Beneficts and Drawbacks EBITDA

How Paul Pomroy helped finance become a strategic player in McDonald’s $27.6bn-turnover operation

MEET CIMA’S NEW PRESIDENT, MALCOLM FURBER

www.fm-magazine.com • July/August 2013

HOLDING ALL THE CHIPS

FIVE REASONS WHY YOU SHOULD

ADOPT INTEGRATED REPORTING

SOPHIA STEIGER ON RISING TO THE CHALLENGE OF MANAGING BILLIONS FOR CREDIT SUISSE

3Financial Management | July/August 2013

The competition provides a platform upon which future business leaders can develop their skills and ambitions – whatever their background.

Corporate social responsibility is also a key element of the GBC. The integrity shown by the finalists in past years has given me great confidence that the next generation will avoid some of the cavalier mistakes made by a minority of today’s enterprises.

The importance of providing the right type of career support and guidance for the next generation was recently brought home to me when I read an article in the Economist. The magazine calculated that almost a quarter of the planet’s young people are neither working nor studying. A third of those who are employed rely on informal or intermittent jobs, making it difficult for them to gain skills.

Meanwhile, there is also a critical skills shortage in many regions around the world that’s likely to get worse. As a resident of South Africa, I see this problem all around me. There are numerous government-backed schemes in the pipeline here that are designed to help bring young people into work. But

Malcolm Furber, FCMA, CGMACIMA president

A word from the president

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‘There is a critical skills shortage in many regions that’s likely to get worse’

One of the events I am most looking forward to as CIMA’s new president is the final of the Global Business Challenge (GBC) in South Africa

next month. For me, this event embodies all the best qualities of the institute.

it is clear to me that South Africa’s young people could benefit greatly from professional qualifications that, like CIMA’s, are both accessible to all and specifically tailored to employers’ needs. In such regions, the institute’s mission of “helping people and businesses to succeed” could not be more appropriate.

A recent report published by the McKinsey Center for Government highlighted the urgent need for a more joined-up approach to this issue and a better-informed dialogue among governments, education providers, employers and young people themselves. CIMA is acutely aware of the global shortage of skilled finance professionals and it takes great care to ensure that its syllabus and strategy equip members with the skills that employers need.

With this in mind, CIMA is reviewing a survey of nearly 130,000 young people who are aiming for a finance-based business career. The idea is to gain an insight into what motivates Generation Y, what ambitions are driving them and what skills they have acquired as they move on to the first rung of the career ladder.

Meanwhile, our imminent employer survey will explore what skills are most in demand in the workplace, what expectations companies have of young people and how the outlooks of these two parties can be brought together to create a mutually beneficial road map for success.

This work will then become part of a larger body of research, the results of which will be presented at the World Congress of Accountants (WCOA) in Italy at the end of next year. CIMA and the AICPA are the main sponsors of the event under the title of the CGMA designation. WCOA is the largest and most comprehensive gathering of finance leaders and it’s an ideal forum in which to address this burning issue.

With such worrying youth unemployment figures looming, it is more important than ever that employers understand the value of our members in terms of their ability to guide the predictive, evidence-based decisions that drive sustainable – and ethical – business success. I am very pleased to be starting my presidency at the launch of such an important project and I’m certain that the results will provide a bright beacon for young people in a careers landscape that can sometimes seem rather gloomy.

CIMA LinkedIn

group: tinyurl.com/

ahxyoda

How has the institute helped your career? We’d like to hear from members and students about how the CIMA qualification has accelerated their progress. Email your story to: [email protected]

4 5Financial Management | July/August 2013Financial Management | July/August 2013

CIMA is the Chartered Institute of Management Accountants 26 Chapter Street, London SW1P 4NP 020 7663 5441 www.cimaglobal.com

President Malcolm Furber, FCMA, CGMA

Deputy president Keith Luck, FCMA, CGMA

Vice-presidentMyriam Madden, FCMA, CGMA

Chief executiveCharles Tilley, FCMA, CGMA

Head of media and communications Katie Scott-KurtiFM is published for CIMA by Seven, 3-7 Herbal Hill, London EC1R 5EJ Group editor Jon Watkins

Editor Lawrie Holmes Managing editor Darren BarrettTechnical editor Neil Cole Group art director Simon CampbellJunior designer Josh Farley

Creative director Michael BoothChief sub editor Steve McCubbinDeputy chief sub editorChris RyderDeputy picture editor Louise Fenerci

Inform 3-21

Features 22-43

Resource 45-63

Back 65-66

A word from the presidentMalcolm Furber – p3I worked on… Growing Ireland West Airport Knock – p6Inform p9–15 A digest of the latest developments in management accountancy and beyond: Hot potato Ethical dilemmas resolved Gen Y Product discovery Must read The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns EverythingThinking and opinion A critical analysis of shared-service centres, plus Andrew Clark of The Times on integrated reporting – p14-15Led by financeHedging commodity risk at Coca-Cola’s Bottling Investments Group – p17

The insider view Singapore – p18The data The rise of intangible assets as a proportion of market value – p21

CIMA CEO columnCharles Tilley – p65 Watercooler – p66

Management accountants offer a unique insight based on a broad knowledge of how various functions in their enterprises work. It’s therefore important to spend time away from the back office and out in the field, says CIMA’s new president, Malcolm Furber. In this issue he urges members to “kick it and hug it” – a call to understand their organisations better by gaining first-hand experience of life on the front line.

The subject of our cover feature, Paul Pomroy, is a good example of a member who has progressed by getting to know his business inside out. On becoming senior vice-president, finance, for McDonald’s in the UK and northern Europe, he added property, construction, support services and, most recently, supply-chain management to his portfolio – just before the horsemeat scandal swept the Continent.

Such a well-rounded approach to accounting in business chimes well with the concept of integrated reporting (IR) – the clear and honest assessment of a company’s performance, its wider impact and the risks it faces. We talk to Paul Druckman, chief executive of the International Integrated Reporting Council, while Andrew Clark, deputy business editor of The Times, offers his views on the IR movement’s progress so far.

Lawrie Holmes

Please send your comments and ideas to [email protected] or join the FM feedback group on CIMAsphere at www.cimasphere.com/groups

Picture researcher Alex Ridley Production manager Michael Doukanaris Account directorSiân DudleyGroup publishing director Rachael Stilwell

Project directorStefanie Hinten-ReedGlobal sales director Hilton YoungAdvertising manager Philippa [email protected] Tel: 020 7775 5717

Editorial director Peter Dean Managing directorJessica GibsonChief executive Sean King Chairman Tim Trotter

The contents of this publication are subject to worldwide copyright protection and reproduction in whole or in part, whether mechanical or electronic, is expressly forbidden without the prior written consent of CIMA/Seven. © Seven All rights reserved. Origination by Altaimage London. Printed in the UK by Wyndeham Press Group.

Subscriptions [email protected] Tel: 01580 883841£45 (UK), £54 (Europe), £72 (rest of world). Back issues: £7.50 (UK), £10 (rest of world) including postage, subject to availability. All payments should be in sterling drawn on a UK bank.

Editor’s note

A meaty role Paul Pomroy on the challenges facing McDonald’s UK – p22

The whole story (so far) The case for adopting integrated reporting – p28

Sophia Steiger Head of IT and real-estate finance at Credit Suisse – p32

Furber education Introducing CIMA’s new president, Malcolm Furber – p38

8 ways to…Improve working capital – p42

Study notesT4 part B case study, paper E1 and paper C01 – p45Technical notesThe pros and cons of Ebitda as a metric; plus the development of management accounting in China – p55What you learn on…CIMA Mastercourses on financial modelling techniques – p62 The instituteA view from professional standards on the benefits of volunteering; plus CIMA’s new tool-evaluation resource – p63CIMA events Dates for your diary, plus a summary of recent institute events – p64

www.cimaglobal.com

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AT A GLANCE

Cover photograph: Plainpicture

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Financial Management | July/August 2013Financial Management | July/August 2013 76

As the finance manager at Ireland West Airport Knock I am responsible for keeping its costs as low as possible in order to remain competitive in the unpredictable aviation market. As a senior executive, I also play a role in strategic planning.

I have worked at Knock since 2003, having returned from the UK, where I’d been at companies including Cinema International Corporation, Nortel, Thanet Healthcare and Learning Curve. It is classed as a regional airport, as it’s not a hub or near a city, which makes

gaining and sustaining new routes relatively difficult. Yet the airport has just had the busiest year in its history, achieving more than 685,000 passengers during probably the worst recession to have hit Ireland in two decades. When I started here, annual passenger numbers were in the region of 200,000.

Like all airports, Knock is capital intensive and has a large proportion of fixed costs, including for maintenance and extensive regulatory obligations in areas such as security and safety. Cost efficiency is also important

because, crucially, if an airline stops using an airport, the airport cannot make a corresponding cost reduction. The loss of any route means that the business will lose both aeronautical and non-aeronautical revenues, which are vital in offsetting its fixed costs. This increases the competitive pressure on the airport and it has to work hard to increase market share and passenger throughput by identifying new opportunities for growth.

The airport has succeeded in reducing its cost base by more than

20 per cent in the past few years, which has helped it to remain competitive. We have used a number of measures to improve efficiency. Nearly two-thirds of our employees are trained in multiple disciplines, for instance, which increases their flexibility and helps to limit costs such as overtime. Procurement is a key focus to ensure value for money, too.

Our KPIs, which are monitored closely every month, include employee cost per passenger and operational cost per passenger. Managers and department

heads are very budget conscious and work with finance and senior managers to ensure that our targets are met. The aviation business is volatile and the loss of any route can have severe consequences for an airport. Cash flow forecasting is essential in order to ensure that the airport has enough funding to enable it to react to risks and survive. We also use both short- and long-term business plans, together with rolling forecasts, to ensure that we are always aware of our financial position and the challenges facing us.

I work on…Growing Ireland West Airport Knock

Name Paula Roberts, FCMA, CGMA

Company Ireland West Airport Knock

Role Finance manager

Industry Aviation

CIMA qualified 2010

Start date 2003 End date Ongoing

Location Charlestown, County Mayo, Ireland Ala

my

[Knock by numbers]A total of

685,000 passengers used the airport in 2012

– its busiest year to date

The airport serves

28 international destinations, with

airlines including Ryanair, Aer Lingus Regional, Flybe

and Lufthansa operating from it

Knock is the

4thbusiest airport in Ireland after

Dublin, Cork and Shannon

During September 2011 Ryanair celebrated the airline’s

4 millionth passenger through the airport

NEWS/OPINION/COMMENT/INSIGHT/ANALYSIS

Financial leaders come to the fore on innovation

9

Senior finance professionals have moved to the centre of discussions about innovation in business, as many firms seek to enhance their portfolios with more

innovative products and need someone to ensure that the right ideas are funded and executed properly.

That’s the view of a new CGMA report entitled “Managing innovation: Harnessing the power of finance”, which argues that CFOs and other finance leaders are no longer seen as putting the brakes on innovation.

Instead, the report points out that management accountants – led by CFOs – are performing a crucial and growing role in driving advances at some of the world’s most innovative companies.

“In those businesses the CFO and finance team are deeply embedded in the process of innovation and have a clear framework to let new ideas take shape,” the report states. “They partner early with other departments to identify concepts with market potential; replace rigid financial metrics with staged measurements to avoid eliminating ideas too soon; and accept that failure is a tolerable outcome for projects along the path to commercialisation.”

The report features interviews with global finance leaders at businesses including the Coca-Cola Company, Royal Dutch Shell and BT Group.Visit the CGMA website at www.cgma.org/resources to download a copy of the report.

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10 INFORM 11Financial Management | July/August 2013Financial Management | July/August 2013

THE DILEMMA I am the finance manager at a global charity. Some of the members of our governing committee travel to overseas offices and I’m concerned about the expenses that one of them submits. These do not always reflect policy, exceeding limits for hotels and including big bar bills. But the FD is reluctant to challenge these and signs them off. CIMA’S RESPONSE You may need to consider whether objectivity is being undermined (see section 120 of the handbook). If there is a policy, it would be best practice for it to be applied equally, since failing to do so poses a threat to internal controls (300.14). Consider whether an informed third party would conclude that compliance with the fundamental principles has been compromised (100.2). Also ensure that you document your concerns with the FD in writing.FOR THE CODE AND OTHER ONLINE ETHICS RESOURCES, VISIT WWW.CIMAGLOBAL.COM/ETHICS

DISCLAIMER CIMA does not provide legal, investment, professional or career advice. No responsibility or liability whatsoever is accepted for any error, omission (whether or not arising out of negligence) or for any loss or damage sustained as a result of reliance on information supplied or comments made.

Integrated reporting ‘would demonstrate the value of data’

Businesses and economies across Europe are failing to acknowledge the value of their data on the balance sheet

– despite recognising the importance of big data and analytics to their success in both the short and long term.

That’s according to a new report from the Centre for Economics and Business Research (Cebr), a London-based economic and business consultancy, in partnership with analytics firm SAS.

The report, “Data on the balance sheet”, suggests that data should be regarded as an asset because it provides potential future economic benefits. But it adds that, although many European firms acknowledge the insights that big data and analytics can provide in helping them to improve customer relations, streamline production and develop new products, most are failing to account for its value in their annual reports.

“While businesses account for the cost of collecting, storing and analysing data,

current accounting methods do not capture its importance,” the report points out. “The lack of awareness of the potential of data hampers policy decision-making.”

According to Cebr’s CEO, Graham Brough, what’s required is a forward-looking integrated accounting framework that shows investors a comprehensive view of a firm’s value, including how it values its data.

“There are three ways to assess the value of data: through its market value, the cost of collecting it and the income derived from it where markets do not exist and value is sensitive to external competitive and regulatory factors,” Brough said. “These three ways have limitations when it comes to depreciation, so we need to find systems outside traditional accounting practices that take into account not only financial and physical capital but also human, social, relationship and knowledge capital. Reports should include a company’s future prospects as well as a review of past performance.”

This month’s dilemma

We asked…Should companies be more transparent about how much tax they pay and where?Source: www.fm-magazine.com.

HOT POTATO

POLL OF THE MONTH

Boot the budget? Why rolling forecasts might make more sense. Traditional budgeting practices are keeping finance departments from remaining relevant in their companies. So says consultant Steve Player, CPA, CGMA, who thinks that budgeting depends too much on assumptions and is not flexible enough. He argues the case for replacing it with continuous planning and rolling forecasts.www.tinyurl.com/p2vuyw7

How work attire influences your next promotion. “Dress to impress” might seem trite advice, but it rings true in the business

What the poll saysUnsurprisingly, in light of recent scandals, the vast majority of respondents feel that firms should be more transparent about their tax affairs. Arguably more interesting is the number who disagreed with that view but acknowledged the need to be aware of public concern in this area – a clear reflection that companies recognise tax issues as a reputational risk.

world. A survey has found that employers still believe that what a candidate wears could influence his or her chances of success.www.tinyurl.com/p7mme9t

Seven ways to improve your delegating skills. Curbing your inner control freak could just make those who work for you feel happier and more empowered – and you could get to free up time to do the kind of big-picture work you were hired to do.www.tinyurl.com/njvttdg

Five ways for finance to become an innovation partner. The finance

function isn’t just for approving or monitoring strategic initiatives; it’s becoming part of the decision-making team. A new CGMA report shows how CFOs and other finance professionals can be partners in successful innovation.www.tinyurl.com/op94t23

One to one: Sir Charlie Mayfield, chairman, John Lewis Partnership. In the latest of a series of interviews with global finance leaders, CIMA’s chief executive, Charles Tilley, asks Mayfield for his tips for achieving long-term business success. www.tinyurl.com/nx6w9k6

Blue-chip Brits plan for growth

IFAC event aims for ‘global unity’

T he International Federation of Accountants (IFAC) has announced that the theme of its

World Congress of Accountants 2014 will be “2020 vision: Learning from the past, building the future”.

CGMA is the primary sponsor of the event, which will be hosted in Rome by the CNDCEC – Italy’s national council of chartered accountants. It aims to explore the pivotal role of accounting in the midst of rapid economic, political and social changes. Delegates will discuss best practice and debate how accountants should lead the way in driving innovation.

executive of Deloitte. “Eighty per cent of respondents believe that business is best placed to do this.”

Two-thirds of business leaders think that growth will come mainly from international markets, with 37 per cent forecasting growth of more than 75 per cent overseas in this period.

The survey has also found that a wide range of approaches are being considered by companies seeking to break into new markets. Forming alliances with local businesses is the most popular method, with 60 per cent of respondents considering such a move. More than half are looking at potential mergers or acquisitions.

CGMAs are ideally placed to help guide businesses through the difficult economic climate, according to both Charles Tilley, CIMA’s chief executive, and Barry Melancon, the AICPA’s president and CEO.

“We are honoured to sponsor the World Congress of Accountants and look forward to showcasing the unique perspective that CGMA designation holders bring to business,” they said in a joint statement. “Professional accountants in business are on the front lines, navigating the challenges of complexity and uncertainty to guide their organisations towards sustainable market opportunity. We believe that our growing community of CGMA designation holders have the skills of the future.”

IFAC’s CEO, Fayezul Choudhury, added that the event would provide “a unique opportunity for accountants from around the world to network, interact and share knowledge. We appreciate CIMA’s and the AICPA’s support for the congress’s goals of fostering global unity and collegiality among professional accountants.”

ON CGMA.ORGFor CGMAs, the following content is now available online

Some of Britain’s largest companies have indicated that the UK may soon offer a more conducive

environment for commercial growth, according to a survey by Deloitte.

Six out of ten respondents expect to invest more than £50m apiece in growth projects this year, while more than two-thirds believe that the next three years will be a period of expansion for them.

Of the 126 companies in the survey, each of which turns over more than £1bn a year, only 28 per cent feel that the next three years will be about achieving stability rather than growth. Only 4 per cent are focused on survival alone.

“The low-growth environment of the past five years, coupled with levels of consumer and government debt, mean that big business has to take a lead in driving a new era of wealth creation,” said David Sproul, UK chief

Yes: 77%

No, but they should be aware of public concern: 17%

No: 6%

Don’t know/undecided: 0%

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Last year we invited Marty Cagan, a partner at the Silicon Valley Product Group, to run a course for all our development teams at Mind Candy, the company that created the popular online game Moshi Monsters. This changed our business quite a bit. Cagan, who is a product management expert, talked to all of our product people – including artists and developers – and senior members of the management team.

HE TAUGHT US all about how products can be developed in this new digital age, based on the idea that you can spin them out using really tiny teams that are incredibly agile because they’re simply sitting there producing prototype after prototype. He also explained the value of user testing – ie, how you determine whether or not your concepts can be successful by bringing customers into the process at a relatively early stage.

CAGAN SAYS THAT PRODUCT DEVELOPMENT TEAMS at the Silicon Valley Product Group ask the management for “a little time to investigate the solution and validate that with customers to ensure it has the necessary value and usability, with engineers to ensure its feasibility and with other stakeholders to ensure that it’s viable for our business. Once we have come up with a solution that works for the business, we can make an informed and highly confident statement about when we could deliver this and what type of result we can expect. We can also decide whether it’s even worth doing.”

Divinia Knowles, FCMA, CGMA, is COO and CFO of Mind Candy

THE COURSE covered many facets of product management, including metrics and the value of analytics. It has changed the way we look at developing products. Before that, when we were in development it cost quite a lot to create Moshi Monsters because it’s a quite complex web-based game. We have since shifted away to this more mobile development world, whereby you can build stuff, test it and throw it away if need be. You can fail fast and you haven’t then sunk your whole business. You can spread

your bets, develop products quickly and then see what sticks. It’s how all very successful firms, such as Supercell, which creates games such as Clash of Clans, have developed the concept by creating lots of small “cells”.

AN INITIAL PART OF THAT STRATEGY, where you put a small, agile team together and quickly build a prototype, is known as product discovery. The way mobile development is going now, you can use this approach to run a business that’s really small but can earn really big revenues. It’s like R&D – but a supercharged version for this generation.

Divinia Knowles on how a US guru transformed her firm’s approach to research and development

Product discovery with tiny teams

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Financial Management | July/August 2013

‘You can build stuff, test it and throw it away if need be. You can fail fast’

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What business leaders have tweeted recently on business strategy and risk

The influence of private equity is everywhere, writes the author of The New Tycoons. Is this something to be feared or embraced?

The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns EverythingJason Kelly, £23.99, Bloomberg Press

Steve Forbes, editor- in-chief and chairman, Forbes Media: @SteveForbesCEO“When it comes to investing, emotions are your enemy.”

Donald Trump: @realDonaldTrump “Be flexibly focused. Focus does not mean being narrow-minded or rigid – Think Big.”

Michael Dell, CEO and chairman, Dell: @MichaelDell “With every great success there is courage, service and sacrifice.”

Jeff Weiner, CEO, LinkedIn: @jeffweiner“Computer science has become the top major at Stanford for the first time, up 50% from traditional rates.”

P rivate equity always seemed like a business outside the grasp of mere mortals, even to a reporter covering the industry. Part of it was

the name: “private equity” conjured up images of dark-suited men behind closed doors making complex decisions about matters uninteresting to everyday folk.

It took a family vacation to the UK to open my eyes to the truth. After visiting the Legoland Windsor theme park (co-owned by private equity houses CVC and Blackstone) with my wife and sons, I realised that what such firms own is in front of us practically from the moment we wake up – the Weather Channel, the London Eye, Toys R Us. Together their assets under management – the combination of their funds and the value of what they own – exceeds $3trn.

By virtue of what these firms control, they’re the ultimate bosses of millions of

workers worldwide, which gives them even more influence over our daily lives. The bulk of money committed to private equity funds comes from public pension schemes. Those pensions, desperate for returns, are increasingly turning to private equity, real estate and hedge funds to make their money grow faster.

All of this led me to my underlying thesis: these businesses matter – not in an oblique academic way, but in the context of all our daily lives.

So what do they actually do when they buy a business? Dollar General, a US retailer specialising in isolated rural markets, serves as a powerful example. In 2007 private equity firm KKR took the struggling Tennessee company, which had fallen out of favour with public investors, and transformed it, hiring a new chief executive – a man who questioned everything down to the amount of shelf space devoted to candles in each store. When KKR took Dollar General back to the public market

Private ubiquity, less the iniquity

TWITTERATI

MUST READ

two years later, the stock price had more than doubled, reaping huge profits for all investors. More important, KKR argues, the new owners revived an ailing business and enabled it to expand, create jobs and generate sustainable profits.

Private equity isn’t always pretty. In the 2012 US presidential election, Republican candidate Mitt Romney, former CEO of private equity firm Bain Capital, was assailed by critics for closing factories and slashing payrolls.

Many remain sceptical that private equity has anyone’s interests at heart beyond its own. Yet even some trade unions that once decried the industry as cold-hearted have chosen to work with private equity rather than fight it.

That’s in part because the influence of private equity is only growing. As its key players look beyond buying and selling companies, they’re lending to businesses, building infrastructure projects and even buying foreclosed homes.

Everywhere we look, there they are.

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15Financial Management | July/August 2013Financial Management | July/August 2013INFORM14

The rise and rise of shared-service centres is a revolution that’s going under the radar

The consolidation of common service activities in a discrete shared-service centre (SSC) is an emerging trend in the evolution of

the multi-divisional form of organisation. Typically, it’s where a firm removes support services such as finance, IT and HR from front-line business units and puts them in a purpose-built facility in a cheaper part of the country or abroad.

Our research considers SSCs as hybrid governance mechanisms that seek to combine market principles with in-house control. They are arm’s-length bodies that can act in an entrepreneurial way – outside the control of divisional management but answerable to it through a service-level agreement (SLA).

While outsourcing also claims to achieve efficiency savings through relocation and the elimination of duplication, an SSC brings a quasi-market feel to relationships with its business-unit “customers”, yet enables the management to retain control of activities so that its services can adapt to changing business needs. SSCs argue that their competitive, independent nature is reinforced through external benchmarking and rankings against other SSCs. Divisions can also hold a centre accountable by either enforcing SLA terms or lobbying senior management. What’s more, there is always an implicit threat that a centre might be outsourced.

In the public sector, too, several bodies have come together to share services through a new organisation with its own constitution and an objective of breaking even or perhaps making a small profit.

Uncritical massThe list of SSCs’ advantages published in the consultancy literature might suggest that the case for them is proven – indeed, there has been little critical research into shared services so far. This apparent neglect may be because the SSC model largely lacks the radical

Thinking

The claimed advantages of

adopting shared-service centres

have hitherto gone largely

unchallenged by academic studies

By Ian Herbert, senior lecturer in accounting and financial management, and Will Seal, professor of accounting and management, at Loughborough University. They are members of an SSC research team supported by CIMA’s general charitable trust.

The demand among investors for firms to adopt integrated reporting is irresistible, writes Andrew Clark. But IR is about more than an annual document – it’s a state of mind

L ife used to be so simple. A flick through an annual report published only a couple of decades ago is a trip down memory lane. Take Sainsbury’s 1990

effort, which runs to a modest 48 pages and features sepia montages of winsome shop assistants dispensing crusty loaves to bad-haired housewives. It was a year of “outstanding” results, Lord Sainsbury declared, devoting three terse paragraphs to the environment and food safety.

Reporting today is an altogether dicier affair as companies have come under pressure to bare their souls. It’s become impossible to ignore moves towards integrated reporting (IR) – an idea endorsed by the Prince of Wales, Nestlé, HSBC, Tata Steel and many more. In April the International Integrated Reporting Council (IIRC) published a draft framework on how multinationals

should publicly discuss their finances, governance, strategy, prospects and challenges. At its heart the IIRC initiative means that they need to be far clearer about where they’re going.

Steve Gale, a partner at accountants Crowe Clark Whitehill, explains: “The investor community is saying: ‘It’s all very well reporting on the past 12 months, but forward-looking aspects are our key interest.’ They want to know what the short- and longer-term strategies are, how the business is going to be run and what challenges are around the corner.”

IR goes well beyond a single annual report. It means transparency, equality and equanimity in everyday discussions among companies, investors, employees and analysts, with regular progress updates and openness – even with regard to ugly happenings.

Sir Mark Moody-Stuart, a former chairman of Shell, believes that any

“thoughtful” firm should report in a more sustainable way. “Companies exist to produce goods and services for members of society,” he says. “But it’s no good doing that if they’re causing long-term damage in the process.”

Why all the caring, sharing hug-talk? Because the figures demand it. If investors value a firm’s brand at billions of pounds, they’ll want to know how the management is protecting these intangibles. BP’s Deepwater Horizon disaster, Barclays’ admission of Libor rigging and the discovery of horsemeat in Tesco’s burgers have cost these companies far more in reputational capital than in straightforward cash flow.

A pilot run by the IIRC on integrated reporting has involved Coca-Cola, Microsoft, HSBC and Unilever, while in South Africa the practice is already enshrined into law. Even the US, where a dour 10-K filing with a pictorial cover tends to pass for an annual report, is waking up to the need for reform.

But not everyone has got the message yet: a PwC study has found that, while 77 per cent of the FTSE 350 mention their “business models” in annual reports, only 40 per cent offer insightful data on these and 8 per cent combine that with talk of future risks. But there are some cases of good practice. Chemicals firm Johnson Matthey and power generator Drax, for instance, were named the best UK companies for sustainability and stakeholder disclosures in the 2012 awards for transparency in governance held by the Institute of Chartered Secretaries and Administrators and Hermes Equity Ownership Services.

The head of communications at one FTSE-250 company told me it was time for firms to put old doubts aside: “It’s actually considered a strength now to talk about your risks and how you plan to mitigate them. It shows you’re on the ball and that you’re scanning the horizon for changes that may be just out of sight.”

Opinion

Andrew Clark is deputy business editor of The Times. He was previously business editor of the Observer and he has worked for the Guardian, the Daily Telegraph, Sunday Business and the Sydney Morning Herald

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impact of outsourcing in terms of a dramatic reorganisation. The migration of activities to an SSC is usually a gradual process that tends to stay under the radar of unions, academics and the media. Despite this, the interim findings of our study indicate that, far from being a peripheral project concerned merely with shuffling the organisational deckchairs, the SSC model represents a quiet revolution in back-office services. Through its emphasis on cross-functional process streams and business process re-engineering, it’s reshaping the way in which activities are done and also has the potential to influence our thinking about the design and operation of large organisations and professional careers.

Although achieving cost savings is a key objective, adding value through improved service is also an important goal for some of the organisations in our study. In these cases, they see the back office as an opportunity to make the most of the talents of front-line staff

rather than just another overhead burden to shed. For most of our research subjects, the real benefit of SSCs is that they make costs that were previously hidden within the divisions more visible.

As well as interviewing SSC managers and their “customers” in business divisions, we have set up the CIMA-Loughborough SSC Forum – a series of round-table workshops bringing together managers from a range of public- and private-sector SSCs to discuss common issues. The forum also encourages its members to collaborate outside its quarterly meetings to share more specific data and experiences.

Further information and resources can be found on the project’s website at www.shared-services-research.com

Led byfinance

A TEAM INVOLVING the president, the corporate treasurer and the heads of finance and procurement worked with the CEOs and the finance and procurement managers of all of Big’s local operations to decide which commodities to hedge, at what price and over what period. Each operation provided local intelligence on commodities, while the group team provided macro viewpoints on commodities and an overall perspective on risk. Once a decision was reached, the group finance team co-ordinated any interaction between the local operation and corporate treasury to execute the hedges.

BIG’S GROUP AND LOCAL FINANCE TEAMS also worked closely with the group and local procurement teams to provide related information identifying what was hedged and its impact compared with the business plan’s assumptions; what wasn’t hedged and its impact at current spot prices versus the business plan’s assumptions; and the technical details required by the controller function to determine the appropriate accounting treatment of the hedges in Coca-Cola’s consolidated results – eg, mark-to-market if required. Initially developed on Excel spreadsheets, the commodity-related data-gathering and reporting process and tools have become more sophisticated to support not only statutory reporting, but also forecasting and scenario planning.

IN 2008 the new hedging plan proposed by Big’s finance team was approved. Treasury would be involved in deciding what hedging to do and how, and then executing hedges if forward contracts/derivatives were involved. In less-developed markets that didn’t have an approved commodity exchange, hedging would often be done by physical means – ie, by buying and stockpiling commodities such as sugar and resin (for use in making PET bottles).

THE NEW APPROACH was based on buying commodities competitively and achieving year-on-year consistency in their overall unit cost. Hedging decisions were based on a number of variables, including forecast commodity requirements over several periods, as well as current commodity prices relative to historical prices and the outlook for prices in the short and longer term. The outlook was developed by using data received from a range of sources, including commodity traders, trade bodies and investment banks. In this way, the view on commodity prices was based on specific data and broader global themes.

IN 2010 COCA-COLA ACQUIRED a bottling business in North America, which served to increase its exposure to commodity risk. Further hedging and related governance were applied to cover both the new enterprise and Big. This brought the relevant leaders from both businesses together. In addition, relevant commodity-hedging-related information was shared routinely with Coca-Cola’s leadership team and board.

IN FORMING AND EXECUTING a global commodity-hedging strategy, Big’s finance team analysed the problem; recommended the solution; developed the supporting governance, operating and reporting processes; and applied the solution in conjunction with stakeholders at group and local level. It then worked closely with a large number of business partners to achieve the plan’s aims: the local operations were able to execute their agreed commodity hedges, the board’s hedging edicts were followed and diverse reporting requirements were satisfied in good time. In short, finance played a key role in improving business performance by partnering multiple stakeholders to manage a big business risk and ensure that resources were suitably allocated across Big’s portfolio to meet its immediate and longer-term goals.


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ALTHOUGH AN AD-HOC commodity- and currency-hedging operation was in place (run by the corporate treasury team), there was neither a view of the commodity risk throughout Bottling Investments Group (Big) nor a co-ordinated plan for tackling it. The project aimed to address these shortcomings at a time of heightened commodity-price volatility. Price rises were being driven by various factors, including increased demand for commodities; production constraints compounded by adverse weather; political interference in producing countries; and the growing influence of speculators in commodity markets.

The finance team of Coca-Cola’s Bottling Investments Group, under Doug Bonthrone, ACMA, CGMA (recently retired as Coca-Cola’s director of global services strategy), spearheaded a hedging project to manage $5bn-worth of commodity risk exposure

The insider view: SingaporeFM examines how business is carried out in countries around the world, with local experts acting as business guides

Singapore can claim to be one of the most dynamic business centres on the planet, offering a key regional trading venue, the world’s busiest container transhipment port and a popular investment destination. It is known for being a leading financial hub, with more than 500 big financial institutions operating on the island, and it hosts the fourth-largest forex trading market after London, New York and Tokyo.

Last year the city state topped Grant Thornton’s second global dynamism index, an annual survey covering aspects such as economic growth, human capital and the financing environment. Singapore’s leading position reflects its favourable conditions for business: it ranks highest in terms of the quality of the financial regulatory system, the level of private-sector credit and the lightness of the tax burden (corporation tax is 17 per cent).

Grant Thornton’s research report states: “Singapore is perfectly placed to act as a gateway between West and East. Business and economic growth prospects are supported by an open, transparent financing environment and a well-educated workforce.”

Singapore benefits from a number of other factors, including its multicultural environment, pleasant climate and relatively low political volatility, observes Yi Cai, ACMA, CGMA, finance business partner at Rolls-Royce Singapore. “It has a well-developed infrastructure and a good pool of skilled labour,” she says. “Also, having English as the official language here makes it convenient for many multinationals to set up their regional HQs here as their base for doing business in Asia Pacific. The government’s policies and regulations are similar to those in the West and they’re quite transparent.”

The government has done an excellent job in promoting and “reinventing” Singapore with a policy that encourages regular foreign investment, according to Naresh Kalani, ACMA, CGMA, a service director at Schindler Lifts in Singapore. “A good example of this is the development of the Marina Bay Financial Centre, which has attracted leading multinationals, banks and legal firms,” he says.

“As well as continuing to be the hub for business across the broader region, Singapore has invested heavily in its financial services, manufacturing and hospitality industries,” reports Hugo Walkinshaw, FCMA, CGMA, executive director at Deloitte Singapore. “When you add to that the advantage it holds with its infrastructure, legal system, talent pool and favourable tax regime, it’s no surprise that Singapore remains a focal point.”

MANAGEMENT CULTURE

DOING BUSINESS

18 INFORM Financial Management | July/August 2013 Financial Management | July/August 2013 19

SINGAPORE’S COMPETITIVENESS is reinforced by a strong focus on learning, which has translated into a steady improvement in the standard of higher education and training in recent years. The combination of a skilled workforce and large numbers of expatriate workers at multinational companies based in Singapore has made for an increasingly diverse business culture.

“While management styles vary from business to business, the general focus is on developing a good team with an execution culture,” Kalani says. “The government is encouraging companies to improve productivity and reduce their reliance on foreign labour. Singapore also has a strong legal framework that supports fair and ethical business.”

Cai reports that the culture of the Singaporean operations of a multinational company will normally match that of the parent company’s home country. “For example, the business culture of a US multinational here would be typically American – efficient and fast-moving – whereas that of a European firm would offer a little more work-life balance,” she says.

This makes for a mix of styles based on whether you are working for a multinational corporation, a large local company, a smaller firm or a public body, according to Walkinshaw, who stresses that establishing personal contacts in Singapore “is very much part of the culture. In an increasingly competitive environment, building and maintaining relationships is essential here.”

CIMA SINGAPORE has identified five key factors that foreign firms and workers should bear in mind when operating in Singapore:RELATIONSHIPS. It’s important to develop a good rapport with others before doing business with them. This is often an unhurried process, as Singaporeans are cautious by nature and like to ensure that they are trading with a trustworthy partner. Investing time in creating strong ties from the start should benefit you in the long term. HARMONY. This is about promoting the good of the group over that of the individual – the family is held in high regard here. Although the concept of harmony is quite a collectivist notion that’s prevalent in this part of the world, Singapore can also be quite individualistic in some ways.EAST MEETS WEST. A relatively young country, Singapore draws influences from both hemispheres and is well placed to do business equally successfully with either. The most developed country in

South East Asia, it strikes a balance between traditional and modern; Eastern philosophy and Western technology. FACE. When communicating with Singaporeans, it is wise to heed the importance of preserving “face”. This is closely linked with pride and forms the basis of an individual’s social status. In order to avoid losing face, Singaporeans control their emotions and do not criticise others directly in public. It is wise to remember that being overtly confrontational here can be disastrous for a relationship.MULTICULTURALISM. Singapore’s diverse population is one of its strengths. Singaporeans are predominantly of Chinese, Malay and Indian ethnicity and, owing to the nation’s open immigration policy, a third of people here have come from abroad. But, to be successful when doing business in Singapore, it is important to appreciate the many different traditions that inform business culture and etiquette here.

Shavonne Sim, CIMA SingaporeEmail: [email protected]

Contact

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COMMERCIAL ENVIRONMENT

[Singapore by numbers]

GDP (purchasing power parity) in 2012

$325bnSingapore is the world’s

40thlargest economy

Real GDP growth rate in 2012

1.3%CPI inflation in 2012

4.4%

Unemployment in 2012

2%Population

5.5 millionSource: CIA World Factbook

The dataThe increasing value of intangible assets

Over the past 25 years the market values of the S&P 500 companies have deviated greatly from their

book values. This value gap indicates that the physical and financial accountable assets reflected on an average company’s balance sheet today comprises no more than 20 per cent of its true value. Research from intellectual property bank Ocean Tomo shows that a significant portion of this intangible value is represented by patented technology.


Illustration byLeandro Castelao

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E9, “Accounting for research and development costs”.

33% When 560 executives were interviewed

for a 2010 Hay Group report entitled “The silver bullet of success: winners

and losers in the M&A game”, the research found that they attributed no more than a third of an organisation’s

value to its intangible assets.

Tangible assetsas a proportion of the market value of the S&P 500

Intangible assetsas a proportion of the market value of the S&P 500

NB: In 2009 tangible assets as a proportion of total market value in the S&P 500 hit a peak of 81 per cent.

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A MEATY ROLE


By Lawrie Holmes Photographs by Matthew Stylianou

When Paul Pomroy took the reins of the UK and northern European finance function for McDonald’s last November, little did he know that the horsemeat scandal would be sweeping the conti-nent within weeks. Given that he’d just assumed responsibility for the group’s supply chain, he was on high alert as soon as it emerged that British super-market chains had been selling contam-inated products. The fast-food retailer, which has been operating in the UK

Paul Pomroy counts logistics among the responsibilities he inherited on

becoming senior vice-president, finance, for McDonald’s UK and northern Europe.

Given all the problems surrounding the supply of beef in Britain this year,

he has plenty on his plate


24 Financial Management | July/August 2013

for 40 years, was given a clean bill of health – testimony to the rigour the company applies to managing its supply chain and no mean feat for a business that serves four million meals a day in the UK alone.

Its advanced approach to logistics is part of a continual cycle of innovation and devel-opment that the group has established to keep pace with consumers’ increasing aware-ness and maturing tastes. Pomroy, who’s worked at the company for 17 years, has been involved in many of those adaptations.

Joining from accountancy firm Smith & Williamson, where he was an insolvency specialist, Pomroy started in McDonald’s UK’s corporate finance department in 1996 as a real-estate analyst. The group was growing fast at the time, opening about 100 outlets every year. But it was a move to the business strat-egy team as a senior accountant in 2002 that catapulted him to the front line of innovation.

“The department was set up as the company looked to become more analytical in our food strategy. This gave me a really broad insight into how the company operated,” he says. “It was a new, proactive approach for the business, investing

$27.57bnIn 2012 the company’s revenues were up 2 per cent on the previous year, enabling it to post a profit of $5.50bn

[McDonald’s by numbers]The business serves

69 million people a day on average in

118countries

Since

1955 the group has opened

34,000outlets

in an in-house department that was geared to analyse perfor-mance and to help shape and monitor the success of the business’s long-term strategy.”

The introduction of salads in 2004 and the Deli Choices range of sandwiches and wraps in 2005, acting on consumers’ enthusiasm for a healthier diet, were pioneering successes for the division. Then came freshly ground coffee – an acknow-ledgment of increasing compe-

tition from operators such as Starbucks and Caffe Nero. For Pomroy such new offerings represented the considerable amount of work that the business strategy team had done in interpreting changes in the market.

“We understand that we need to listen to what our custom-ers want, so everything we do is about moving in a direction and at a pace that suits their lifestyles,” he says. “But we also understand that at each time of day, stage of the week or point in the year there will be different needs and preferences, so we continually run our portfolio based on consumer insight.”

In a global business that means acknowledging the diver-sity of tastes around the world. The group’s four-day annual convention in Orlando, Florida, brings together teams from all of its territories to compare notes. Although its Big Mac, McChicken Sandwich and fries are still core products in most markets, there is flexibility in the system to suit different regions, whether that’s the McAloo Tikki in India or Le Croque McDo in France and Belgium.

Arch reformerIn 2005 the UK business decided to improve the image of its outlets by giving them a more upmarket look. “Cash flow was at its lowest level and we hadn’t reinvested in the estate because our focus had been on growth, so we had taken our foot off the pedal when it came to the look and feel of our restaurants,” Pomroy admits. “That had left us out of touch with our customers.”

The revamp went ahead the following year, featuring “rad-ical changes to the colour scheme, furniture, lighting and layout of our restaurants. In 2007 we also introduced free Wi-Fi, which was another reaction to changing demand,” he says.

Part of the complexity of introducing so many changes has been that, of the 1,200 McDonald’s outlets in the UK, more than 800 are owned and run by franchisees. These 160 entre-preneurs each run an average of five restaurants, although some have significantly more.

“Through our franchised structure we have multiple enter-prises running at the heart of the public-facing McDonald’s business. Supporting these operations with bespoke advice is as much of my job as the top-level financial management

‘We need to listen to what our customers want, so

everything we do is about moving in a direction and at a pace that suits their lifestyles’

1.8 million people are

employed in its restaurants,

80 per cent of which are run by franchisees


including the installation of an Oracle database, the introduc-tion of automated P&L for every market and the extensive use of intuitive software.

“We have a big-data ware-house and have numerous inputs – including the results of about 3,000 interviews con-ducted with customers each month,” he says.

The use of such tools has been vital in making the most of the large volume of informa-

tion that’s become available to the company, according to Pomroy. “There’s no doubt that the smart use of research and customer insight forms a huge part of our strategy. Our cen-tral business strategy and insight unit plays an integral role in generating and evaluating both qualitative and quantita-tive insight that’s used to help inform, update, evolve and future-proof the business.”

He adds: “We don’t work simplistically with one piece of software that wraps together every piece of insight we’re gathering and produces one output a day. We take a much more bespoke and segmented approach. Instead of pumping the entirety of our data into one black-box generator and working from one supposedly comprehensive output metric,

of McDonald’s UK,” Pomroy says. “Our franchisees are vital stakeholders. They all cham-pion our values and we involve them heavily in the planning process. So we now have a situ-ation where 50 or so franchisee representatives are involved in discussions concerning areas such as prices and products.”

Because many of the fran-chisees have backgrounds in other industries, McDonald’s, which still owns all the real estate, is keen to give them as much guidance as possible.

“All franchisees go through a rigorous recruitment process and extremely comprehensive training, where they are advised on how to manage their operations. Access to financial guid-ance is continuous. The main lenders – Barclays, RBS and HSBC – are invited to exhibit at our annual general meetings so that franchisees can consult them on any issues,” says Pomroy, who adds that an important part of his job is to pre-sent “worthwhile investment cases and strategic business moves to the franchisee network”.

In 2008, Pomroy was made vice-president, finance, with his remit extending to pricing, profitability and financial pro-jections. At this time his team adopted several innovations,

we continually review, and draw insight from, all of the dif-ferent strands of research we conduct. The business strategy and insight unit, the department heads, the project leader-ship groups and the executive team pull together this wealth of insight in a way that lends best to their particular areas of development.”

With so much information to hand, Pomroy and his team were able to create KPIs for each department in areas such as strategic direction, sales, service quality and environmental performance. “We drove efficiencies across the business, even in the recycling and conversion of used cooking oil to bio-diesel to fuel our delivery fleet,” he says.

Pomroy’s current job has added responsibility for the com-pany’s development division, which encompasses property, construction and support services, and for the northern divi-sion management team. But supply management remains his main priority, given the problems that food manufacturers, supermarket chains and other restaurant groups have faced in recent months.

For McDonald’s the avoidance of such problems has largely been down to its efforts to build good relationships with sup-pliers, according to Pomroy. “We have an investment plan for working with the 17,500 British and Irish farmers who form the 80 per cent of our supply chain that sits in the UK and Ireland. Our Farm Forward programme, which we launched in 2012, is another demonstration of our long-term commit-ment to British and Irish farming, where we look to champion high-quality ingredients, share best practice, drive improve-ments in animal welfare standards and inspire people to enter the exciting agricultural industry.”

Returns of the MacMcDonald’s UK is proud of its long-term partnerships with its suppliers, he adds. “This certainty is what allows them to invest and grow their businesses as we grow ours. Our strong and sustained sales growth in the UK means we spend more than £360m a year on our supply chain here – £40m more than we spent in 2011.”

In the context of the horsemeat scandal, the company’s reputation for managing its supply chain can only have been enhanced, Pomroy argues. “We believe that food quality begins at the very first stage of the supply chain. All of our raw ingredients meet the highest possible standards of quality and safety. We use 100 per cent British and Irish beef in our burgers – no fillers, trimmings or additives – and traceability is important to us, just as we know it’s important to our customers. We are able to track which farm and which herd a certain batch is from. It’s the simplicity of our products and supply chain, paired with the long-term nature of our part-nerships, that play a massive part in this.”

Given the fact that members of the public are increasingly prepared to use social media to broadcast their views on issues such as the horsemeat scandal, the company has invested heavily in developing online platforms, such as the “What

makes McDonald’s” microsite, that allow consumers to com-municate directly with the company.

“There are lots of challenges that only get bigger if we don’t keep pace with the customer who is savvy with social media,” Pomroy says. “We want to be able to hear consumers’ ques-tions and comments, tell them our story and give them all the information we have readily available.”

The horsemeat scandal has not been the only corporate issue to have prompted large numbers of consumers to vent their anger online recently. Google, Starbucks and Amazon, for instance, have attracted disdain from those who feel that they haven’t paid enough UK corporation tax, despite gener-ating huge profits in Britain. Pomroy stresses that McDonald’s is acutely aware of the debate – and pays its fair share. “We paid over £42m in corporation tax in 2011 and a significant amount of additional tax is paid by our franchisees,” he says.

Looking ahead, he believes that the UK’s continuing aus-terity measures are bound to affect consumer spending. He acknowledges that consumers are bound to be worried about whether their earnings will keep pace with the increase in living costs – and that McDonald’s needs to keep thinking about such issues when forming its strategy.

“Our challenge is to ensure that we don’t run too fast,” Pomroy says. “We need to be aware of what the customers are willing to spend and to deliver the same high quality they have come to expect. They want to feel assured about what they’re getting.”

‘Our franchisees are vital stakeholders. They all

champion our values and we involve them heavily in

the planning process’

‘All of our raw ingredients meet the highest possible standards of quality and safety’

Phot

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Mac daddy: the world’s largest McDonald’s outlet opened in London 2012’s Olympic Park

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The integrated reporting movement is gaining momentum as the desire to know exactly how firms

operate and where they make their money increases. Paul Druckman, CEO of the International Integrated

Reporting Council, offers his progress report

Jean-Marc Huët, CFO of Unilever, recently asked: “What would be the impact on our business strategy and our investment decisions if we factor in the full cost of the resources we’re using?” His words reflect a broader view in business that, in order to have effective strategies, firms need a more comprehensive understanding of how they make their profits, according to Paul Druckman, CEO of the International Integrated Reporting Council (IIRC).

“To do so, they need to broaden the scope of their reporting structure to include more than financial information,” he says.

To this end, the IIRC has launched a pilot programme invol-ving more than 90 organisations, including Coca-Cola, Tata Steel, Hyundai and CIMA, and over 30 institutional investors.

Druckman argues that efficient markets depend on a regular flow of accurate information. There is a growing recognition that firms aren’t well equipped to explain the factors affecting their creation and preservation of value in the short and longer term.

“Reporting has in some cases been reduced to a compliance exercise leading to ever more complex, lengthy documents that fail to show how the company’s strategy and business plan create value,” he says. “We need a framework that enables a business to express its value-creation process clearly and concisely. Integrated reporting (IR) is just such a framework. It is designed primarily for investors and is being driven by their demand for more value-relevant information. It also fulfils a wider need in business to think across silos.”

Political dimensionIR is part of the broad trend towards openness in business after the financial crisis. “This movement is coming from political leaders and is mirrored by those at the forefront of business,” Druckman says. “The G8 is focused on transparency. IR supports this, as it puts awareness of an organisation’s stra tegy, business model and capitals at the heart of reporting.”

Political leadership undoubtedly has an impact on what businesses want from corporate reporting, he argues. “President Obama’s call for extractive industries to be clearer about where they create profits is important and it’s caused a rethink for many in the sector. The extractive industries are one of the IIRC pilot programme’s most active sectors, as many of these companies are conscious that, in order to improve stakeholder relations,

they need to communicate better, especially in light of recent high-profile incidents,” Druckman says. “Oil and gas is a sector that has in the past been labelled as dirty – it has negative impacts on the resources and capitals it uses. When these organisations tell their stakeholders how they use the capitals available to them to create value now and in the future, we will all benefit.”

Future investmentInstitutional investors are becoming strong advocates of IR. For instance, Aled Smith, fund manager at M&G, recently said: “My strategy is based on the observation that a lot of companies are making good long-term investments that may hurt their short-term cash flow. Investors often overlook these companies because they shun volatility.”

Druckman thinks that many investors are realising that short-termism actually creates volatility and contributes to financial instability, which in turn erodes long-term value. “To move away from this, investors are seeking to increase their knowledge of the businesses they invest in,” he says. “To make decisions for the short, medium and long term, a finance provider needs an under-standing of, and confidence in, their business models as well as a better view of how value is created over time.”

This is evident from the 50 or so institutional investors that have got involved directly with the IIRC, working on an inter-national IR framework that should enable businesses to give them better information. Steve Waygood, head of sustainability, research and engagement at Aviva Investors, recently said: “A significant number of investors are looking at non-financial issues that are longer term in nature and will materialise in the cash flows of the company, so are relevant to the valuation.”

Technological advancesTechnology will play a key role in the adoption of IR, according to Druckman, referring to the report issued last year by software giant SAP. “It has used its own software to weave together finan-cial and non-financial information, making clear connections between various sections of the report and showing the inter-dependencies. With a ‘key facts’ page giving lucid and concise explanations of how these factors affect each other, it has used innovative ways to present information that wasn’t previously reported in order to tell its unique story of value creation.”

He continues: “Tangible and intangible information, or the capitals as we refer to them, are at the core of this. Advance-ments in technology that secure material information helps IR and helps to promote its worth to businesses. It is important to highlight, however, that IR is not about more reporting; it is about better reporting. Although improvements in technology have meant that companies can collect more information, IR is concerned with how they use this information and present it in a comprehensible way to stakeholders.”

THE WHOLE STORY (SO FAR)

By Lawrie Holmes Illustration by Tomi Um

Financial Management | July/August 2013 31

Companies that are inter-ested in being more innovative with their reporting, using it as a force for improvement both internally and externally, should consider the resources and evi-dence arising from the IIRC’s pilot programme, according to Druckman. “These elements include the Pilot Programme Yearbook 2012 and ‘Building the business case for integrated reporting’,” he says. “They outline the benefits that businesses have had so far on their journey towards IR.”

Quick on the uptakeDruckman says that the IR concept was adopted in a wide range of sectors during the period of consultation on the IIRC’s draft reporting framework, which ran for three months from mid-April. The industries that took the most interest tend to be less well understood by investors and wider stakeholders, he reports. These include financial services, utilities and the extractive industries, which particularly need to be able to tell their story of value creation over time in a clearer, more concise way.

IR’s unique selling point is that it is market-led – that is, it’s created by the business and investor communities for the busi-ness and investor communities, stresses Druckman, who lists some of its main identified benefits:l Establishing the basis for a more meaningful engage-ment with investors. IR helps a firm to fulfil its stewardship role by placing the strategy and business model at the centre of communications, better articulating the investment case.

l Breaking down silos. As Bob Laux, senior director of financial accounting and reporting at Microsoft, says: “IR provides a holistic method for explaining how the organisation is doing and how the management thinks it will do in future. It takes into account the connec-tivity and interdependencies between the range of factors that have a material effect on an

organisation’s ability to create value over time.”l Disclosing more than financial information alone. There is a growing understanding among all stakeholders that, in order to convey a full story of value creation, all resources and relation-ships need to be considered and communicated. l Conveying information clearly and concisely. As Russell Picot, group CFO at HSBC, notes: “Investors are frustrated by the challenge of unravelling hundreds of pages of material. At the moment reporting has a very heavy compliance burden. Sometimes that gets in the way of good communication.” l Focusing on the future. Currently, most of the information available to investors is historic. They are required to navigate a course around the next corner with only a rear-view mirror, as if there were no road ahead. IR serves as the road map that sup-ports investment decision-making.

Citing a study by the Black Sun consultancy of the behavioural effects of IR among the companies involved in the pilot pro-gramme, Druckman says 98 per cent of them believe that the shift towards IR should lead to a better understanding of how their businesses will create value over time.

‘Obama’s call for extractive industries to be clearer

about where they create profits has caused a rethink’

“The countries that are leading on the journey towards IR are doing so for a variety of reasons, but generally it’s because the culture and future of business in these countries – for example, the G8 nations that are calling for a focus on transparency – match the principles of IR.

“Moving to IR promises to offer any country that adopts it a competitive advantage. As Magnus Böcker, chief executive of the Singapore Stock Exchange, says: ‘We support having a continued discussion on IR, as we want to participate to help share the future.’

“I recently visited Australia, a key territory for creating awareness and promoting IR, because the country will in 2014 take on the presidency of the G20, where there is a keen interest in IR as one of the supporting themes for work on transparency. Japan’s Ministry of Economy,

Trade and Industry has established a corporate reporting laboratory to examine how reporting can support long-term investment. And the Asia Pacific Economic Co-operation Business Advisory Council is seeking to establish whether IR could significantly accelerate long-term investment in strategically important sectors, including infrastructure and energy financing.

“Policy-makers in the EU have also taken steps towards IR, with Michel Barnier, European commissioner for the internal market and services, stating: ‘We are following with great interest the evolution of the IR concept.’

“South Africa is the best example of early adoption. The Johannesburg Stock Exchange has committed to having IR as a listing requirement as soon as we at the IIRC publish our international reporting framework. South

African businesses are already required to produce integrated reports under the country’s King III corporate governance code.

“With our pilot programme operating in 25 countries, the move to take up IR is widespread, yet there are certain regions where there are problems. In America, for example, there are perceived inconsistencies between IR and restrictions on reporting on future activity. There are also certain regions that we have yet to reach, such as the Middle East, where corporate reporting in the main isn’t at a stage where it can develop into IR. But organisations such as the Pearl Initiative, a private-sector-led not-for-profit organisation established to improve transparency, accountability and business practice in the Arab world, are laying the groundwork for the introduction of IR.”

DRUCKMAN ON THE GLOBAL ADOPTION OF IR

What’s your role at Credit Suisse?I’m responsible for managing a multi-billion-dollar global cost base. This includes the costs relating to the IT programmes that deliver the innovative solutions for the future; the IT applications that are relied upon every day; and the infrastructure that we all assume will be there, such as computers, phones and the buildings we work in.

I am concerned with both efficiency and effectiveness, ensuring that we get the best value from our investments. This requires a focus on financial accounting and management reporting, plus the ability to understand M&As and drive programme management.

It’s a complex environment that’s similar to those of other financial services companies, big firms such as BP and large government departments. The challenge is to optimise spending while ensuring that operational risks are minimised, enabling our people to innovate while meeting ever-extending regulatory requirements such as Basel III.

To match up to this challenge, I have a global team based in Zurich, London, New York, Singapore, Pune (India) and Wroclaw (Poland). It’s a combination of strong business partners working across IT and real estate who understand all the business issues. They analyse the data, providing insight and decision support to the business with rigorous accounting, control frameworks and straight-through processes.

The requirement for sufficient controls and processes to ensure that we meet all our global regulatory requirements is significant. For IT alone we process more than CHF300m (£207m) of accruals monthly and manage nearly CHF2bn-worth of assets on the balance sheet.

What are the secrets of managing finance successfully for a global banking giant?There are two key ingredients: being a subject expert and having a great team. Genuinely, to get to the heart of helping any business to be more efficient and effective it’s essential that the finance team has a thorough understanding of the business. My degree in IT and my years with Deloitte focusing on cutting IT costs have been key.

Persuading CIOs and COOs to trust my opinion from day one, enabling me to challenge the status quo, was another challenge. Weaving this trust with that of my team is essential. I recognise that building the best team comes from finding opportunities for individuals to demonstrate their full potential. Because of the hierarchies in which

we work, particularly in banking, some of the best talents are hidden. Each quarter I ask the whole team to gain an understanding of what they are working on and dive deep into various topics. This way I can really find out what people are capable of. It does take time, but it pays dividends over and over. Combining this with Credit Suisse’s formal internal-mobility and grow-your-own programmes means that we have a greater flow of talent across all levels.

In addition, you cannot forget to have fun. For me that happens in the office and outside. I’m fortunate to have a very supportive husband and kids who understand that mummy works, but that when she is at home she is 100 per cent there. We’re rigorous in ensuring that the weekend is for family time, whether we spend it swimming in the lake, skiing in the mountains or travelling across Europe.

How important is CIMA training to your team?As we increasingly use locations such as Pune and Wroclaw, the need for a common language becomes more important. We’ve launched a pilot programme to provide CIMA training to those who haven’t had access to it. This gives everyone the chance to learn together and gain access to a professional qualification that they can use in my team, other parts of Credit Suisse or elsewhere later down the line. With internal mobility being a focus at the bank, the CIMA qualification is like a passport that signals the depth of the holder’s skills.

For my department it means that, whether a member is in the business partnering team or in accounting and controls, each person knows all the basics. More crucially for me, it means that they know when to ask other subject experts for help. I don’t expect everyone in my team to be a specialist in software capitalisation, for example, but I do expect them to understand the concept and know where to go for detailed answers.

How much of an impact can management accountants make in financial services?When the business needs to save money or be innovative, it’s a fantastic time for management accountants – no longer is it only about preparing accounts or monthly reports. In today’s dynamic environment the business is relying on our insight and it challenges us to take decisions that make the difference. This is when good accountants become valued business partners.

The change agenda across financial services is evolving continually, giving everyone the chance

Sophia Steiger has progressed from working at London’s largest sewage plant to managing assets worth billions for a global bank. She traces her journey from serious muck to serious money


Sophia Steiger, FCMA, CGMA, head of IT and real-estate finance, Credit Suisse

CREDITRATATA ED



to develop. For most of my team that’s about showing their potential and that they can actually grow faster than they would have done before the financial crisis. With increased accountability and delegation, individuals have got more involved and closer to the business than ever. It’s exciting to see how much we are getting done and the tremendous impact we are making on the bottom line.

Were you born to be a management accountant?After gaining a first-class degree from my business studies and IT course at the University of Kent, I knew I could do anything. Although I was offered the chance to pursue a PhD in neurological programming, the lure of gaining a CIMA qualification led me to take a “proper job” in accounting for a public utility, Thames Water, at the largest sewage works in London. Through my experience with the student Industrial Society

and having worked for two summers as a junior accountant at the Ministry of Defence, I knew what I was getting myself into.

In almost two years of finance rotations across the business and studying every Saturday for CIMA lectures, I had acquired a lot of knowledge in group planning, internal auditing and management accounting. My time at the sewage works was never going to be the sexiest part of my CV, but it was great experience. I was the only accountant on site, responsible for everything from invoice processing to capex programmes of more than £200m. Thames Water certainly taught me that if you don’t ask, you won’t get.

I have sought the full range of skills necessary to be an exceptional CFO. One needs to have financial accounting and management reporting expertise complemented by experience of change and programme management and M&As.

You ran finance at a joint venture for a leading retailer. What were the big challenges there?I joined supermarket group Safeway in 1997 to be head of fixed-asset accounting, responsible for all investment accounting, processes and systems. This was an opportunity to combine my IT programming knowledge with my accounting training. Being responsible for all the investment business cases gave me a great insight into the business strategy, the investments and the direction of the company, whether it was building new stores or deciding to close down its loyalty-card programme.

The most challenging and exciting aspect was the formation of the joint venture between Safeway Stores (Ireland) and Wellworths. This encompassed the acquisition, integration, rebranding and operations of 13 stores in Northern Ireland. My first foray into M&As was a fascinating experience. I worked closely with the CFO and along the way I experienced everything from complex modelling to the related media relations that come with a joint venture.

When the deal was done I was offered the role of financial controller with involvement at board level. The job taught me the importance of having a tight leadership group. From day one we learnt lessons from moving into an unknown market, experiencing local politics, cultures and different employment regulations. We quickly established that for every similarity there was a difference. Together we had to act pragmatically as we stepped through the first six months, making tough decisions to drive the business towards a

sustainable profit. Balancing the need to focus on operational cost reduction and supporting a joint-venture board was developmental. Under a great mentor, I learnt to do both while managing the associated workload and dynamics.

How did you fare when you ran a dotcom at the height of the internet boom?In 1999 I was approached to join Toyzone, a start-up with an eclectic set of shareholders. With the safety net of knowing that Safeway would take me back, I joined to gain experience of balancing the rigours of finance with those of innovation and entrepreneurship. I was 27, with no kids and no commitments, so I stepped away from the traditional accounting career path I had been taking until then. As commercial director I was responsible for the finances and had oversight of the IT that supported the organisation. By the time that I arrived there and drew up the firm’s first

set of management accounts, many of the trials and tribulations experienced by other e-commerce companies were very evident in this one. The margins were thin, the volumes depended heavily on advertising and the competition was massive.

For nine months we renegotiated every single contract, realigned delivery channels, worked with our shareholders for preferential treatment and stripped the enterprise back to a solid business model, but retaining an innovative toy brand and selling via new channels, including cable TV. My joint-venture experience at Safeway proved enormously valuable as I stepped through more potential M&A deals – especially my dealings with board members with multiple agendas and the daily practicalities of keeping a business afloat.

After my experience at Safeway and Toyzone, I had a thirst to learn more about programme management and managing change. My move to Deloitte in 2001 gave me the chance to build on my


retail experience in other sectors – and the firm had attracted some very experienced professionals from whom I thought I could learn a lot.

What do you count as your biggest achievements with Deloitte? My 12 years at Deloitte, where I was a partner, provided me with a lifetime experience and a lot of achievements. I was lucky enough to work with some of the biggest clients it has, including Habitat, Vodafone, Transport for London, the Department for Work and Pensions, Santander, Barclays, Deutsche Bank and Credit Suisse. I was responsible for delivering some of the largest cost reductions and programmes achieved in Europe, designing and executing finance transformations and operating-model projects, undertaking global process excellence initiatives and implementing market-leading financial management solutions. Recognised as a thought leader in the field by my peers, clients and the competition, I was asked to become a CIMA Mastercourse tutor and share my experience with other members of the institute.

Deloitte’s recognition that diversity is a key differentiator – notably in the search for talent and in delivering the best results for clients – meant that I learnt a huge amount about being mentored, being a good mentor and promoting the career progression of women. I developed and led the firm’s parenting programme, providing access to information about balancing family and work, and tracking metrics. Internal initiatives were also key in demonstrating the organisation’s support for its people, including the publication of employees’ stories and the introduction of fridges to store breast milk and in-vitro fertility medicines.

One of my early career goals was to gain global experience. After the birth of my second child, Deloitte offered me the opportunity to move to Switzerland and build its financial consultancy business. Because the office there also had a truly international workforce, I was able to experience many different cultures. In 18 months my financial consulting business team had grown six-fold and was a real contributor to the global firm. Building something from the ground up in banking, healthcare and manufacturing was extremely rewarding.

After 12 years at Deloitte, I decided to return to industry and I believe that I’m making a real difference at Credit Suisse. I bring the rigour of being a management accountant together with my experience of challenging the status quo and delivering significant cost savings.

‘Building something from the ground up in banking, healthcare and manufacturing was extremely rewarding’

1992 Works during her vacations from university as a junior accountant in the Civil Service.

1994 Recruited by Thames Water as management accountant.

1996 Appointed financial controller at Safeway Stores.

1999 Joins dotcom retailer Toyzone.co.uk as commerce director.

2001 Moves into consultancy as a partner with Deloitte.

2012 Hired by Credit Suisse as head of IT and real-estate finance.

SOPHIA STEIGER

Photographs by Adrian Samson

39Financial Management | July/August 2013Financial Management | July/August 201338

CIMA’s new president, Malcolm Furber, FCMA, CGMA, is a strong believer in lifelong learning and

understanding the organisation around you in order to stay relevant. He describes how those

values have served him well over the years

Malcolm Furber’s first piece of advice to aspiring management accountants would be “kick it and hug it”. The institute’s new president is convinced that all members of the finance team need to spend time in the field understanding exactly how their organisation works – and this motto reflects his time as a senior manager at gases company Afrox. That job involved improving the performance of the firm’s fleet in hauling gas cylinders across South Africa, where he’s been based since 1980. “Kick the tyres and hug a cylinder” was what Furber would say to his staff, urging them to get out of the office and fill a cylinder or drive a truck.

In his presidential term he will promote some of the key principles he has championed in recent years, including continuing professional development as the key to staying relevant; the importance of the business partner role for fin-ancial managers; and the value of spending as much time as possible in the field.

Furber developed these ideas in a career that took him from Sanderson Wallpapers in the UK, where he started out as a trainee accountant; through a long spell at ICI, when he moved to Africa; and then to Afrox, a subsidiary of UK giant BOC Group, which was acquired in 2006 by its German rival, Linde. A new direction, in the form of consultancy, has since given him the opportunity to work with many public and private organisations around the world, helping them to tackle the various performance challenges facing them.

Furber’s career got off to a false start when a serious injury in a car crash put paid to his degree in computer studies. He found himself back in his home town, Gosport in Hampshire, working for Sanderson Wallpapers. Spending a lot of time on the factory floor there instilled his hands-on approach to accounting. But it was the switch to the agrochemicals arm of ICI that really put him on track. The company supported his CIMA training, which included a marketing course at the University of Bradford.

Furber’s ambition and appetite for learning stood out. “In my first two years of study I got As in every subject, so I sat seven papers in three days the following year. In those days if you failed one CIMA exam you failed the whole thing,” he recalls.

After qualifying in 1978 he became a marketing accountant covering Asia Pacific, based in the UK. “This was really about business partnering, high-level reporting and business devel-opment in the region,” says Furber, who was soon to be assigned a project in Indonesia that was teetering towards collapse. “They’d devalued their currency by 50 per cent over-night. I had to go out there to devise a funding model and compile a full economic study of the country, which had become politically unstable. After three months the market-ing director asked me to come back to present to the board.”

Into AfricaHis move to ICI’s subsidiary in South Africa in 1980 was the precursor to a series of senior jobs there in finance, IT and cor-porate planning. After talking with David Swarbrick – a former England rugby union player who’d become a director at ICI – Furber, a talented full-back himself, decided that the country was the place to further his career despite its political isola-tion owing to the international boycott of the apartheid regime. Knowing that his British passport would help in establishing commercial relationships in nearby Zimbabwe and Malawi, he realised that he could make a sizeable contribution.

Furber made it his mission to “bring in the business part-nering concept. There was a severe shortage of management

By Lawrie Holmes Photographs by Rebecca Hearfield

FURBER EDUCATION


skills in South Africa at the time – people weren’t coming in – and the business was taking months to do its accounts. The first thing was to set up the function there properly so that it could get reporting back into the UK.”

He ended up working across most of the subsidiary’s oper-ations, including petrochem-icals and pharma ceuticals. “Once I had established the management accounting func-tion, I drifted into corporate planning and IT, where they found other things I could do,” Furber says. “It’s one of the powers of the CIMA qualification – you touch on these on the academic side, but it’s so easy to pick up skills that build on the qualification. That’s a real strength of CIMA: you can build on it very easily.”

Furber moved on to Afrox in 1992. Once again, he found himself working at the heart of operations. “I was back on the factory floor at the main site, reporting to an engineer,” he recalls. “They threw me in the deep end. As I was the new kid on the block, the firm asked me: ‘Because they don’t know you here, would you chair the wage negotiations?’ So I learnt Zulu to understand what everybody was saying.”

A veldt of differenceIt was during this period that apartheid came to an end. “It was an exciting time to be in South Africa when it happened,” he says. “I was conscious that the improvement of education for the masses was paramount. It’s still needed to some extent; the standard of education is not quite as good as it should be. It’s a huge country, though. You do find schools in the rural areas, but these don’t have high-quality teachers because they’re in the cities – and clearly not everyone can live there.”

In recognition of the poor conditions under which account-ing trainees often had to study – for example, trying to work in candlelight whenever there was no electricity supply – Furber got heavily involved with improving standards and became influential in introducing the AAT programme to South Africa.

In 2004 he started in consulting, where he has played a key role in business improvement assignments in both the private and public sectors, including a two-year business intelligence project at the South African Revenue Service. This change in direction enabled him to contribute more to CIMA’s activities. He became a regular speaker on behalf of the institute on topics including supply management, activity-based costing, inte-grated business planning and performance management. He has been a member of Council for 15 years, getting involved in the institute’s past four qualification reviews and its ethi-cal code. He’s served as a membership assessor and has also

chaired the policy committee on lifelong learning.

In the year ahead Furber is keen to ensure that CIMA’s strengths are recognised more widely. “We have a lot of intel-lectual property and resources that are going to grow, espe-cially in association with the AICPA in the form of the CGMA designation. Our competitors are having to play catch-up following our joint venture,” he says. “We also have a large

programme of topics we are focusing on, including big data and finance transformation, as well as sustainability and integrated reporting.”

While building his career, Furber has also pursued an inter-est in flying that has progressed into aerobatics. Once he’s back to earth, golf, archery, hiking, water sports and military modelling are among his pastimes when he’s not travelling around the world for CIMA or clients. One of these is a South African bank that wants him to train its graduate intake, which fits in well with his ethos.

“I’ve always been keen on bringing youngsters through and getting the green from behind their ears,” he says. “I want to get them going out – kicking and hugging.” Visit www.fm-magazine.com/feature/qa/thoughts-cima’s-new-president for an extended version of this interview.

‘As I was the new kid on the block, the firm asked me:

“Because they don’t know you here, would you chair

the wage negotiations?”’

It’s hardly surprising that some jobseekers, when faced with a coveted job offer, fear negotiating for a higher salary. Most think that doing so could damage their relationship with a new employer

or recruiter. But, if you’re in this category, you may be doing yourself a great disservice by not speaking up. It doesn’t hurt to ask, especially if you cover the following bases.

Conduct researchBe sure to enter negotiations with the most up-to-date information about the typical rate of pay for your industry and job title by reviewing compensation surveys and resources such as Robert Half’s salary calculator for the accounting and finance fields. Consider asking past colleagues or contacts in your professional network for their insight as well. And don’t forget to consider your geographic region – it plays a significant role in determining pay levels.

Show them your valueBe prepared to demonstrate your own return on investment to the potential employer. Provide quantitative examples of your contributions to previous employers. For instance, maybe your quick identification of a payroll problem saved your company thousands of pounds. Results such as this help to put you in a stronger negotiating position.

Look beyond salaryYou’ve heard it before: money isn’t everything. If an employer is unable to

meet your request for additional compensation, consider asking for other benefits. What would make the difference for you? The opportunity to work flexibly? The employer’s support for a professional qualification or additional training? More annual leave? More and more firms are willing to provide such things to secure the best talent, especially when they can’t offer the desired level of pay.

Say ‘no’ when you need toIf an offer is lower than you think it should be, point it out politely and then counter with your desired salary. If the employer can’t or won’t move, it’s up to you to decide whether or not you can accept the terms. This will depend on your need for immediate employment, as well as how excited you are about the particular opportunity. (Note: if you’re desperate to leave your current job, don’t tip your hand, as it will weaken your position in negotiations.)

Get it in writingOnce you agree to the terms, ask that a letter be drawn up, outlining the specifics of the offer: salary, benefits, the position’s title and key

responsibilities, plus any special arrangements that resulted specifically from the negotiations. Having everything in writing should prevent any misunderstandings later.

And remember: few salary negotiations are swayed positively by overly aggressive tactics. Regardless of how the negotiations play out, remain professional and courteous at all times. While you may not get what you ask for, you can still walk away with a potential employer’s respect – and, in the long run, that may prove far more valuable to you and your career than a larger pay slip right now.

To benchmark your salary or new offer visit Robert Half’s new salary calculator tool at roberthalf.co.uk/finance-accounting-salary-calculator

Robert Half is the world’s first and largest specialised staffing firm, with a global network of more than 350 offices worldwide. For more information about our professional services or career advice, please visit roberthalf.co.uk

Find your next role at roberthalf.co.uk

www.cimaglobal.com/myjobsJob search clinic sponsored by Robert Half

Closing the dealIt’s OK to negotiate salary with a potential employer

Get

ty Im

ages

Financial Management | July/August 2013 41CIMA MY JOBS


8 WAYS TO… IMPROVE WORKING CAPITAL

There’s never been a better time for finance professionals to focus on better ways of managing their working capital, given the wide range of options available. So just how can an organisation make its working capital work that bit harder?

By Peter Bartram

It’s not the responsibility of the finance department alone. Companies should implement a cash-focused management system, argues Daniel Windaus, a senior director at REL Consultancy, which advises on working-capital issues.

The way to make sure that cash-focused management happens is to use key performance indicators (KPIs) on working capital all the way down the business to operational level. Ensure that the KPIs are aligned with individual managers’ responsibilities.

Cash management should be an active process, linked to improvements in working processes, Windaus says, but making better working capital a company-wide mission takes time.

The banks’ unwillingness to lend, especially to SMEs, has put a strain on the working capital of many businesses. John Alexander, an insolvency practitioner and partner at accounting firm Carter Backer Winter, says it’s best to meet the bank sooner rather than later to increase a credit line.

FDs who’ve had the brush-off from one of the ‘big four’ banks could

1Manage working capital actively throughout the organisation

2 Consider alternative funding

3 Pay your suppliers on time

5 Make expenses more visible

7 Manage the payment process more effectively

8 Investigate the benefits of e-procurement

6 Manage your stock actively

4 Negotiate discounts with your suppliers

“Provide awareness training at management level and activity training on new processes at operational level,” he advises. “Changing habits does not happen overnight, so firms will need to provide ongoing support in order to run these processes successfully.”

consider moving to one of the up-and-coming business lenders, such as Santander or Aldermore Bank, which opened in 2009 and has lent more than £1bn to 12,000 small businesses.

But bank loans and overdrafts aren’t the only source of working capital. Firms are turning to asset-based finance such as invoice discounting, while others are harnessing the power of the web to raise finance. Rupert Honeywood, for instance, raised £71,500 from crowd-funding sites to start his business, the Personal Development Bureau.

Firms can benefit from discounts through early payment, bulk supply or regular orders. FDs need to consider what kind of leverage they can bring to each supplier. One way of driving down prices as far as possible is to ensure that the firm has only one point of contact with each supplier.

Sometimes it’s something as simple as making sure the supplier is referred to

Holding unnecessary levels of the wrong stock can be one of the biggest drags on working capital. Stock problems often result from a lack of communication among different departments. Regular (monthly or quarterly) stock checks are part of the answer. But the information emerging from these checks needs to be reviewed and acted upon.

“The reason that most companies shy away from inventory management is because they fear their safety stocks will become dangerously low and they won’t be able to provide the right service level,” explains Hugh Williams, managing director of Hughenden Consulting, a supply-chain specialist.

His solution: analyse revenue and sales of individual products and decide which should be “made to stock” and which “made to order”.

Daniel Ball, a director at Wax Digital, an e-procurement specialist, says firms that have turned to electronic sourcing tools to aid their buying processes have cut costs by an average of 18 per cent. This serves to ease their working capital.

“For example, e-auctions help to create a competitive tension that is often missing in traditional negotiations,” he says, arguing that auctions also make it easier for buyers to negotiate with suppliers across a wider range of issues, such as payment terms. “You could factor one supplier’s willingness to accept 60-day payment terms against another similarly priced supplier’s refusal to trade on anything other than 30-day terms.”

Ball adds: “The rigorous authorisation process mandated by e-procurement also stops maverick spending – the hidden eater of working capital.”

Now there’s a counterintuitive way of improving your working capital. But Clive Adolph, a partner with PBA Accountants, argues that companies that pay on time develop better relationships with suppliers and are in a position to negotiate better deals.

“If you don’t have a good relationship with your suppliers, you could end up not receiving goods when you need them. And, if you can’t fulfil your commitments, that’s not good for your cash flow either,” he warns.

Karen Penney, vice-president and general manager UK for American Express Global Corporate Payments Europe, points out that a new EU directive requires 60-day payment terms for commercial business transactions. She says that firms can protect their cash flow, while ensuring that their suppliers are paid promptly, by using third-party payment providers. A company can pay its supplier, but need not settle up with its provider for up to 58 days.

by the same name. Jon Asprey, vice-president of strategic consulting at Trillium Software, a data governance specialist, recalls one case in which a company had 70 variants of IBM as a supplier. “This meant that it was very difficult for the firm to build up an aggregate picture of its total purchasing. That in turn made it harder to identify opportunities for bulk purchasing and discounts,” he says.

Even expenses claims with small excess amounts can have a cumulatively negative impact on working capital. The key is to set clear rules in areas such as travel and accommodation – and then to ensure that these are followed.

It is important to have the tools to monitor expense claims without huge manual effort. Penney believes that expense management tools such as corporate card programmes make expenses more visible. “The detailed reporting helps businesses to see where costs can be consolidated, thereby making forecasting easier and more streamlined,” she says.

Customers will give all sorts of excuses to pay late. One of the most common is an inaccurate invoice, so make accurate invoices a key performance measure for receivables billing.

Bad debts, a particular drag on working capital in tough times, can often be reduced by making more rigorous credit checks on new customers and managing credit limits more carefully.

Illustration by Borja Bonaque

study notes

STUDY & TECH NOTES/THE INSTITUTE/EVENTS

RESOURCE45Financial Management | July/August 2013

In this issue: Paper E1 Enterprise Operations, p48Paper C01 Fundamentals of Management Accounting, p50

What’s the difference between an ethical issue and a business issue? This question seems straightforward enough, yet recent T4 exam results have shown that many students find it a tough one to answer By the T4 case study writer

T4 part BTest of Professional Competence in Management Accounting

T he T4 assessment matrix indicates that 10 marks are available in the exam under the “ethics” cri-terion for identifying, discussing and advising

on ethical issues raised in the unseen material. But candidates in every sitting have been confused about what consti-tutes an ethical issue and what distin-guishes it from a business issue.

Before I clarify the difference and explain what the exam requires with regard to your discussion of, and advice

on, ethical issues, it’s useful to consider CIMA’s code of ethics. This sets out the following five fundamental principles for professional accountants:l Integrity. Be straightforward and hon-est in all your professional relationships.l Objectivity. Do not allow bias, conflicts of interest or the undue influence of others to override your judgement.l Professional competence and due care. Maintain your knowledge and skill at the level required, to ensure that a client or employer receives competent servi-ces based on current developments in

practice and legislation, and act dili-gently in accordance with the available technical and professional standards.l Confidentiality. Respect the confi-dentiality of information acquired as the result of professional and business relationships, so neither disclose any such information to third parties with-out proper and specific authority (unless there is a legal or professional right to do so) nor use the information for your personal gain or that of third parties.l Professional behaviour. Comply with relevant laws and regulations, avoiding any action that discredits the profession.

The T4 exam requires you to specify what the ethical issue is in a given sce-nario; explain why you consider it to have an ethical dimension; and provide detailed guidance on what action could be taken to address that issue, both im-mediately and in the longer term, along with your justification for that advice.

Between one and three marks are available for identifying an issue and jus-tifying why you think it has an ethical dimension. Because of this mark alloca-tion, you would be well advised to find a second ethical issue and repeat the


process. A further five marks are avail-able (up to three per issue) for giving detailed and justified recommendations. Demonstrating a good understanding of what an ethical issue is and why, togeth-er with providing sound advice, should therefore earn you up to 10 marks under the ethics criterion.

So what is the difference between an ethical issue and a business issue? There is a fine line, especially when some of the ethical issues included in the unseen material get “mixed in” with the busi-ness issues. In general, a business issue is one that affects an organisation’s per-formance, profitability or cash flow and which needs to be addressed in order to improve the company’s efficiency. By contrast, an ethical issue is one where the performance of the business (and often its profitability) is being prioritised above the wellbeing of its employees or what is considered to be good practice.

Let’s consider an example of a prob-lem with both business and ethical aspects from the May 2012 exam, which concerns a toy firm called Jot (bit.ly/T4May2012). The company is having trouble with its IT systems, which means that incorrect invoices are being sent to customers.

Here is an edited extract from the unseen material: “The finance and IT director is concerned that Jot’s different IT systems are not integrated, which has caused data duplication and conflicts. Some customers have queried and not settled their invoices, as the volume of products invoiced for does not agree with the volume of products received. This is causing some conflict between the finance department, which is chas-ing overdue trade debtors, and the sales department, which is trying to keep cus-tomers satisfied. One of the problems is that Jot appears to have invoiced cus-tomers for a number of products that have been supplied as replacements for faulty or damaged goods.”

The business issue here is the effect that Jot’s issuing of incorrect invoices could have on its customers. This could deter them from dealing with it again and delay the payment of invoices, lead-ing to further strain on the cash flow of this small company. From the busi-ness’s perspective, there is an urgent need to establish a more robust and pro-fessional system for controlling inven-tory and raising invoices.

performing workshops must be closed immediately. He has asked you, the management accountant, to name the two worst-performing workshops so that he can announce their closure. You don’t feel confident that your information is robust enough to justify this decision.”

The business issue here is that man-agement action needs to be taken to improve the quality of vehicle servicing, workshop utilisation and profitability. From a business perspective, therefore, replacement managers could be trans-ferred into these ten workshops to make the decisions required to improve the quality of their work.

From an ethical standpoint, the issue is that a decision affecting the jobs of employees at two workshops hinges on data that you have been asked to pro-vide. There have been no clear guide-lines about the criterion for selection – should it be the poorest quality, the most complaints, the lowest utilisation levels or the biggest losses? Furthermore, no workshop should be closed simply to “show the power” of the BVS board. It is unethical not to inform and consult the workers affected before a closure deci-sion is taken.

You have been put in a difficult situ-ation whereby people’s jobs depend on information that may not be correct and which could result in an unfair decision. In addition, it is not good practice to make an example of underperforming workshops by closing them without first trying to improve their performance.

CIMA’s code of ethics states that you must act with objectivity and fair-ness in your capacity as BVS’s manage-ment accountant. On this ethical issue, therefore, you should advise against any immediate closure. Instead, the manag-ers and employees at all ten workshops should be informed that, unless the quality of their work improves within, say, three months, then closures will be made. You also should discuss the shortage of reliable information with the finance director, with a view to per-suading PIE’s representative to defer any closure decision until the results of the management interventions are known.

Further reading CIMA Official Study Text – T4 Test of

Professional Competence in Management Accounting, CIMA Publishing, 2012.

From an ethical standpoint, the prob-lem is that Jot’s IT systems are clearly failing to provide sufficiently sound information that would enable accurate invoicing. The justification of why this is an ethical issue is that such an un-professional state of affairs could reflect badly on the company and so harm its reputation. The lack of clear procedures and the poor integration of IT systems

at Jot are contrary to two principles in the CIMA code of ethics: integrity and professional competence and due care.

Your advice on the ethical issue ought to be that Jot’s procedure for returned goods and faulty products should be reviewed immediately with the aim of ensuring that invoices aren’t raised for replacement items. Another recom-mendation should be that Jot recruits an experienced IT manager to work with the sales and finance departments to review the systems and improve the pro-cedures that are causing these faults. Furthermore, a longer-term review of Jot’s IT systems should be conducted with the goal of ensuring that all invoi-ces are prepared accurately.

Let’s consider another example – this time from the March 2013 exam (bit.ly/T4March2013) – involving a fleet main-tenance firm called BVS. This concerns problems with ten of the company’s managed workshops, which are experi-encing low utilisation levels and produc-ing poor-quality work. This problem has business and ethical aspects.

Here is an edited extract from the unseen material: “The representative of PIE (the private equity investor with a majority shareholding) on BVS’s board has insisted that two of the ten under-


Get

ty Im

ages

The balance of economic power has shifted dramatically towards the world’s emerging markets in recent years, but their imminent supremacy over the developed Western nations is far from assuredBy Tharindu Ameresekere

Paper E1Enterprise Operations

G lobalisation has meant that all but the smallest and most local of busi-nesses are subjected to a plethora of international factors, making it nigh

on impossible to survive by staying local. Enterprises either have to go global or accept the risk that they may lose busi-ness to international competition.

E1 students need to develop a broad understanding of the global business environment and how it relates to the syllabus. The table on the opposite page lists key topics in the syllabus and gives relevant industry examples and refer-ence points.

For many organisations in the devel-oped world, their expansion plans in the past ten to 20 years have usually taken them towards Asia. China and India have offered them promising opportunities, as have the so-called tiger economies of Hong Kong, Taiwan, South Korea and Taiwan, and, latterly, Indonesia, Malay-sia, the Philippines and Thailand.

There are also opportunities in Africa – some authors even bracket the conti-nent’s largest economy, South Africa, in among the Brics. Latin America, too, has shown promise as an emerging market. Its proximity to the US, the world’s larg-est consumer, makes the region attrac-tive, although the relatively high labour costs there and government policies such as deliberate currency devaluations have helped Asia to remain the more popular destination for investments, es-pecially in manufacturing. These invest-ments increased when even white-collar functions such as R&D shifted to Asia.

Asia has become the go-to market for many businesses, therefore. The turning point for the global economy and a key factor in the shifting balance of power

from West to East was when, having been the factories of the world for decades, China and India began spending the fortunes they amassed in their years of rapid industrialisation. In contrast with the recession suffered by most Western economies, we find two nations, each with populations of over two billion, with huge economic growth and a grow-ing appetite for consumption.

In 2011 the economies of the Brics grew at an average of 7 per cent com-pared with global economic growth of 2 per cent. Little wonder, then, that multinationals from these nations are investing in the West. In a reversal of the old economic order, Western brands such as Harley-Davidson and Burberry are thriving on the growth of emerging markets, while the survival of Caterpil-lar, threatened by a decline in the US building industry, was secured as the result of China’s construction boom.

Despite remaining the largest eco-nomy in the world on paper, the US lost status after the 2007-08 financial crisis triggered by sub-prime mortgage lend-ing, which caused ripples to spread through other Western markets. Debt is the biggest problem facing the Obama administration. Despite an improvement in GDP, the trade balance in March 2012 indicated a deficit of $51.8bn. In addi-tion, unemployment reached 8.1 per cent in April 2012 from a low in May 2007 of 4.4 per cent. Such changes led indirect-ly to a reduction in consumer confidence and spending, which in turn created a vicious circle of reduced investment, de-pressed demand and further job losses.

When considering the EU, Greece’s potential exit from the eurozone, the lack of liquidity in Spain’s banking system, political instability in Italy and the public’s lack of appetite for further austerity throughout the continent all send worrying messages. The combined GDP of the 27 member states trading, by agreement, mostly without barriers such as tariffs, is projected to have grown by a mere 0.3 per cent last year.

It’s clear, then, that the mature econo-mies of the West are still faring relatively poorly, but a total shift in power from West to East in terms of trade, invest-ment, GDP and income are yet to occur. There are numerous reasons for this.

Some Western organisations feel that doing business in China does not take place on a level playing field, believing that domestic firms have an unfair advantage. Some think that corporate political activity is a key requirement for trading there. In 2011, for example, General Motors (through a joint venture, Shanghai GM) made a financial contri-bution to the Chinese Communist Party’s 90th-birthday celebrations. Commenta-tors have suggested a link between this sponsorship and the fact that GM’s luxury model, the Cadillac, is aimed at high-ranking party members.1

There are implications for cor porate social responsibility, too, as there have been labour-rights violations in some emerging economies. Spanish clothing giant Zara, for instance, was recently crit-icised for contracting with Bangladeshi factories with fatally poor safety stand-ards.2 And Apple attracted negative pub-licity for its use of Foxconn, a Chinese manufacturer whose poor conditions,

Growth of Western economies versus that of non-OECD economies (including the Brics)

Real GDP growth (% change year on year) 9 Non-OECD nations 8 (including Brics) 7 6 5 4 3 2 1 0 OECD nations -1 (Western economies) -2 -3 -4 2006 2007 2008 2009 2010 2011 2012 2013

Source: Economist Intelligence Unit.

Financial Management | July/August 201348 Financial Management | July/August 2013 49

including excessive working hours, have led to a spate of suicides among workers.

Furthermore, the mature economies of the West cannot simply be written off. During the last quarter of 2011 there were signs of increased consumer spending in the US and, since this fuels 70 per cent of the nation’s economy, it came as heartening news for Obama. Much of the growth was powered by a 15 per cent surge in sales of cars (con-sidered a key eco nomic indicator in the US) and of other long-lasting manufac-tured goods. The Economist Intelligence Unit has forecast that real GDP growth in the US for 2013-16 will remain fairly stable at just over 2 per cent a year.

Many of the Brics depend on the US and EU for their growth. Whenever these mature markets cool down and/or their governments tighten expenditure, the emerging economies feel the effects – we have already seen a deceleration in China’s manufacturing sector and lower-than-predicted growth in Brazil.

In emerging markets, fast GDP growth may also have negative implications for social cohesion: where the increased wealth is held by a relatively small number of people, this can lead to unrest. India has been plagued with political turmoil and corruption for decades, while Russia depends heavily on oil exports, so any decline in the price could put the

government in jeopardy, since it needs oil prices to remain high to support its fiscal spending projects. Brazil, despite its best efforts, is still struggling to main-tain law and order, while its infrastruc-ture has not been modified to reflect the wave of investment heading towards the country. (China scores well in this area compared with the other Brics.)

Declining demand from the West has created further threats. The outsourcing and offshoring of manufacturing and service provision to emerging economies has slowed considerably owing to con-cerns in the developed world about rising costs in China and other offshor-ing destinations. There is also a growing recognition among Western firms that there are more subtle challenges – for example, in finding outsourcing partners with the right strategic fit or the need for better quality control. These are linked with Oliver Williamson’s transaction cost theory, which identified the hidden costs of outsourcing.

There has been an obvious shift in economic power towards the emerging markets, but the Brics’ success brings with it political challenges and is also tempered by a dependence on demand from the more mature Western econo-mies, which clearly have several prob-lems of their own. While the US and EU have seen increased competition from imports and are still suffering the ef-fects of recession and austerity, they cannot be written off just yet, because slight, but reliable, signs of growth remain.

Tharindu Ameresekere is a senior CIMA lecturer at the Wisdom Business Academy, Sri Lanka, and the founder of a company providing integrated social media marketing solutions.

References and further reading 1. “GM sponsors and celebrates soon-to-be released Chi-Com propaganda film”,

Washington Times, May 2011 (bit.ly/GMChina).

2. “Bangladesh: factory fire kills seven workers” World Socialist Web Site, February 2013 (bit.ly/BanglaFire).

3. “Apple’s overseas demand in a word: ‘exploding’”, The Motley Fool, June 2011

(bit.ly/AppleExplodes). CIMA Official Study Text – E1 Enterprise

Operations, CIMA Publishing, 2012.

The global business environment as it relates to E1

Industry example

Apple’s sales from outside the US have soared over the past few years. They increased from $14bn in 2005 to $64bn in 2010. In 2010, 56 per cent of the company’s sales revenue came from international markets.3

US telecom equipment providers lobbied the government to prevent Chinese firm Huawei from acquiring 3com.

The Brics’ emergence is one of the most dominant trends of globalisation. China, for instance, has become the largest market for cars and luxury goods.

These include organisations from the developed world – eg, Toyota and Coca-Cola – and, more recently, ones based in emerging markets, such as Tata and Geely.

Nike controversially offshored production in a bid to reduce its labour costs and gain access to developing Asian markets, while keeping its design function in-house.

US executives are surprised by their Brazilian counterparts’ propensity for arriving late at meetings and starting them by discussing the previous night’s football match.

Measures such as the UK combined code on corporate governance and the Sarbanes-Oxley Act 2002 have been designed to prevent scandals such as Enron, which shook confidence in the capital markets in 2001.

In 2012 an aviation show in China was sponsored by European aircraft manufacturers in a bid to ease tensions between China and EU governments concerning air access for commercial flights. This prevented the loss of access to one of the world’s most important aerospace markets.

Facebook entered a partnership with environmentalist lobby group Greenpeace aimed at reducing the ecological impact of its systems.

Syllabus topic

The effects on business of globalisation, both in general and in specific areas – eg, trade.

Risks to globalisation – eg, protectionism.

The development of emerging economies.

The development of multinational companies.

The growth in outsourcing and offshoring, and their impact on decision-making.

Cultural differences.

Corporate social responsibility and corporate governance.

Government regulations on business and corporate political activities.

The effects of NGOs on business and perceptions of NGOs as strategic partners.


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When you’re applying process costing, it’s important to take note of the manufacturing method used. In scenarios where ingredients are mixed up together, the concept of normal and abnormal loss comes into playBy Grahame Steven, FCMA, CGMA

Paper C01Fundamentals of Management Accounting

M y previous article about process cost-ing, published in the April issue of Velocity, focused on a company that

made finished products by assembling components (bit.ly/ProcessCostingPart1). In this article I’ll consider a firm in the process industry using the first in, first out (Fifo) method. Manufacturers in this sector mix ingredients to make goods such as food, paint and chemicals.

The company, Slap It On, makes paint in batches. All of the ingredients (raw materials) are put in at the start of the mixing process and the normal loss occurs during the initial stage of manu-facturing. At the end of every month some batches are partially completed (work in progress). Unfinished batches are finished in order of completeness – ie, the batch closest to completion is finished first, the second-closest is fin-ished next and so on.

The following figures are obtained for July:l Opening WIP: 800kg (£1,080, 100 per cent complete), plus mixing work (£200, 50 per cent complete), making a total value of £1,280.l Costs incurred: 1,000kg of material A at £1.24 per kg (£1,240); 4,000kg of mat-erial B at £1.40 per kg (£5,600); and £2,996 for the mixing work.l Normal loss: 5 per cent (applies to new inputs of raw materials only).l Output: 5,110kg.l Closing WIP: 390kg (100 per cent com-plete; mixing work 60 per cent complete).

The main difference between Slap It On and the component manufacturer in my Velocity article is the assumption of a normal loss. Losses occur in manufac-turing processes that mix ingredients for

many reasons. Losses occur in baking, for instance, because it’s impossible to trans-fer all of a mixture in a bowl to the next stage of the manufacturing process and because of evaporation during cooking.

Based on its experience, Slap It On ex-pects a normal loss of 5 per cent, which will occur early in the manufacturing process. July’s normal loss is expected to be 5% x (1,000kg + 4,000kg) = 250kg. In practice, this figure will be higher or lower owing to factors such as manufac-turing efficiency and material quality.

The first step towards a process account is to work out how much of July’s output was started and finished that month by subtracting the opening WIP from the total output: 5,510kg – 800kg = 4,310kg.

The next step is to work out whether or not there was an abnormal loss (or gain) as follows:

Determining abnormal gain or lossOpening WIP 800kgMaterial A 1,000kgMaterial B 4,000kgNormal loss -250kgClosing WIP -390kgExpected output 5,160kgActual output 5,110kgDifference (abnormal loss) 50kg

The next step is to calculate the num-ber of equivalent units for materials and mixing. For materials, the figure for the opening WIP is zero, as no more mate-rial was used in relation to opening WIP; 4,310 is included for the paint that was started and finished in July; 390 is included for the closing WIP, since all the materials were issued in July; and 50 is included for the abnormal loss, be-cause this must be valued.

For mixing, 800 x (100% – 50%) = 400 is included for opening WIP in relation

to the work done in July; 4,310 is includ-ed for paint started and finished in July; 390 x 60% = 234 is included for the mixing done in July in relation to the closing WIP; and 50 is again included for the abnormal loss. The two workings can be summarised as follows:

Equivalent units of work in July Materials MixingOpening WIP 0 400Started and finished 4,310 4,310Output 4,310 4,710Closing WIP 390 234Abnormal loss 50 50 4,750 4,994

The cost per equivalent unit for materials is therefore ([1,000kg x £1.24] + [4,000kg x £1.40]) ÷ 4,750 = £1.44. And the cost per equivalent unit for mixing is £2,996 ÷ 4,994 = £0.60.

The output, closing WIP and abnor-mal loss can now be valued as follows:l Output: £1,280 + (400kg x £0.60 per kg) + (4,310kg x £1.44 per kg) + (4,310kg x £0.60 per kg) = £10,312.l Closing WIP: (390kg x £1.44 per kg) + (234kg x £0.60 per kg) = £702.l Abnormal loss: (50kg x £1.44 per kg) + (50kg x £0.60 per kg) = £102.

The abnormal loss is valued, because this is the cost of failing to achieve the expected level of output in July. But the normal loss is not valued, since Slap It On expected to incur this.

The figures we have can now be used to prepare the process account:

Process account for July £ £Opening WIP 1,280 Output 10,312Material A 1,240 Ab loss 102Material B 5,600 Closing WIP 702Conversion cost 2,996 XXXXXX 11,116 11,116

Before going through the following worked example – covering the assembly of components rather than the mixing of materials – you may wish to review my original Velocity article using the web link at the start of this piece.

Worked example on assemblyA company called Picture This assem-bles camcorders from parts bought in from suppliers. A camcorder component kit is issued from stores to the assembly

line whenever another camcorder has to be assembled. There are partially com-pleted camcorders (WIP) at the end of each month. Incomplete camcorders are assembled in order of completeness – ie, the one closest to completion is finished first, the second-closest to completion is finished next and so on.

The following figures were obtained for July:l Opening WIP: 30 component kits (£2,460, 100 per cent complete), plus assembly work done in relation to the opening WIP (£1,650, 50 per cent com-plete), making a total value of £4,110.l Costs incurred: 120 component kits at £9,960; £12,096 on the assembly line.l Output: 105 camcorders.l Closing WIP: 45 component kits (100 per cent complete; assembly work 40 per cent complete).

The first step in getting to the process account for July is to subtract the open-ing WIP from the total output to calcu-late how many camcorders were started and finished that month: 105 – 30 = 75.

The next step is to determine the number of equivalent units for compo-nents and their assembly. For compo-nents, the figure for opening WIP is zero, as no more component kits were used in

relation to opening WIP; 75 is included for kits started and finished in July; and 45 is included for the closing WIP.

For assembly, 30 x (100% – 50%) = 15 is included for the opening WIP in relation to the work done in July; 75 is included for camcorders started and finished in July; and 45 x 40% = 18 is included for camcorders assembled in July in rela-tion to the closing WIP. The two work-ings can be summarised as follows:

Equivalent units of work in July Component kits AssemblyOpening WIP 0 15Started and finished 75 75Output 75 90Closing WIP 45 18 120 108

The cost per equivalent unit for the component kits is therefore £9,960 ÷ 120 = £83. And the cost per equivalent unit for assembly is £12,096 ÷ 108 = £112.

The output and closing WIP can now be valued as follows:l Output: £4,110 + (15 units x £112 per unit) + (75 units x £112 per unit) + (75 units x £83 per unit) = £20,415.l Closing WIP: (45 units x £83 per unit) + (18 units x £112 per unit) = £5,751.

The figures we have can now be used to prepare the process account:

Process account for July £ £Opening WIP 4,110 Output 20,415Components 9,960 Closing WIP 5,751Assembly cost 12,096 XXXXXX 26,166 26,166

Practice question on mixingNow return to the paint firm, Slap It On, and test yourself by producing a process account from the following figures for August (the solution can be found on FM’s website at www.tinyurl.com/nt3j4t5): l Opening WIP: 390kg (£562, 100 per cent complete), plus mixing work (£140, 60 per cent complete), making a total of £702.l Costs incurred: 14,000kg of material A at £1.19 per kg; 49,000kg of material B at £1.37 per kg; £38,244 for mixing process.l Normal loss: 5 per cent (applies to new raw material inputs only).l Output: 59,800kg.l Closing WIP: 1,240kg (100 per cent com-plete; mixing work 80 per cent complete).

Grahame Steven is a lecturer and teaching fellow in accounting at Edinburgh Napier University.

Financial Management | July/August 2013 5150


May exam resultsThe results for all paper-based exams were sent out by first-class post, airmail or email on 11 July. (The T4 on PC results were released on 13 June.) The deadline for registering on “My CIMA” to receive results via email was 5 July.

The institute cannot give out results over the telephone or to personal callers at any of its offices.

Attendance receiptsYou will have received an attendance slip for each exam you took. You should keep these for at least four months after the exams as proof of your sitting.

Marks per questionYour results will include a breakdown of the marks awarded for each answer. You should review this information, together with the question paper, model answers and post-exam guide, to help identify any problem areas.

Exam papers and model answersThe May question papers and model answers are available to download from the relevant “Study resources” pages on CIMA’s website at www.cimaglobal.com/ Students/Exam-preparation/. Further model answers can be found in Velocity (www.cimaglobal.com/velocity).

Post-exam guidesPost-exam guides will be available in early August on the “Study resources” pages of CIMA’s website. These are essential reading for unsuccessful candi-dates and those studying a new subject.

Script and administrative review services A script review service will be available for May’s three Strategic level papers and the T4 part B exam after the results are released. The service will be available to you only if you scored between 40 and 49

marks (between 20 and 24 cre dits in T4 part B) in the exam for which you want a review.

An administrative review service will be available for all Operational, Manage-ment and Strategic level papers.

The application deadline for all ser-vices is 5pm (BST) on 10 August. Further details about these and how to apply for them can be found in the “After the exams” section at www.cimaglobal.com/exams.

Extra exam sittingsThe “September extra” exams will actu-ally be held from 27 to 31 August. (The next opportunity to sit T4 part B on PC will be on 29 August.)

The extra exams at Operational and Management level will be available in the UK and Ireland only to candidates taking resits (these are paper based). The extra exams at Strategic level on PC for resit students have been extended to all countries, but please check the CIMA website for availability.

The deadline for entries is 19 July. Visit www.cimaglobal.com/exams for full guidance on how to enter.

Students taking the extra exams and wishing to enter the November paper-based exams without being charged the usual late-entry fee will, after receiving their results, have from 20 to 25 Septem-ber to submit their entries online via their “My CIMA” accounts. There is no option to enter any later.

November 2013 examsThese exams will be held from 19 to 21 Nov ember. Online entries will be accep-ted from 1 August – enter by logging in to your “My CIMA” account. The stan-dard closing date for entries is 5pm (BST) on 13 September. If you enter after this date, you will have to pay an additional late-entry fee. The deadline for late entries is 5pm (BST) on 19 September.

CIMA does not accept cancellations and will not refund fees. To change papers

or exam centres, you will need to email [email protected] and pay a fee. Full information on entering and sitting the exams, including fees, can be found at www.cimaglobal.com/exams.

Pre-seen material for papers at Strategic level and T4 part BThe pre-seen material for the September extra and November T4 part B case study exams will be available to download from www.cimaglobal.com/t4preseen from mid-July. The pre-seen material for the extra E3, F3 and P3 exams can be down-loaded now from www.cimaglobal.com/strategicpreseen. A new case study for the November exams will be available in mid-October.

It’s your responsibility to download this material and familiarise yourself with it. A “clean” copy of the pre-seen material and further unseen material will be pro-vided in the exams. You cannot take any notes with you into the exam hall.

CIMAsphereVisit www.cimaglobal.com/sphere, CIMA’s online community, to ask ques tions, share information and seek expertise and sup-port from students, members and alumni. The site also features useful blogs.

Computer-based assessments at Certificate levelFor full information about entering for a computer-based assessment, visit www.cimaglobal.com/certificateentry.

If you wish to sit Operational or Man-agement level exams in November, you must have completed the Certificate level by 12 September.

QueriesVisit www.cimaglobal.com to see if your question is answered there, or get in touch with CIMA Contact ([email protected]) or your local office (see panel, page 51).

Code of ethics CIMA members and students are required to comply with the CIMA code of ethics. Ensure that you are familiar with the code and how to apply it.

Further resources are available at www.cimaglobal.com/ethics. Also see this month’s Hot Potato, page 10.

Exam noticeVisit www.cimaglobal.com regularly for updates


technicalnotes

In this issue: Opportunities and challenges for management accounting in mainland China, p57

Earnings before interest, taxation, depreciation and amortisation (Ebitda) is viewed all around the world as the key measure of a company’s perfor-

mance. Managers frequently use it when planning for both the short and long term. It’s also often used to evaluate the impact of strategic decisions. All this is despite the fact that various authors have highlighted a number of disadvan-tages associated with Ebitda, which is not even required under Gaap to be in-cluded in financial statements.

A growing emphasis on Ebitda has increased the need for firms to capitalise their operating costs. Under certain accounting standards it’s permissible to capitalise fixed operating costs. In the telecoms industry, the costs of sharing infrastructure, for example, are capital-ised on the grounds that they are proxy for owning a network. In almost all indus-tries, firms replace operating expenses such as leasing costs by acquiring long-term fixed assets in order to improve their Ebitda or prevent it from falling.

The use of Ebitda as a KPI disguises risks associated with operating and net income. The diagram, right, shows that shareholders provide money for capital

expenditure to generate revenue, but such spending has no impact on Ebitda – ie, it ignores what is driving any improvement in Ebitda. So it’s question-able how such a KPI can be used to com-pare companies.

Some people argue that firms may have low or high depreciation depend-ing upon their capital expenditure, so the depreciation charge distorts inter-company comparisons of earnings. As shown on the right side of the diagram, most people would agree that capex in fact drives earnings, so corresponding depreciation should be deducted from earnings to be used when comparing companies. As Warren Buffet said: “Does management think the tooth fairy pays for capital expenditures?”

This means that depreciation, being a non-cash item, should not be ignored. Ebitda should be adjusted to include fixed costs (depreciation and amortisa-tion, as well as interest) to make it mean-ingful. This gives us earnings before tax (EBT) without other income from asso-ciated companies or losses on disposal – these being non-operating activities. Adjusted EBT is an important KPI and it can be calculated easily. Using adjusted EBT instead of Ebitda highlights the fact that fixed costs are also important and can be considered controllable to some extent, as all costs are variable in the long run. It depends how the manage-ment team views such fixed costs, par-ticularly when the emphasis is on incur-ring operating costs through capex to avoid any adverse impact on Ebitda. Tax can be ignored, because it does not serve as a performance measure.

Adjusted EBT is also closer to eco-nomic profit before tax, which is calcu-lated after considering all explicit and implicit costs. Adjusted EBT captures all operating expenses, whether paid or to be paid, and it also removes any creativ-ity in managing operating costs through capex. Adjusted EBT is therefore a better KPI than Ebitda.

Germany’s Metro Group uses value-added KPIs such as economic profit

By Ijaz Muhammad, ACMA, CGMA, senior manager, regulatory economics, at du Telecom

Profiting games: the benefits and drawbacks of Ebitda

Capex

Revenue Ebitda

Capex

Revenue EBT

EBT is a better key performance indicator than Ebitda

57Financial Management | July/August 2013Financial Management | July/August 201356

along with the more conventional KPIs in its annual report. This appears as earnings before interest and taxation after cost of capital (Ebitac), which can be calculated as Ebit – (capital employed x weighted-average cost of capital).

Another important consideration is how sensitive a company’s earnings are in relation to its operating activities and how this can be measured. To some extent, the price/earnings ratio gives a market-related external measure based on the mix of organic growth, but it doesn’t provide a great deal of insight about volatility in organic earnings. Like other KPIs, in isolation a P/E ratio can be misleading. For instance, in the short run a share price can be sometimes clin-ically maintained or improved through a share buy-back (artificial demand) or the excessive disbursement of dividends from accumulated retained earnings, thereby resulting in a disconnection between current earnings and the result-ing share price. Therefore a high or low P/E ratio might not explain much about possible volatility in a company’s cur-rent earnings or its future earning abil-ity. Almost all such analyses based on the Ebitda and P/E ratio may lead to incorrect conclusions about a company’s value and potential for growth.

We can apply the costing concept of operational and financial leverage to explore an organisation’s cost structure and the impact of its fixed costs on earn-ings. These two ratios can provide an in-depth insight into a firm’s cost struc-ture, exposure to operating income and income after financial charges before investment income and taxation. Oper-ating leverage (OL) can be expressed as

operating income before depreciation divided by operating income after depre-ciation. It explains how sensitive earn-ings are in relation to operating fixed costs or depreciation. The higher the fixed costs or depreciation are, the higher the OL will be. Financial leverage (FL) can be expressed as operating income after depreciation divided by income after financial charges before taxation. The higher the financial charge, the higher the FL, eroding the firm’s earning capacity. Multiplying the OL by the FL gives the total leverage.

In the tables above I have applied the concepts of OL and FL to the published financial results of two big telecoms companies. The first table shows that, while company A’s Ebitda and Ebitda

percentage have been fairly stable over the four years covered, the firm’s earn-ing capacity has been falling consist-ently owing to an increase in OL. Bear-ing in mind the principle that historical earnings are the best predictor of future earnings, we can assume that an increase in total leverage and a decrease in adjusted EBT might indicate the risk of a decrease in future income. For com-pany B, earnings and total leverage are almost stable. A consistently higher per-centage increase in total leverage means that earnings are volatile.

Many analysts evaluate a company’s financial health based on its Ebitda, free cash flows and expected dividend. For any business, a stable Ebitda and the announcement or disbursement of improved dividends signal a strong financial position. This creates demand for its shares, which leads to an increase in the share price. Analysts should look into the adjusted EBT and total leverage as well as the league of companies they are comparing – eg, an incumbent oper-ator versus second-tier operators or mobile virtual network operators.

One of the main disadvantages of using Ebitda to compare companies is that it encourages them to swap their operational expenses with capex rather than seeking innovative ways of control-ling fixed and variable costs. I would use OL and FL, to see the risk associated with the company’s earning capacity, along with adjusted EBT instead of Ebitda.

A s the result of “lost dec-ades” Japan fell from its position as the world’s second-largest economy and was re-placed by China, which

posted a GDP of about $8.28trn last year. Although China’s annual GDP growth fell to its slowest pace in 13 years in 2012, it was still 7.8 per cent, which surpassed a number of forecasts. Sustainable growth is ensuring social and political stability. All this has encouraged private-sector in-vestment, which has created a lot of jobs in mainland China. The most popular industries include financial services (in-cluding even investment banking), real estate, tourism and hospitality.

Chinese businesses have enjoyed a growing degree of autonomy since the government adopted its economic reform policy. Management accounting con-cepts such as capital budgeting, just- in-time inventory, cost-volume-profit analysis and total quality management have become increasingly important.1 This creates demand for more high- quality professional accountants with up-to-date knowledge, but they are in short supply in a nation of 1.4 billion people. The Chinese Institute of Certified Public Accountants has approximately

250,000 members, 100,000 of whom are in public practice. This means that about 60 per cent of the nation’s professional accountants are in business.

Although cost and management accounting techniques are practised in both state-owned enterprises (SOEs) and the private sector, management accounting is still a relatively new pro-fession in mainland China. People could see some internationalisation of its ac-counting practices in 2006 when the Ministry of Finance issued standards that are a convergent version of IFRS, but such practices tended to be focused on compliance in statutory reporting.

In general, the increasing level of foreign direct investment (FDI) and the growing number of foreign-invested enterprises will heighten demand for more modern management accounting practices. FDI increased from $92bn in 2008 to $112bn in 2012, representing

about 27,000 investment projects each year (apart from in 2009, which was affected by the global credit crunch). This growth is expected to continue as the stable political environment keeps attracting money from overseas. In 2011 FDI projects were concentrated mainly in manufacturing; wholesale and retail trading; and leasing and business ser-vices (see table, page 59).

China’s encouragement of public list-ings over the past decade has improved the transparency and corporate govern-ance of domestic companies. During 2000-11 the number of listed firms increased from 1,088 to 2,342, while turnover in the two stock exchanges of Shanghai and Shenzhen increased from ¥3,166bn in 2005 to ¥42,164bn in 2011 (see table, below). Such figures are impressive for a developing country.

One of the objectives of Beijing’s SOE reforms is to induce market capital into unitary state ownership to dilute the state’s equity and control. This should align SOEs to perform more according to market forces than to administrative directions. In future, therefore, manage-ment accounting practices will work more to service these firms’ investors and other stakeholders rather than purely to satisfy the authorities’ compli-ance requirements.

Chinese firms continue to face issues concerning internal control and the problem of how to supervise an org-anisation to benefit all stakeholders.

By Dr Laurence Yuen, FCMA, CGMA deputy general manager, finance, at Zhuhai Chimelong Investment and Development Company

Opportunities and challenges for management accounting in mainland China

Company A’s selected financial performance indicators 2011 2010 2009 2008Ebitda (£000) 14,475 14,670 14,735 14,490Ebitda % 31.2 32.0 33.1 35.3Earnings per share (£) 13.7 15 16 8.8Share price (£) 172 170 136 127Operational leverage 2.98 2.88 2.96 2.13Financial leverage 8.05 * 1.23 3.00 3.04Total leverage 24.0 3.5 8.9 6.5Adjusted EBT (£000) 274 1,902 756 1,186

*Includes a substantial reduction of the provision for potential interest on tax issues.

Company B’s selected financial performance indicators 2011 2010 2009 2008Ebitda (NOK000) 30,526 29,221 30,670 30,304Ebitda % 31.0 30.8 33.8 31.2Earnings per share (NOK) 4.4 8.7 5.2 7.8Share price (NOK) 105 90 87 39Operational leverage 2.01 2.23 2.00 1.87Financial leverage 1.17 1.16 1.20 1.23Total leverage 2.3 2.6 2.4 2.3Adjusted EBT (NOK000) 13,010 11,262 13,677 13,342

The number of publicly listed companies in China and their combined turnover 2011 2005 2000On the Shanghai Stock Exchange 931 834 572On the Shenzhen Stock Exchange 1,411 547 516Total number 2,342 1,381 1,088

Combined turnover (¥bn) 42,164 3,166 n/aSource: China Statistical Yearbook.

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For instance, relatively low returns on equity are not uncommon in SOEs, while private enterprises have been adversely affected by fraud. The key management accounting challenge is to ensure integrity and uphold profes-sional ethics. A case of fraud involving a company called Qiong Min Yuan, for instance, shook the stock market for months in 1996-97. The case involved stock manipulation and the false report-ing of a profit of ¥570m.

Despite efforts to improve corporate governance and internal control frame-works, there have been other dramatic cases over the years involving organisa-tions as diverse as Euro-Asia Agricul-tural, Shanghai Land Holdings and, most recently, Caterpillar, which reported a non-cash goodwill impairment charge of $580m at a Chinese subsidiary, Siwei, after the US heavy plant manufacturer discovered “deliberate, multi-year, co-ordinated accounting misconduct” at the company.

Cultural factors represent another big challenge to the development of man-agement accounting in China. These include the nation’s hierarchical ideol-ogy. Professional independence is not encouraged and people tend not to take responsibility for matters beyond the limits of the systems and rules to which they normally work. Research has indi-cated that support from the most senior

managers is the predominant success factor in ensuring the implementation of management accounting systems in a Chinese enterprise.2

China’s accounting law was enacted in 1985 (and amended in the 1990s) to ensure the accuracy and completeness of financial information provided by companies. Preparing fraudulent finan-cial statements, failing to keep financial records and altering accounting treat-ments at random could be treated as criminal offences and penalised accord-ingly, for example. But it’s time for the authorities to review this legislation. It still requires all entities’ financial years to run from 1 January to 31 December rather than allowing enterprises to set their financial years according to their business needs. This state of affairs is not practical in the long term, because

it puts Chinese accounting firms under tremendous pressure to complete all their auditing jobs in Q1.

Continued economic growth in China will force domestic companies to adopt more Western accounting concepts and systems in order to manage their operations effectively. This process will necessitate training, education and per-haps even apprenticeships in offering consistent and continuing education for potential and existing financial manag-ers so that management accounting can develop as a profession in China. As glo-balisation and technological advances continue imposing pressure on business to turn ideas into income, enterprises need their finance teams to play an increasingly forward-looking and stra-tegic role. This means that management accountants may find themselves even more in demand.

References 1. M Islam, J Kantor,

“The development of quality management accounting practices in China”, Managerial Auditing Journal,

Vol 20, No 7, 2005. 2. L Liu, F Pan, “The implementation

of activity-based costing in China: an innovation action research

approach”, British Accounting Review, Vol 39, No 3, 2007.

‘Continued economic growth in China will

force domestic companies to adopt

more Western accounting concepts’

Number of foreign direct investment projects in ChinaSector 2011 2010 2009 2008Farming, forestry and fishing 865 929 896 917Mining 87 92 99 149Manufacturing 11,114 11,047 9,767 11,568Supply of electricity, gas and water 214 210 238 320Construction 215 276 220 262Transport and logistics 413 396 395 523Information technology 993 1,046 1,081 1,286Wholesale and retail trading 7,259 6,786 5,100 5,854Hospitality and catering 513 579 502 633Financial intermediation 156 85 52 25Real estate 466 689 569 452Leasing and business services 3,518 3,418 2,864 3,138Scientific research and technical services 1,357 1,299 1,066 1,839Environmental management and public facilities 151 143 183 138Services to households and other services 212 217 207 205Education 15 12 20 24Health, social security and welfare 11 12 18 10Culture, sport and entertainment 152 168 158 170Public management, social and international bodies 1 2 0 1Total 27,712 27,406 23,435 27,514Investment actually utilised ($bn) 116 106 90 92

Source: China Statistical Yearbook.


Whether you are an accountant, a banker, an administrator or a manager, it is difficult to get by these days without using Excel, Microsoft’s ubiquitous spreadsheet software. The package has been around for years and it’s developed in such a way that it has become one of the indispensable tools of office life. Yet, as with all modern IT applications, there is a right way to use it and a wrong way. Not only that, but, unless you are a professional Excel jockey, you’re probably using fewer than 5 per cent of its capabilities.

Maybe you are well aware of this state of affairs, but have you ever thought of doing something to change it? The financial modelling training provided by BPP will open your eyes to some incredibly useful Excel functions. More crucially, they will teach you how to get the best out of the program. You will be much better able to do your job and your colleagues will be grateful for the technical guidance you’ll be able to pass on to them.

Excel in excelsisSo what is the difference between simply using Excel and financial modelling? Financial modelling refers

What you learn on…Mastercourses on financial modelling

to Excel files (models) that clearly derive an answer (output) from a number of assumptions (inputs) via workings. So, if you are organising a school outing to a castle, for example, you might build a simple model to work out the total cost based on the number of children on the trip, the distance driven by the coach, the cost of entry to the castle and any other assumptions that would affect the cost.

Done correctly, this would tell you the total cost of the exercise, but the real value of the model lies in the scenario analysis that can be performed once the model is built. What if we take the train there instead? What if we eat at the castle’s café rather than taking packed lunches? Excel can be used to give you the total cost in any of these circumstances, so you can better decide how you want the day to run.

How can training courses help you with something that sounds relatively simple? Unsurprisingly, there is a right way and a wrong way to go about building such models, too. A poorly constructed model can often produce wrong answers and lead to poor decisions. It may seem obvious, but a high-quality financial model will:

l Be flexible, making it easy to trace changing inputs through to the outputs.l Not fall apart as the inputs change.l Look professional and be easy on the eye.

The courses provide numerous tips and golden rules that, if applied with discipline and rigour, will always result in effective, high-quality models.

The courses on offerBPP offers a number of CIMA Mastercourses in this area, but at the core are “Introduction to financial modelling” and “Intermediate financial modelling”, both of which last for two days. The focus of these courses is the forecasting of an integrated set of financial statements – ie, the income statement, cash flow statement and statement of financial position. This could be done for many different purposes – eg, budgeting, credit analysis, business planning, financial analysis etc. On these courses the forecasts are used to value a business and a sensitivity analysis is then performed on that value. For example, how does the value change as the forecast interest rate fluctuates?

Both courses are suitable for accountants and non-accountants, but it’s helpful for delegates to have a basic level of financial literacy. The introductory course is for people who are concerned about their Excel skills (it uses a theoretical model designed for the classroom), while those more confident with using Excel could attend the intermediate course straight away (it uses a real company as an example).

Both courses have been running for many years, developing along with each new version of Excel, and they invariably receive outstanding feedback. A typical delegate leaves with the comment: “Crikey – I wish I’d come on this course a few years ago.”

For further details of BBP’s financial modelling courses, available through CIMA Mastercourses, visit www.cimamastercourses.com/IT-skills

Dave Marlow qualified as a chartered accountant with PwC, where he helped clients to implement change projects and

related training programmes. He later worked in the City, developing, designing and delivering financial courses for bankers, lawyers and accountants. He now looks after BPP Professional Education’s financial modelling training.

As a CIMA management accountant, you know that your professionalism and skills are invaluable to you, but have you

ever thought how they could be used to benefit other people? Even better, what if you could help others and benefit your career at the same time? Volunteering for a charity is a fantastic way of giving something back to the community while simultaneously enhancing your CV. It can also form a valuable and enriching part of your continuing professional development.

Owing to financial pressures, it’s becoming increasingly difficult to obtain budgetary approval for training and development activities, but volunteering gives you a chance to share your expertise and to enhance and refine your skills in a completely different business setting. The challenges you’ll face are not only valuable to you as an individual and the charity; they can also be enjoyable and rewarding.

Business is constantly evolving as social entrepreneurship and corporate social responsibility are incorporated into the objectives and key success factors of many organisations. There are many opportunities out there that will enable you to match your management accounting skills to the business needs of others. Perhaps you may even feel that your skills are a little one-sided and that you are lacking in certain technical

The instituteThe benefits of volunteering, plus how to choose the most appropriate management tools

or softer skills. If so, volunteering your expertise should benefit you.

In troubled times many NGOs are finding it increasingly difficult to keep their heads above water. Many people who work in smaller charities have had little or no formal business training, so this is where you could come in. As a professional accountant in business, you have a wealth of skills that can help them to drive their causes forward. Many of the skills that are in most demand are strategic thinking, business planning, project management and financial guidance – a perfect match for any CIMA member. So why not take a minute to review your CPD plan and see whether you would like to try something different?

In addition, you may find it useful to visit www.tinyurl.com/pe8gvek and read how other CIMA members have volunteered their management accounting skills in the past.

View from the professional standards team

CIMA unveils tool-evaluation resourceThere is a huge array of management accounting practices and tools on the market, all of which promise to help define and manage an organisation’s strategy, resources, customers and costs, so improving its overall performance.

A recent Google search on “management accounting tools” returned nearly 13 million results. In this context, managers can often struggle to identify the most suitable tools and apply them effectively. With this problem in mind, CIMA and the AICPA have developed Essential Tools for Management Accountants – a book supported by an online resource (www.cgma.org/essentialtools) – to:l Support businesses in evaluating the value of the main management accounting tools.l Help management accountants and their organisations to choose the most appropriate tools for their needs.l Provide guidance and examples of best practice.

On the website you’ll find a summary of the essential information on more than 20 established management accounting tools, ranging from the balanced scorecard to Porter’s “five forces” model. This explains:l What each tool does and what value it can offer management accountants and their organisations.l Factors to take into account when implementing and using a tool.l The actions to take – and avoid – in order to maximise a tool’s potential.l What best practice looks like – including case studies.l Where to find further information about a tool if you want to delve deeper.

Join the debate, rate the tools’ effectiveness and help the institute to identify which to cover in future by visiting www.cgma.org/essentialtools

14 August Joint business conference, Zambia.26-30 August CIMA Global Business Challenge, South Africa.

PRESIDENTIAL ENGAGEMENTS


EventsYour guide to recent and forthcoming CIMA events

Past eventsCIMA/Hong Kong agreement signed7 June, Hong KongCIMA has signed a mutual exam paper exemptions agreement with the Hong Kong Institute of Certified Public Accountants (HKICPA) after a mutual review process. The agreement, which took effect on 1 July and lasts until 30 June 2018, provides mutual exemptions for members of one body to become members of the other.

“This agreement strengthens long-standing links and friendships between CIMA and the HKICPA,” said CIMA’s managing director, Andrew Harding. “For CIMA members it offers access to the HKICPA qualification programme and for Hong Kong CPAs it provides access to CIMA membership and the CGMA designation, which

was established through our joint venture with the AICPA.”

Harding (pictured, third from right) added: “We believe that businesses across the world need strong management accounting skills to support their sustainable growth. We look forward to working with our colleagues at the HKICPA to help maintain Hong Kong’s reputation as a world-leading centre for business.”

Coming eventsUKMini MBA for accountants 15-19 July, 9.30am-5pmLondon Cost: £599 + VAT per workshop (£415 + VAT per workshop for the full five-day series with membership of the CIMA corporate discount scheme)An intensive five-day course that will introduce you to MBA-type thinking and how this can be applied to the finance function.Contact 0845 026 4722, email mastercourses@ cimaglobal.com or visit www.cimamastercourses.com/MBAA

Data analysis with Excel6 August, 9.30am-5pmLondon

Cost: £599 + VAT (£539 + VAT for CIMA members)This Mastercourse covers analysis, reporting, array formulas, nesting functions, data manipulation, scenario analysis and automation. Contact 0845 026 4722, email [email protected] or visit www.cimamastercourses.com/DAWE

UK Gaap – a comprehensive refresher14-15 August, 9.30am-5pmLondon Cost: £999 + VAT (£899 + VAT for CIMA members)An essential refresher of UK financial reporting standards, the course covers the main requirements of each standard.

Visit www.cimaglobal.com/events for updates and a full list of events, which are free unless otherwise stated. CIMA Mastercourses – your catalyst for business change: visit www.cimamastercourses.com or call 0845 026 4722. To submit an event for this page, email [email protected]

Contact 0845 026 4722, email [email protected] or visit www.cimamastercourses.com/UGCR

South AfricaGlobal Business Challenge final28-29 AugustMaslow Hotel, Sandton, JohannesburgThe international business competition designed to bring out the best in the young business leaders of tomorrow reaches its exciting finale. Contact [email protected] if you are interested in attending or sponsoring this event. With regional finals still to take place in Australia, Myanmar, New Zealand, Singapore,

Thailand and Vietnam, you can follow the competition atwww.cimaglobal.com/events-and-cpd-courses/globalbusinesschallenge

CIMA CPD autumn academy23-24 September, 9am-5pmCIMA, 26 Chapter Street, London SW1P 4NPCost: £799 + VAT (early-booker rate of £699 + VAT on all bookings received by 9 September)This two-day event will cover a wide variety of topics and incorporates a case study and time for networking. Contact 0845 026 4722, email [email protected] or visit www.cimaglobal.com/autumn

Making big data work for you6 June, The Oberoi, BangaloreCIMA hosted a round-table discussion entitled “Making big data work for you: transforming insights into opportunity” in conjunction with CFO India magazine.

The event covered questions such as:l Is business intelligence work in progress and big data a next step?l Could big data change your organisation’s strategy or business model? l What is the accountant’s role with regard to assembling non-financial data?

CIMA’s chief executive, Charles Tilley, gave a keynote address to the round table, which was moderated by Shalini Dagar, editor of CFO India, and attended by 16 CFOs. HP’s head of global business services, Ravichandran Venkataraman, also addressed the event.


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They are fond of proclaiming the amount of money they have spent on public services, but this input-based approach is flawed. It would be better to focus on how value is achieved by measuring the impact of their policies in terms of outputs and outcomes.

This angle will be familiar to those of you who have followed my thoughts on integrated reporting (IR). Although IR’s main focus is investors, the model can be flexed in the public sector to recognise alternative funding providers and desired outcomes. In this context it’s essential that key decision-makers have a deep understanding of how value, in the shape of outputs, can be measured over time. Having reliable costing information that identifies the financial flows in government departments is a building block for this process. Such a grasp of how the costs incurred drive value-adding outcomes is crucial at any time, but even more so in this era of resource constraints and spending cuts.

CIMA has been working with the UK’s Institute for Government on a blueprint for reform that will lead to better decision-making and more efficient government. Our most recent report on this subject, “Financial leadership for government”, highlights the lack of development of strategic financial roles

Charles Tilley, FCMA, CGMAChief executive, CIMA

CIMA CEO column‘What is missing in Whitehall is strong financial leadership at a macroeconomic level’

The call for the efficient and effective use of taxpayers’ money is a familiar one, yet all too often governments are failing to back up their

policies and decision-making processes with solid performance measures.

in central government. The research underlines my long-held opinion that what is missing in Whitehall – and in many other seats of government – is strong financial leadership at a macroeconomic level. Lord Browne, the government’s “lead non-executive”, recently called for a more businesslike approach to government – a view that I firmly support.

Governments need to be able to show taxpayers exactly what they are getting for their money. In effect, it’s about demonstrating their return on investment. The resulting focus on costs, outcomes and value creation will inform policymakers and enable ministers to base their decisions on reliable evidence rather than gut feeling. Policy should be shaped on what can be delivered, and at what cost. Longer-term strategies based on solid management information, and with strong performance objectives, will ensure a strong focus on value for money, enabling departments to control expenditure while retaining public services and investing for the future.

In order to achieve these outcomes, the emerging strategic focus of finance teams is paramount. In the private sector the CFO is increasingly seen as an organisational leader, rather than the head of a team. This development needs to be matched more closely in the public sector. The finance function in the public sector has a vital role to play by increasing its emphasis on supporting

decision-making and performance management, providing insight through the identification and analysis of financial and non-financial data.

Management accountants are adept at translating facts and figures into relevant, timely and actionable information. The profession has an obvious role in leading this transformation. Strong and clear political oversight is also needed to drive it forward. Change must be demanded from the top – and senior leaders must be seen to be accountable for outcomes. In order to drive efficiency and focus on real priorities, rather than being sidetracked by populist policies, they must focus relentlessly on performance management. This culture must permeate through the entire structure. Such an approach would consistently improve the transparency and accountability in government, leading to greater public reassurance in an era where change is the new normal.

CIMA’s “Financial leadership for government” report can be found at www.cimaglobal.com/leadership


Not much time ever passes before an email alerts you to the arrival at your firm of his or her successor. I imagine that’s because they’ve been spending too much time with their family.

Managers and HR departments are obsessed by restructuring, downsizing and rightsizing. Employees’ cynicism about internal communications must surely be a given, but I wonder how many internal communications professionals are prepared for media ridicule? In April a story lambasting HSBC’s description of cutting jobs as “demising human capital”, with 3,000 people set to be “impacted”, made the front page of the Financial Times.

Management is riddled with double talk. “I hear you” means: “I’m going to waste a bit of time before disagreeing with you.” “I’m taking your idea on board” is a quicker way of saying: “I’m going to pretend to have listened to your idea when I haven’t, because I’m just about to disregard what you said – if I haven’t already done so.”

I blame the trainingSeemingly straight-talking executives return from residential management training courses blathering on about how “to operationalise projects with many moving parts”, declaring that this is not a “zero-sum game” and, as such, we’re aiming for “maximum market penetration”. They will suggest “giving your ideas some oxygen as we socialise them and then circle back for a deep-dive Swot analysis”. Here’s a thought: in parallel with the executive training, why not offer a glossary for the delegates’ soon-to-be bamboozled colleagues?

Courses on how to manage teams, negotiate effectively or work with

Watercooler Management-speak: double take on the double talk

I am sure that they really do love their family, but did they really give up their annual salary, car allowance and pension contributions to spend more time with them? ‘Left to spend more time with their family’ is such an odd turn of phrase to explain an employee’s departure

difficult people have considerable merit. Yet core to every scenario in every hotel training room stocked with pyramid-shaped water bottles, dishes of boiled sweets and fluorescent decanters of cordial (when would you ever think: lime cordial; I must have lime while I learn?) lies the need to communicate clearly.

But trainers and “facilitators” bandy around their faux-slang, mid-Atlantic-twang-of-an-accent approach to unnecessary sentence construction: “Who’s seen that before, yeah? Let’s just throw some ideas around and see where they land, OK?” Answer: usually on a flip chart, where some will be parked and most will go on the back burner.

Corporate health warning: delegates, do not let this rub off on you. Resist the lingo, the verbiage and the vernacular. Return to work a better manager with perspective. Be able to identify and understand personality types; enjoy exploring how best to engage with different views; understand the need to be able to manage upwards as well as downwards; come back more

assertive and better at presentations; and, above all, please. Speak. Clearly. Why? Because “key operational strategies to drive an-order-of-magnitude paradigm shift designed to future-proof the outturn going forward” undermines the very message you’re trying to send as a newly trained executive on the path to greatness, which is: “I’m your manager. Have confidence that we will succeed. Follow me.”

My favourite post-training conversation was recounted by a junior employee at a certain national broadcasting corporation. Having returned from a management training session, her boss declared: “I’m told that apparently I need to praise people more. If you think you need more praise, please do let me know.” This speaks so clearly on many, many levels.

My book, The Lingua Franca of the Corporate Banker, is all about corporate jargon and includes a glossary of more than 500 expressions. Each entry includes an explanation of the term’s supposed meaning and its likely origin. Examples include:GO, NO GO As in “what’s our go, no go plan?” – ie, do we proceed or not? This term has too many Os for my liking. It looks suspiciously like an island in the Indian Ocean: “This summer I’ll be taking a holiday on the Isle of Gonogo.”GET YOUR HEAD AROUND IT To consider and understand a concept. It’s similar to “embrace an idea” (go on, give it a cuddle). Does not apply to all body parts – don’t wrap your legs around an idea.GLUE As in “he’s the glue in our team” – the individual who holds (or drags) a group together. Usually that’s the person who organises the social drinks.

Julia Streets is the founder and director of Streets Consulting, an international business development, marketing and communications consultancy. She is also a writer (author of The Lingua Franca of the Corporate Banker), after-dinner speaker and stand-up comedian. The Lingua Franca of the Corporate Banker is available from Searching Finance, Amazon and Barnes & Noble. Facebook The Lingua Franca of the Corporate BankerTwitter @streets_ julia Email [email protected]

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Beneficts and Drawbacks EBITDA

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Transcript of Beneficts and Drawbacks EBITDA