we’ll find that costs can be classified in many ways – fixed, variable, mixed, product, period, relevant are just some classifications commonly used. I recently watched two documentaries on BBC television which portrayed the different meanings and uses of the word cost. I’ll summarise them below.
The first example is from a documentary called Inside Claridge’s – Claridge’s is a up-market hotel in London. In the episode I watched, the hotel was being decorated for Christmas. The decorations inside and out were quite fabulous, and the Christmas tree was commissioned from a custom designer. The programme narrator asked the hotel manager how much the decorating cost. His reply: “How much does magic cost”. A great answer I thought. To try to convert this to management accounting speak, I would translate the answer as “That’s not a relevant cost, the decision is made”.
Fault (Photo credit: orkybash)
The second example was a documentary on BBC Four on living near an earthquake zone or fault lines. One seismologist spoke about a complex underground monitoring system, which could sense earthquake vibrations and give warnings (via sirens or signs) to residents in cities like Los Angeles and San Diego. The system would cost in excess of $100 million, and give enough time to do things like shut down nuclear reactors or close-up an open wound on a hospital operating table (the seismologist’s words, not mine). I was thinking $100 million, that’s a lot. The seismologist then quickly noted that the economic output of California is in the order of $200 billion per annum. This makes the cost look a lot smaller, given that large earthquakes probably are a once in a lifetime event.
Some quotes about accounting
For the fun, I decided to do a search of some websites who provide famous quotes for this post. I searched using simply the word “accounting” and here are a few of the results. Enjoy.
Mark-to-market accounting is like crack. Don’t do it.
I have made the tough decisions, always with an eye toward the bottom line. Perhaps it’s time America was run like a business.
I never get the accountants in before I start up a business. It’s done on gut feeling, especially if I can see that they are taking the mickey out of the consumer.
20 years of balanced scorecards
The balanced scorecard was 20 years old in 2012. Here is link to a video from CGMA where the original scorecard creators, Kaplan and Norton, reflect on the last two decades.
Reporting financial information on the Internet and social media
Image via CrunchBase
As you may know, public companies publish a lot of financial information. As accountants, the first of such information that comes to mind is the annual report and accounts – which is a legal requirement. Other such information includes regular notifications and reports to stock exchanges. Normally, the format, content and timing of any financial information releases by public companies is well-regulated and usually a mass communications medium is used. Of course, like all other aspects of business life the pace of technological change – in particular the use of Internet and social media – is causing some issues for the reporting of financial and similar information by companies.
Take for example the recent Netflix issue. In July 2012, the CEO of Netflix commented on Facebook
“Netflix monthly viewing exceeded 1 billion hours for the first time ever in June.”
The Facebook page had close on 250,000 followers at that time. The result of this post was an approximate 30% increase in stock price the following day. Later in July, a quarterly earnings release showed a substantial fall in revenues and the stock price fell. The US Securities and Exchange Commission (SEC) were not overly impressed with the initial release via Facebook, arguing that the information was material and should have been disclosed by means of a regulatory filing or press release. So, in essence, the argument of the SEC is that Facebook (or other social media) are not necessarily the correct communications medium. The counter argument would of course be that social media may actually be a communication medium with a much broader spread.
Perhaps what this example shows is the need for a policy for how and when to use the internet/social media as a means to reporting key financial and business information using social media?
Management Accounting – textbook launched
So, after a few years work, our textbook has launched today!!!!! Go on, buy a copy.
Management Accounting – John Burns,Martin Quinn,Liz Warren,João Oliveira – McGraw-Hill Education.
A bad tax, or a good tax?
Let me start this post by saying I am not a tax expert. But from my accounting studies, I do remember that one of the fundamental principles of any tax is that it should be fair. If you read my blog from time to time, you’ll know that I do try to encourage thinking about the costs and revenues of making decisions. This post combines this thinking about the costs/revenues associated with decisions and what mat/may not be a fair tax.
In July 2012, a story hit the German media about a baker in Saxony (Eastern Germany, bordering the Czech Republic and Bavaria) who was subject to a tax audit. You can read the story here (in German), but I’ll summarise it here. The baker donated his stale bread to charity – which was of course a morally good deed. But, the tax people seen this a different way. As the bread had been created from flout, water and so on, some value had been added and thus this implied value-added tax (VAT) was payable according to tax law. So the tax authorities duly assessed the baker for VAT owing.
This story has too points. First, the German tax authorities were legally probably correct – and most European countries would probably also be so. But, if such good deed cease because of a tax law being rigidly applied, how much extra does it cost the state to make good this charitable donation. I have no idea, but I would guess it probably would be better for the German (or any other) tax authority to ignore minor infringements of the law in such cases. The alternative might be to feed the local poor, which I think it is not too hard to conceive as being more costly than forgoing the VAT “due”.
Kindle Fire breaks even – but profits elsewhere
Image via CrunchBase
I have written a few posts before on breakeven, but here is a great example of how businesses are prepared to accept not making money on some products, for the sake of others. In October 2012, Amazon launched its Kindle Fire tablet and its Paperwhite e-reader in the UK and other European countries. The Kindle Fire retails at about £150, which is probably less than half the price of an iPad and about £100 cheaper than an iPad mini. In an interview with the BBC , Amazon’s boss Jeff Bezos said the company sells its hardware at cost i.e. they breakeven. This may explain the cheaper price of the Kindle Fire compared to the iPad. However Amazon earn profits on Kindle book sales, Kindle book rentals and its Prime service. In contrast, Apple have noted they breakeven on services such as iTunes and make profits on their hardware,
Deferred revenues on software sales – the accrual concept in action
The accruals concept is one of the fundamental accounting concepts which – more or less – dictates how we do accounting. I have written about the accruals concept previously. Briefly, the accruals concept means that revenues and costs need to be matched against each other – when something is paid, or when the cash is received is not relevant.
Here is a great real life example. As you may know, Microsoft released Windows 8 in October 2012. Of course, for Windows 8 to be available on new devices, Microsoft sold it to equipment manufacturers well in advance of this. This means they had incurred the cost of distributing the software to the manufacturers and also received payment. However, the cash received is not a sale in accounting terms as the software was not officially released until October 26th, 2012. Or, to put this in accruals concept terms, there could be no matching of costs and revenues until the actual official release date had passed. So, in their quarterly report at the end of September 2012, Microsoft deferred revenues of $783 million. You can read more here.
The learning curve – real life application
I have previously written about the learning curve and its use in management accounting practice. The learning curve effect refers to a possible tendency for tasks to be performed quicker as employees learn them and become more efficient. Thus, over time, costs may decrease. The term experience curve is also used to describe this effect – have a look at the previous post for detail on how to calculate the learning curve effect.
In October 2012, CIMA reported some research on two cases of actual use of the learning curve. The full details can be found here , but I will summarise them briefly here. Pricing was a key issue for one case, so they used the learning curve in their cost and pricing calculations to ensure they were giving customers the most competitive price. In the second case, the learning curve effect was used in investment evaluation to obtain the best future cash flow projections.
Management accounting text book – Burns, Quinn, Warren and Oliveira
A book on which I am a co-author will be available from January 15th next. It’s a contemporary book, with an emphasis on the changing nature of management accounting. Of course we cover the basic and traditional material too. You can find out more at this link.
A new (old) way of financing – trade finance
Finance (Photo credit: Tax Credits)
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
Martin's accounting blog 