Food supply chain and accounting
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.
Speed cameras business
In July this year (2013), I read an interesting brief news report about a speed van operator in Ireland. Yes, we all hate these guys, but the article made me realise this seems like a good business to be in – even if you are hated by motorists. According to the article, the GoSafe consortium makes a profit of almost €50,000 per week or €2.5m per year. It has almost €11m debt and is contracted to provide 6,000 hours per month to the Irish state. The article notes that at least one motorist per hour is caught speeding. I don’t know the ins and outs of the contract, but if the company makes a profit of €2.5m annually, even if it does pay out some dividends, the debt owing could be paid down quickly it would seem. The management accountant in me would really like to know what is the breakeven number of speeding motorists per day! You can read more at this link: http://www.rte.ie/news/2013/0720/463662-speed-vans/
A cost-volume-profit-example – a child care facility
The BRiC charging (Photo credit: fe2cruz)
In this and the next post, I will give you two simple examples of cost-volume-profit (CVP) analysis in action. CVP analysis, or sometimes it’s called break-even analysis, is a useful decision tool for any business to understand effects of cost changes or sales volume changes on underlying profit.
The first example relates to small Montessori school run by someone I know. In Ireland, preschool children get some free childcare and the owner of the facility gets paid €250 per child per month. The Montessori in question is insured to have 11 children with one staff member, but beyond this a second employee is needed. The full capacity of the school is 15 children and the extra employee costs €620 per month. This is a fixed cost. If you do some quick calculations, you can see that it takes 3 children (€ 750) to cover the employee cost. Thus, the owner needs to have 11 or less children with one employee, or 14 or more with two employees. So you can see how the fixed cost increase affects the volume needed to keep profit levels stable. There may of course be some additional variable costs with more children, but I am ignoring these to keep the example simple.
Technology and new business-models – taxi despatching
I always like to read about new ways of doing business, or new technology can change existing businesses. You may have seen how various new technologies have helped the taxi-sector. For example, in London you can send a text from a smart phone requesting a taxi and your position can be pin-pointed by the GPS within the phone. Now let’s take this a step further and add an app to the smart phone and then the way the whole taxi industry operates could change? How you might ask. This post from the Babbage blog on Economist.com explains why. In several European countries, taxi users can now use apps to request a taxi. The apps ping the nearest cab, and once a customer accepts a particular offer they can track the taxi progress. All the taxi needs is the same app effectively. This changes the way business is done in the sector as the taxi dispatcher is effectively cut out of the picture. I don’t know about other cities, but I can tell you that a taxi dispatcher would charge its drivers in the order of €200 per week or more in Dublin. For this, the driver (who suffers all risks of owning and paying for the cab) gets fares directed to them usually through some system installed in their cab. Now, if I were a self-employed taxi-driver you could cut out that cost by using an app, I’d be giving it some serious consideration. Of course, as the post notes, taxi dispatchers are not seating idle and a race is on between taxi dispatchers and app developers!
Pricing tips for small business
I’m a bit lazy today, sorry, so I’m directing you to a nice post on setting prices in small online business: Top 5 pricing tips for small business
Prices, costs and business failure – a few examples from Ireland
In recent years hard economic times have hit Ireland and other developed economies. According to an article in the Guardian over a year ago now, the number of businesses failing in Ireland was 5 times that in 2010 – a huge chunk of these being construction firms. I hope have some sympathy for many of the hard-working business people who perhaps have seen a lot of their money lost. But, there is a part of me (probably the accountant) who is not at all surprised at so many Irish businesses failing. Why? Am I getting more cranky (Yes, of course I am)? Well, let me give me a few of many examples I have encountered over the last few years which seem to show poor decision making. But before I do, I should say that many Irish businesses who started during the “boom” years were already doomed to failure due to a pretty high cost structure e.g. rent.
The first example dates back about 2-3 years now. In the area where I live, we collect an amount of money each year to help maintain the common greens in the area. The landscaping business doing the work was charging about €7000 per annum and a new landscaper offered to do the work for €4500. Both were sole traders with similar costs (as best I could guess at least). The original landscaper said he could not do the work for that price and would not even reduce his current price, so the business was lost. Now I don’t know what either landscaper was thinking, but it fairly obvious that the original landscaper was living in the boom years in my opinion. He could have reduced his price by some amount, say €1500. This would mean his net contribution would fall by €1500, but instead he lost €7500 – a bad decision.
The second example relates to a really nice bakery I visited recently in a more affluent part of Dublin. Yes, the price is of course going to be affected by the area, but having paid €4.60 (ok my wife bought it) for a loaf of sour-dough bread I thought this is not a sustainable business. Even people in affluent areas cut back on spending in lean times. The point here is that I thought the price was more reflective of a time four or five years ago.
The third example relates to an employee within a business. The employee left as €900 per week income was not “enough” for him. The job involved manual labour and some skills, but nothing that could not be replaced readily. The right decision was made by the business owner, which was adiós amigo. The employees decision was rather silly though, as the immediate income from social benefits would be way lower.
These three examples to some extent portray how high prices may have become engrained in the minds of business people following many years of the Celtic Tiger. I like to study how practices have become accepted/taken-for-granted, or institutionalised. When practices become institutionalised, there are hard to change. So I wonder are businesses in Ireland failing because some business owners cannot make the change in their minds to reduce costs or prices? In other words, they are finding it hard to break the institutionalised practices associated with past more affluent times. I know there are many other factors, but based on my experience, at least some business failures in Ireland result from a failure to change mindset.
How business models can (climate) change
Following on from my last post on what is a business model, here I recount two articles I had saved from last year on how climate change can force businesses to change – and in some cases even change the business model.
The first article comes from Time (Sep 04, 2011). It recounts how Spanish winemaker Torres are increasingly moving their crops to higher, cooler areas of Spain. Due to global warming, the hotter climate means sweeter fruit and earlier ripening. At the same time, the early ripening of the fruit is offset by the fact that the seeds and skin (which give flavour) are not ripe. Thus, as a possible solution, vines are being planted at a higher, cooler altitude in an effort to offset the warming experienced in traditional regions.
The second related article comes from The Economist (Sep 10, 2011, online). In this articles, you can read how English wine is being produced in increased volumes and better quality – with locally grown grapes. Again, it is climate change – bringing warmer climes to Southern England – meaning that more traditional grape varieties can be grown in England as opposed to the typically acidic German varieties. The result has been a product of increasing quality, and a tendency to produce higher margin sparkling wines – something that was not so easily done before. Thus, the business model of English vineyards may have changed from one where imported “grape juice” was added to make local wine, to one where high quality, high-margin product is the norm.
Data centres costs – weather is a key factor
(Image from Economist.com)
A few weeks ago I was listening to the radio in the car. A news item came on about why Ireland is attractive to companies like Google and Microsoft to set up data centres. It wasn’t tax, or our educated workforce. Much to my surprise it was the Irish weather. Well, I suppose all three are important, but with an ambient average temperature well below 20 celsius, the cost of cooling the data centres falls considerably. Here’s a post I read earlier from Babbages’ blog on The Economist. It gives some great detail on the costs of running these data centres Data centres: Social desert | The Economist. I have to say, as a management accountant weather conditions would not be the first thing I’d consider in cost decisions – a good reason to talk to other people in the organisation to find out what’s going on.
Liquidity issues – Apple has more cash than the United States
I read a new report on the BBC iPhone app this morning and just had to write about it. Over the coming months I will be writing a series of posts on analysing businesses. One area I’ll cover is liquidity and solvency. Liquidity is the ability to turn assets into cash, while solvency is the ability to pay debts as they fall due. Now, we have been hearing quite a lot about some European countries and the US having debt problems. Things really come to a head when those debts cannot be repaid, and to repay them, you need cash. According to the report by the BBC, Apple Inc had $76 billion in liquid resources (cash and other assets easily converted to cash) according to its most recent accounts. The report puts the liquid resources of the US $73 billion. When I read this I started to understand why it is so important for the US to raise more cash – hence the need to raise it’s borrowing limit. If the US were a small business, there’s a good chance it would be gone by now, as it would have little cash and no way to raise more. Watch out for more posts on business analysis soon. In these posts I’ll write about some common ways to evaluate and analyse how a business is doing.
Problems at Honda?
Following the earth quake and tsunami in Japan earlier this year, car manufacturers faced many problems. One I have wrote about previously, namely the fact that supplies of components dried-up after the disaster due to the close-knit just-in-time management systems used. The Economist provided another example from Honda recently. Honda launched their new Civic model in April/May this year. The problem of course was whether or not the company could actually deliver enough cars to meet demand, due to production disruption and supplier problems. Other car manufacturers, particularly US ones, would of course benefit. However, for Honda the short term seems still slightly troublesome
Problems at Honda?
Following the earth quake and tsunami in Japan earlier this year, car manufacturers faced many problems. One I have wrote about previously, namely the fact that supplies of components dried-up after the disaster due to the close-knit just-in-time management systems used. The Economist provided another example from Honda recently. Honda launched their new Civic model in April/May this year. The problem of course was whether or not the company could actually deliver enough cars to meet demand, due to production disruption and supplier problems. Other car manufacturers, particularly US ones, would of course benefit. However, for Honda the short term seems still slightly troublesome
Setting prices in small business
Setting a price for a small business can be a challenge. Cut the price too much and you loose money. Raise the price and you loose business. An article in the New York Times recounts the experience of some US small business. The basic message is that price is not everything. One business owner recounts how the quality customers gained outstrips those lost due to a perceived high price. Here’s one story
“About three years ago a computer error caused all of the prices on Headsets.com to be displayed at cost rather than retail. With the lower prices on display for a weekend, Mike Faith, the chief executive, expected sales to soar. Instead, the increase was marginal. “It was a big lesson for us,” Mr. Faith said.”
The basic lesson from this experience is that customers don’t think price is the be all and end all. The experience of a gluten free flour business showed that competitors prices may not matter as much as one thinks too. The company managed to raise its price by 20% in the first year in business by convincing customers that the product had more added value than competing flour. The most important lesson mentioned is that costs must be covered in the price charged. Seem so obvious, but I have written several pieces on this blog about breaking even.
Just in case or just-in-time?
Just-in-time is a management concept originating from Japan. The basic idea is that everything happens “just-in-time”; materials and supplies arrive just in time for production to start, and production finishes just in time for the customer to take it. With not much room of error, if a supplier fails to deliver goods on time production is disrupted and may even cease. Normally companies that use the just-in-time philosophy have close supplier relationships and tend not to run into supply problems. The savings from reduced inventory levels are obvious. Recent events in Japan however have raised issues about how tight things can get with just-in-time. A disastrous earthquake/tsunami in March this year left parts of Japan’s east cost in ruins. Factories were destroyed and power supplies disrupted for months. An article in The Economist (March 31, 2011) mentions how global firms are re-thinking how the manage production following events in Japan. According to the article, one company that controls 90% of the market for a resin is in smartphones had ceased production. Another company which supplies 70% of the global supply of a polymer used in iPod batteries is also out of action. And, car manufacturers in Japan and America have had to cut back on production as parts are in short supply. The events in Japan have prompted some commentators to say a “just-in-case” systems is also needed, according to the Economist.
Preventive maintenance – a good investment?
This article on The Economist website brought me back to my days working as a management accountant in manufacturing firms. Maintaining manufacturing and process equipment was always a delicate balance. Spares and maintenance staff pay was quite a substantial cost in one plant I worked in over the years. This plant, like others, tried its best to engage in preventive maintenance programs. This usually implied using a mixture of following guidelines from equipment manufacturers and the experience of the maintenance staff. But, as I am sure you can imagine, preventative maintenance comes at a cost too. The arguments would always be “should we wait until it breaks, or fix it before it breaks”. Of course, letting a piece of equipment go unmaintained can create serious problems. A business needs to avoid its main manufacturing process being down – losses of revenue per day (or even per hour) rack up very quickly. So from an accounting and profit view, a balance needs to be achieved between the right level of preventive maintenance and the cost of same.
Of course modern technology can help. When I left my last manufacturing role back in 2004, process equipment could be remotely diagnosed and repaired by engineers. I always remember being amazed in or around 2001 when a production manager told me how the main machine at our plant had PLC’s (programmable logic circuits) with an IP address – the same as any PC or internet device. This meant the engineers from the equipment manufacturer could simply connect over the internet. At the time I was thinking, wouldn’t it be great if fault information could be sent out instead, or even better, that fault signs might be noted in advance.
So, reading the above mentioned piece from The Economist brought me back to those great days when I as an accountant was constantly amazed by how advanced machinery had become. But now it seems a “virtual engineer” may be on hand to predict if electrical equipment is showing early signs of failure (read the piece for more detail). No detail is given on the cost of such devices, but it would seem to be a great cost-saving idea. It could mean that preventive maintenance costs are incurred less frequently as equipment may be perfectly fine beyond it’s normal maintenance period
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.
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