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FIVE REASONS WHY YOU SHOULD ADOPT INTEGRATED REPORTING

HOLDING ALL THE CHIPS


How Paul Pomroy helped finance become a strategic player in McDonalds $27.6bn-turnover operation MEET CIMAS NEW PRESIDENT, MALCOLM FURBER SOPHIA STEIGER ON RISING TO THE CHALLENGE OF MANAGING BILLIONS FOR CREDIT SUISSE

Financial Management | July/August 2013

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Illustration: Jrn Kaspuhl/Dutch Uncle

There is a critical skills shortage in many regions thats likely to get worse

A word from the president

CIMA LinkedIn group: tinyurl.com/ ahxyoda

ne of the events I am most looking forward to as CIMAs new president is the nal 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 Africas young people could benet greatly from professional qualications that, like CIMAs, are both accessible to all and specically tailored to employers needs. In such regions, the institutes 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 nance 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 nancebased 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 rst 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 benecial road map for success.

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 nalists in past years has given me great condence that the next generation will avoid some of the cavalier mistakes made by a minority of todays 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 planets young people are neither working nor studying. A third of those who are employed rely on informal or intermittent jobs, making it dicult for them to gain skills. Meanwhile, there is also a critical skills shortage in many regions around the world thats 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 How has the institute helped your career? Wed like to hear from members and students about how the CIMA qualication has accelerated their progress. Email your story to: responses@cimaglobal.com

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 nance leaders and its an ideal forum in which to address this burning issue. With such worrying youth unemployment gures 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 Im certain that the results will provide a bright beacon for young people in a careers landscape that can sometimes seem rather gloomy.

Malcolm Furber, FCMA, CGMA CIMA president

AT A GLANCE
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Financial Management | July/August 2013

Financial Management | July/August 2013

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A word from the president Malcolm Furber p3 I worked on Growing Ireland West Airport Knock p6 Inform p915 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 Everything Thinking and opinion A critical analysis of shared-service centres, plus Andrew Clark of The Times on integrated reporting p14-15 Led by nance Hedging commodity risk at Coca-Colas Bottling Investments Group p17

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Resource

45-63

Editors note
Management accountants oer a unique insight based on a broad knowledge of how various functions in their enterprises work. Its therefore important to spend time away from the back oce and out in the eld, says CIMAs 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 rst-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, nance, for McDonalds 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 companys 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, oers his views on the IR movements progress so far.

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Study notes T4 part B case study, paper E1 and paper C01 p45 Technical notes The pros and cons of Ebitda as a metric; plus the development of management accounting in China p55 What you learn on CIMA Mastercourses on nancial modelling techniques p62 The institute A view from professional standards on the benets of volunteering; plus CIMAs new tool-evaluation resource p63 CIMA events Dates for your diary, plus a summary of recent institute events p64

The insider view Singapore p18 The data The rise of intangible assets as a proportion of market value p21

Back
CIMA CEO column Charles Tilley p65 Watercooler p66

65-66

Features

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A meaty role Paul Pomroy on the challenges facing McDonalds UK p22 The whole story (so far) The case for adopting integrated reporting p28 Sophia Steiger Head of IT and realestate nance at Credit Suisse p32 Furber education Introducing CIMAs new president, Malcolm Furber p38 8 ways to Improve working capital p42
CIMA is the Chartered Institute of Management Accountants 26 Chapter Street, London SW1P 4NP 020 7663 5441 www.cimaglobal.com Cover photograph: Plainpicture

Lawrie Holmes
Please send your comments and ideas to editor@fm-magazine.com or join the FM feedback group on CIMAsphere at www.cimasphere.com/groups
Head of media and communications Katie Scott-Kurti FM is published for CIMA by Seven, 3-7 Herbal Hill, London EC1R 5EJ Group editor Jon Watkins Editor Lawrie Holmes Managing editor Darren Barrett Technical editor Neil Cole Group art director Simon Campbell Junior designer Josh Farley Creative director Michael Booth Chief sub editor Steve McCubbin Deputy chief sub editor Chris Ryder Deputy picture editor Louise Fenerci Picture researcher Alex Ridley Production manager Michael Doukanaris Account director Sin Dudley Group publishing director Rachael Stilwell Project director Stefanie Hinten-Reed Global sales director Hilton Young Advertising manager Philippa Mathers
philippa.mathers@seven.co.uk Tel: 020 7775 5717

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President Malcolm Furber, FCMA, CGMA Deputy president Keith Luck, FCMA, CGMA Vice-president Myriam Madden, FCMA, CGMA Chief executive Charles Tilley, FCMA, CGMA

Editorial director Peter Dean Managing director Jessica Gibson Chief 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.

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Financial Management | July/August 2013

Financial Management | July/August 2013

[Knock by numbers]

passengers used the airport in 2012 its busiest year to date The airport serves

685,000 28

A total of

international destinations, with airlines including Ryanair, Aer Lingus Regional, Flybe and Lufthansa operating from it Knock is the

Name Paula Roberts, FCMA, CGMA Company Ireland West Airport Knock Role Finance manager Industry Aviation CIMA qualied

busiest airport in Ireland after Dublin, Cork and Shannon During September 2011 Ryanair celebrated the airlines

4th

4 millionth
passenger through the airport

I work on Growing Ireland West Airport Knock


Start date End date Ongoing Location Charlestown, County Mayo, Ireland

As the nance 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 Id been at companies including Cinema International Corporation, Nortel, Thanet Healthcare and Learning Curve. It is classed as a regional airport, as its not a hub or near a city, which makes

gaining and sustaining new routes relatively dicult. 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 xed costs, including for maintenance and extensive regulatory obligations in areas such as security and safety. Cost eciency 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 osetting its xed 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 eciency. Nearly two-thirds of our employees are trained in multiple disciplines, for instance, which increases their exibility 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 nance 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 ow 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 nancial position and the challenges facing us.

Alamy

INFORM
Financial leaders come to the fore on innovation
enior nance professionals have moved to the centre of discussions about innovation in business, as many rms seek to enhance their portfolios with more innovative products and need someone to ensure that the right ideas are funded and executed properly. Thats the view of a new CGMA report entitled Managing innovation: Harnessing the power of nance, which argues that CFOs and other nance 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 worlds most innovative companies. In those businesses the CFO and nance 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 nancial 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 nance 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.

NEWS OPINION COMMENT INSIGHT ANALYSIS

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Financial Management | July/August 2013

Financial Management | July/August 2013

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HOT POTATO

Blue-chip Brits plan for growth

This months dilemma


THE DILEMMA I am the nance manager at a global charity. Some of the members of our governing committee travel to overseas oces and Im concerned about the expenses that one of them submits. These do not always reect policy, exceeding limits for hotels and including big bar bills. But the FD is reluctant to challenge these and signs them o. CIMAS 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 resultof reliance on information supplied or comments made.

Integrated reporting would demonstrate the value of data

usinesses 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. Thats 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 rm SAS. The report, Data on the balance sheet, suggests that data should be regarded as an asset because it provides potential future economic benets. But it adds that, although many European rms 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 Cebrs CEO, Graham Brough, whats required is a forward-looking integrated accounting framework that shows investors a comprehensive view of a rms 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 nd systems outside traditional accounting practices that take into account not only nancial and physical capital but also human, social, relationship and knowledge capital. Reports should include a companys future prospects as well as a review of past performance.

ome of Britains largest companies have indicated that the UK may soon oer 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 ve 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

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.

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 Italys 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.

IFAC event aims for global unity

CGMAs are ideally placed to help guide businesses through the dicult economic climate, according to both Charles Tilley, CIMAs chief executive, and Barry Melancon, the AICPAs 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. IFACs 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 CIMAs and the AICPAs support for the congresss goals of fostering global unity and collegiality among professional accountants.

POLL OF THE MONTH


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

Yes: 77%

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

Getty Images

No: 6%

Dont know/undecided: 0%

What the poll says Unsurprisingly, in light of recent scandals, the vast majority of respondents feel that rms should be more transparent about their tax aairs. 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 reection that companies recognise tax issues as areputational risk.

ON CGMA. ORG

For CGMAs, the following content is now available online

Boot the budget? Why rolling forecasts might make more sense. Traditional budgeting practices are keeping nance 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 exible enough. He argues the case for replacing it with continuous planning and rolling forecasts. www.tinyurl.com/p2vuyw7 How work attire inuences your next promotion. Dress to impress might seem trite advice, but it rings true in the business

world. A survey has found that employers still believe that what a candidate wears could inuence his or her chances of success. www.tinyurl.com/p7mme9t Seven ways to improve your delegating skills. Curbing your inner control freak could just makethose who work for you feel happier and more empowered andyou could get to free up time todo the kind of big-picture work you were hired to do. www.tinyurl.com/njvttdg Five ways for nance to become an innovation partner. The nance

function isnt just for approving ormonitoring strategic initiatives; itsbecoming part of the decisionmaking team. A new CGMA report shows how CFOs and other nance professionals can be partners in successful innovation. www.tinyurl.com/op94t23 One to one: Sir Charlie Mayeld, chairman, John Lewis Partnership. In the latest of a series of interviews with global nance leaders, CIMAs chief executive, Charles Tilley, asks Mayeld for his tips for achieving long-term business success. www.tinyurl.com/nx6w9k6

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Financial Management | July/August 2013

Product discovery with tiny teams


Divinia Knowles on how a US guru transformed her rms approach to research and development
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 developedin this new digital age, based on the idea that you can spinthem out using really tiny teams that are incredibly agile because theyre simply sitting there producing prototype after prototype. He also explained the value ofuser testing ie, how you determine whether or not your concepts canbesuccessful by bringing customers into theprocess at a relatively early stage. CAGAN SAYS THAT PRODUCT DEVELOPMENT TEAMS at the Silicon Valley Product Group ask the management for alittletime to investigate the solution and validate that withcustomers to ensure it has the necessary value and usability, with engineers to ensure itsfeasibility and withother stakeholders to ensure that its viable for our business.Once we have come up with a solution that works for the business, we can make an informed and highly condent statement about when we could deliver this and what type of result we can expect. Wecan also decide whether its even worth doing. 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 its a quite complex web-based game. We have since shifted away to this more mobile development world, whereby you can build stu, test it and throw it away if need be. Youcan fail fast and you havent then sunk your whole business. You can spread

You can build stu, test it and throw it away if need be. You can fail fast
your bets, develop products quickly and then see what sticks. Its how all very successful rms, 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, isknown as product discovery. The way mobile development is going now, you can use this approach to run a business thats really small but can earn really big revenues. Its like R&D but a supercharged version for this generation.
Illustration: Raymond Beisinger/Dutch Uncle

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

MUST READ

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Private ubiquity, less the iniquity


The inuence 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 Everything Jason Kelly, 23.99, Bloomberg Press
workers worldwide, which gives them even more inuence 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 rm 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
Steve Forbes, editorin-chief and chairman, Forbes Media: @SteveForbesCEO When it comes to investing, emotions areyour enemy. Donald Trump: @realDonaldTrump Be exibly focused. Focus does not mean being narrow-minded or rigid Think Big.

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 rms 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 rms control, theyre the ultimate bosses of millions of

two years later, the stock price had more than doubled, reaping huge prots for all investors. More important, KKR argues, the new owners revived an ailing business and enabled it to expand, create jobs and generate sustainable prots. Private equity isnt always pretty. In the 2012 US presidential election, Republican candidate Mitt Romney, former CEO of private equity rm Bain Capital, was assailed by critics for closing factories and slashing payrolls. Many remain sceptical that private equity has anyones 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 ght it. Thats in part because the inuence of private equity is only growing. As its key players look beyond buying and selling companies, theyre lending to businesses, building infrastructure projects and even buying foreclosed homes. Everywhere we look, there they are.
Michael Dell, CEO and chairman, Dell: @MichaelDell With every great success there is courage, service andsacrice. Je Weiner, CEO, LinkedIn: @jeweiner Computer science has become the top major at Stanford for the rst time, up 50% from traditional rates.

TWITTERATI
Starstock

What business leaders have tweeted recently on business strategy and risk

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Financial Management | July/August 2013

Financial Management | July/August 2013

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Thinking

Opinion
The demand among investors for rms to adopt integrated reporting is irresistible, writes Andrew Clark. But IR is about more than an annual document its a state of mind

The rise and rise of shared-service centres is a revolution thats going under the radar
he 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, its where a rm removes support services such as nance, 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 arms-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 eciency savings through relocation and the elimination of duplication, an SSC brings a quasimarket 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. Whats 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 prot.

L
The claimed advantages of adopting sharedservice centres have hitherto gone largely unchallenged by academic studies 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 ndings of our study indicate that, far from being a peripheral project concerned merely with shuing the organisational deckchairs, the SSC model represents a quiet revolution in back-oce services. Through its emphasis on cross-functional process streams and business process re-engineering, its reshaping the way in which activities are done and also has the potential to inuence 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 oce as an opportunity to make the most of the talents of front-line sta rather than just another overhead burden to shed. For most of our research subjects, the real benet 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 CIMALoughborough 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 specic data and experiences. Further information and resources can be found on the projects website at www.shared-services-research.com
By Ian Herbert, senior lecturer in accounting and nancial management, and Will Seal, professor of accounting and management, atLoughborough University. They are members of an SSC research team supported byCIMAs general charitable trust.

ife used to be so simple. A ick through an annual report published only a couple of decades ago is a trip down memory lane. Take Sainsburys 1990 eort, 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 aair as companies have come under pressure to bare their souls. Its become impossible to ignore moves towards integrated reporting (IR) an idea endorsed by the Prince of Wales, Nestl, 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 nances, governance, strategy, prospects and challenges. At its heart the IIRC initiative means that they need to be far clearer about where theyre going. Steve Gale, a partner at accountants Crowe Clark Whitehill, explains: The investor community is saying: Its 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

Illustration: Karolin Schnoor /Dutch Uncle

Uncritical mass
The 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

Illustration: Lyndon Hayes/Dutch Uncle

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

thoughtful rm should report in a more sustainable way. Companies exist to produce goods and services for members of society, he says. But its no good doing that if theyre causing long-term damage in the process. Why all the caring, sharing hug-talk? Because the gures demand it. If investors value a rms brand at billions of pounds, theyll want to know how the management is protecting these intangibles. BPs Deepwater Horizon disaster, Barclays admission of Libor rigging and the discovery of horsemeat in Tescos burgers have cost these companies far more in reputational capital than in straightforward cash ow. 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 ling 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 oer insightful data on these and 8 per cent combine that with talk of future risks. But there are some cases of good practice. Chemicals rm 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 rms to put old doubts aside: Its actually considered a strength now to talk about your risks and how you plan to mitigate them. It shows youre on the ball and that youre scanning the horizon for changes that may be just out of sight.

Financial Management | July/August 2013

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Led by nance
The nance team of Coca-Colas Bottling Investments Group, under Doug Bonthrone, ACMA, CGMA (recently retired as CocaColas director of global services strategy), spearheaded a hedging project to manage $5bn-worth of commodity risk exposure
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 inuence of speculators in commodity markets. IN 2008 the new hedging plan proposed by Bigs nance 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 didnt have an approved commodity exchange,hedging would often be done by physical meansie, by buying and stockpiling commodities such assugar 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 specic data and broader global themes.

A TEAM INVOLVING the president, the corporate treasurer and the heads of nance and procurement worked with the CEOs and the nance and procurement managers of all of Bigs 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 nance team co-ordinated any interaction between the local operation and corporate treasury to execute the hedges. BIGS 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 plans assumptions; what wasnt hedged and its impact at current spot prices versus the business plans assumptions; and the technical details required by the controller function to determine the appropriate accounting treatment of the hedges in Coca-Colas 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 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-Colas leadership team and board. IN FORMING AND EXECUTING a global commodity-hedging strategy, Bigsnance 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 plans aims: the local operations were able to execute their agreed commodity hedges, the boards hedging edicts were followed and diverse reporting requirements were satised in good time. In short, nance 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 Bigs portfolio to meet its immediate and longer-term goals.

Illustration: Mike McQuade

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INFORM

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Financial Management | July/August 2013

19

The insider view: Singapore


FM examines how business is carried outin countries around the world, with local experts acting as business guides

[Singapore by numbers] GDP (purchasing power parity) in 2012 Unemployment in 2012

$325bn
largest economy

2%

Singapore is the worlds

40th 1.3%

5.5 million
Source: CIA World Factbook

Population

Real GDP growth rate in2012

CPI ination in 2012

4.4%

Contact
Shavonne Sim, CIMA Singapore Email: singapore@cimaglobal.com

DOING BUSINESS COMMERCIAL ENVIRONMENT


Singapore can claim to be one of the most dynamic business centres on the planet, oering a key regional trading venue, the worlds busiest container transhipment port and a popular investment destination. It is known for being a leading nancial hub, with more than 500 big nancial 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 Thorntons second global dynamism index, an annual survey covering aspects such as economic growth, human capital and the nancing environment. Singapores leading position reects its favourable conditions for business: it ranks highest in terms of the quality of the nancial regulatory system, the level of privatesector credit and the lightness of the tax burden (corporation tax is 17 per cent). Grant Thorntons 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 nancing environment and a well-educated workforce. Singapore benets from a number of other factors, including its multicultural environment, pleasant climate and relatively low political volatility, observes Yi Cai, ACMA, CGMA, nance 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 ocial language here makes it convenient for many multinationals to set up their regional HQs here as their base for doing business in Asia Pacic. The governments policies and regulations are similar to those in the West and theyre 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 rms, he says. As well as continuing to be the hub for business across the broader region, Singapore has invested heavily in its nancial 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, its no surprise that Singapore remains afocal point.

MANAGEMENT CULTURE
SINGAPORES 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 ofthe Singaporean operations of amultinational company will normally match that of the parentcompanys home country. For example, the business culture of a US multinational here would be typically American ecient and fast-moving whereas that of a European rm would oer 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 rm or a public body, according to Walkinshaw, who stresses that establishing personal contacts in Singapore isvery much part of the culture. In an increasingly competitive environment, buildingand maintaining relationships is essential here.

CIMA SINGAPORE has identied ve key factors that foreign rms and workers should bear in mind when operating in Singapore: RELATIONSHIPS. Its 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 benet 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 thats 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 inuences 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 individuals 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. Singapores diverse population is one of its strengths. Singaporeans are predominantly of Chinese, Malay and Indian ethnicity and, owing to the nations 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 dierent traditions that inform business culture and etiquette here.

Gallery Stock

Financial Management | July/August 2013

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The data

1976
was a breakthrough year in the development of standards for reporting intangible assets, when the then International Accounting Standards Committee published exposure draft 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 organisations value to its intangible assets.

The increasing value of intangible assets


ver 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 nancial accountable assets reected on an average companys balance sheet today comprises no more than 20 per cent of its true value. Research from intellectual property bank Ocean Tomo shows that a signicant portion of this intangible value is represented by patented technology. Illustration by Leandro Castelao

Tangible assets

as a proportion of the market value of the S&P 500

Intangible assets

as a proportion of the market value of the S&P 500

Source: Ocean Tomo / Hay Group and mergermarket / Financial Reporting and Global Capital Markets (Oxford University Press, 2007).

83%

68%

32%

20%

20%

17% 1975

32% 1985

68% 1995

80% 2005

80% 2010

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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Financial Management | July/August 2013

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A MEATY ROLE
Paul Pomroy counts logistics among the responsibilities he inherited on becoming senior vice-president, nance, for McDonalds UK and northern Europe. Given all the problems surrounding the supply of beef in Britain this year, he has plenty on his plate

By Lawrie Holmes Photographs by Matthew Stylianou When Paul Pomroy took the reins of the UK and northern European nance function for McDonalds last November, little did he know that the horsemeat scandal would be sweeping the continent within weeks. Given that hed just assumed responsibility for the groups supply chain, he was on high alert as soon as it emerged that British supermarket chains had been selling contaminated products. The fast-food retailer, which has been operating in the UK

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$27.57bn
In 2012 the companys revenues were up 2 per cent on the previous year, enabling it to post a prot of $5.50bn

1.8 million people are employed in its restaurants, 80 per cent of which are run by franchisees

[McDonalds by numbers]

the group has opened

1955
outlets

Since

69 million
people a day on average in countries

The business serves

34,000

118

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 development that the group has established to keep pace with consumers increasing awareness and maturing tastes. Pomroy, whos worked at the company for 17 years, has been involved in many of those adaptations. Joining from accountancy rm Smith & Williamson, where he was an insolvency specialist, Pomroy started in McDonalds UKs corporate nance 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 strategy 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

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

in an in-house department that was geared to analyse performance and to help shape and monitor the success of the businesss 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 acknowledgment of increasing competition from operators such as Starbucks and Cae Nero. For Pomroy such new oerings 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 customers 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 dierent needs and preferences, so we continually run our portfolio based on consumer insight. In a global business that means acknowledging the diversity of tastes around the world. The groups 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 exibility in the system to suit dierent regions, whether thats the McAloo Tikki in India or Le Croque McDo in France and Belgium.

Arch reformer
In 2005 the UK business decided to improve the image of its outlets by giving them a more upmarket look. Cash ow was at its lowest level and we hadnt reinvested in the estate because our focus had been on growth, so we had taken our foot o 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 radical 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 McDonalds outlets in the UK, more than 800 are owned and run by franchisees. These 160 entrepreneurs each run an average of ve restaurants, although some have signicantly more. Through our franchised structure we have multiple enterprises running at the heart of the public-facing McDonalds business. Supporting these operations with bespoke advice is as much of my job as the top-level nancial management

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of McDonalds UK, Pomroy says. Our franchisees are vital stakeholders. They all champion our values and we involve them heavily in the planning process. So we now have a situation where 50 or so franchisee representatives are involved in discussions concerning areas such as prices and products. Because many of the franchisees have backgrounds in other industries, McDonalds, 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 nancial guidance 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 present worthwhile investment cases and strategic business moves to the franchisee network. In 2008, Pomroy was made vice-president, nance, with his remit extending to pricing, protability and nancial projections. At this time his team adopted several innovations,

Our franchisees are vital stakeholders. They all champion our values and we involve them heavily in the planning process

including the installation of an Oracle database, the introduction of automated P&L for every market and the extensive use of intuitive software. We have a big-data warehouse and have numerous inputs including the results of about 3,000 interviews conducted with customers each month, he says. The use of such tools has been vital in making the most of the large volume of information thats become available to the company, according to Pomroy. Theres no doubt that the smart use of research and customer insight forms a huge part of our strategy. Our central business strategy and insight unit plays an integral role in generating and evaluating both qualitative and quantitative insight thats used to help inform, update, evolve and future-proof the business. He adds: We dont work simplistically with one piece of software that wraps together every piece of insight were 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,

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

we continually review, and draw insight from, all of the different strands of research we conduct. The business strategy and insight unit, the department heads, the project leadership 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 eciencies across the business, even in the recycling and conversion of used cooking oil to biodiesel to fuel our delivery eet, he says. Pomroys current job has added responsibility for the companys development division, which encompasses property, construction and support services, and for the northern division 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 McDonalds the avoidance of such problems has largely been down to its eorts to build good relationships with suppliers, 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 commitment to British and Irish farming, where we look to champion high-quality ingredients, share best practice, drive improvements in animal welfare standards and inspire people to enter the exciting agricultural industry.

makes McDonalds microsite, that allow consumers to communicate directly with the company. There are lots of challenges that only get bigger if we dont keep pace with the customer who is savvy with social media, Pomroy says. We want to be able to hear consumers questions 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 havent paid enough UK corporation tax, despite generating huge prots in Britain. Pomroy stresses that McDonalds is acutely aware of the debate and pays its fair share. We paid over 42m in corporation tax in 2011 and a signicant amount of additional tax is paid by our franchisees, he says. Looking ahead, he believes that the UKs continuing austerity measures are bound to aect 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 McDonalds needs to keep thinking about such issues when forming its strategy. Our challenge is to ensure that we dont 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 theyre getting.

Returns of the Mac


McDonalds 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 companys 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 llers, trimmings or additives and traceability is important to us, just as we know its important to our customers. We are able to track which farm and which herd a certain batch is from. Its the simplicity of our products and supply chain, paired with the long-term nature of our partnerships, 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

Getty Images,Getty Plainpicture Photographs: Images, Lay

Mac daddy: the worlds largest McDonalds outlet opened in London 2012s Olympic Park

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THE WHOLE STORY (SO FAR)


By Lawrie Holmes Illustration by Tomi Um

The integrated reporting movement is gaining momentum as the desire to know exactly how rms operate and where they make their money increases. Paul Druckman, CEO of the International Integrated Reporting Council, oers his progress report
they need to communicate better, especially in light of recent high-prole 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 benet.

Future investment

ean-Marc Hut, 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 were using? His words reect a broader view in business that, in order to have eective strategies, rms need a more comprehensive understanding of how they make their prots, 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 nancial information, he says. To this end, the IIRC has launched a pilot programme involving more than 90 organisations, including Coca-Cola, Tata Steel, Hyundai and CIMA, and over 30 institutional investors. Druckman argues that ecient markets depend on a regular ow of accurate information. There is a growing recognition that rms arent well equipped to explain the factors aecting 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 companys 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 fulls a wider need in business to think across silos.

Institutional 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 shortterm cash ow. Investors often overlook these companies because they shun volatility. Druckman thinks that many investors are realising that shorttermism actually creates volatility and contributes to nancial 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 nance provider needs an understanding of, and condence 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 international 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 signicant number of investors are looking at non-nancial issues that are longer term in nature and will materialise in the cash ows of the company, so are relevant to the valuation.

Technological advances

Political dimension

IR is part of the broad trend towards openness in business after the nancial 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 organisations strategy, 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 Obamas call for extractive industries to be clearer about where they create prots is important and its caused a rethink for many in the sector. The extractive industries are one of the IIRC pilot programmes most active sectors, as many of these companies are conscious that, in order to improve stakeholder relations,

Technology 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 nancial and non-nancial information, making clear connections between various sections of the report and showing the interdependencies. With a key facts page giving lucid and concise explanations of how these factors aect each other, it has used innovative ways to present information that wasnt 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. Advancements 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.

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Companies that are interested in being more innovative with their reporting, using it as a force for improvement both internally and externally, should consider the resources and evidence arising from the IIRCs 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 benets that businesses have had so far on their journey towards IR.

Obamas call for extractive industries to be clearer about where they create prots has caused a rethink

Quick on the uptake

Druckman says that the IR concept was adopted in a wide range of sectors during the period of consultation on the IIRCs draft reporting framework, which ran for three months from midApril. The industries that took the most interest tend to be less well understood by investors and wider stakeholders, he reports. These include nancial 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. IRs unique selling point is that it is market-led that is, its created by the business and investor communities for the business and investor communities, stresses Druckman, who lists some of its main identied benets: l Establishing the basis for a more meaningful engagement with investors. IR helps a rm to full its stewardship role by placing the strategy and business model at the centre of communications, better articulating the investment case.

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 connectivity and interdependencies between the range of factors that have a material eect on an organisations ability to create value over time. l Disclosing more than nancial information alone. There is a growing understanding among all stakeholders that, in order to convey a full story of value creation, all resources and relationships 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 supports investment decision-making. Citing a study by the Black Sun consultancy of the behavioural eects of IR among the companies involved in the pilot programme, 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.

l Breaking down silos. As

DRUCKMAN ON THE GLOBAL ADOPTION OF IR


The countries that are leading on the journey towards IR are doing so for a variety of reasons, but generally its because the culture and future of business in these countries for example, theG nations that are calling for a focus on transparency match the principles of IR. Moving to IR promises to oer any country that adopts it a competitive advantage. As Magnus Bcker, chiefexecutive 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 take on the presidency of the G , where there is a keen interest in IR as one of the supporting themes for work on transparency. Japans Ministry of Economy, Trade and Industry has established a corporate reporting laboratory to examine how reporting can support long-term investment. And the AsiaPacic Economic Co-operation Business Advisory Council is seeking to establish whether IR could signicantly accelerate long-term investment in strategically important sectors, including infrastructure and energy nancing. Policy-makers in the EU have also taken steps towards IR, with Michel Barnier, Europeancommissioner 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 countrys King III corporate governance code. With our pilot programme operating in 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. Thereare also certain regions that we have yet to reach, such as the Middle East, where corporate reporting in the main isnt at a stage where it can develop into IR. But organisations such as the Pearl Initiative, a private-sector-led not-for-prot organisation established to improve transparency, accountability and business practice in the Arab world, are laying the groundwork for the introduction of IR.

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Sophia Steiger has progressed from working at Londons largest sewage plant to managing assets worth billions for a global bank. She traces her journey from serious muck to serious money
Whats your role at Credit Suisse? Im 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 eciency and eectiveness, ensuring that we get the best value from our investments. This requires a focus on nancial accounting and management reporting, plus the ability to understand M&As and drive programme management. Its a complex environment thats similar to those of other nancial services companies, big rms 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). Its 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 sucient controls and processes to ensure that we meet all our global regulatory requirements is signicant. For IT alone we process more than CHF300m (207m) of accruals monthly and manage nearly CHF2bnworth of assets on the balance sheet. What are the secrets of managing nance 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 ecient and eective its essential that the nance 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 nding 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 nd out what people are capable of. It does take time, but it pays dividends over and over. Combining this with Credit Suisses formal internal-mobility and grow-your-own programmes means that we have a greater ow of talent across all levels. In addition, you cannot forget to have fun. For me that happens in the oce and outside. Im 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. Were 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. Weve launched a pilot programme to provide CIMA training to those who havent had access to it. This gives everyone the chance to learn together and gain access to a professional qualication 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 qualication is like a passport that signals the depth of the holders 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 dont 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 nancial services? When the business needs to save money or be innovative, its a fantastic time for management accountants no longer is it only about preparing accounts or monthly reports. In todays dynamic environment the business is relying on our insight and it challenges us to take decisions that make the dierence. This is when good accountants become valued business partners. The change agenda across nancial services is evolving continually, giving everyone the chance

CREDIT RAT A ED AT
Sophia Steiger, FCMA, CGMA, head of IT and real-estate nance, Credit Suisse

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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 nance 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 dont ask, you wont get. I have sought the full range of skills necessary to be an exceptional CFO. One needs to have nancial accounting and management reporting expertise complemented by experience of change and programme management and M&As. You ran nance 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 xed-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 loyaltycard 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 rst 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 oered the role of nancial 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 dierent employment regulations. We quickly established that for every similarity there was a dierence. Together we had to act pragmatically as we stepped through the rst six months, making tough decisions to drive the business towards a

to develop. For most of my team thats about showing their potential and that they can actually grow faster than they would have done before the nancial crisis. With increased accountability and delegation, individuals have got more involved and closer to the business than ever. Its 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 rst-class degree from my business studies and IT course at the University of Kent, I knew I could do anything. Although I was oered the chance to pursue a PhD in neurological programming, the lure of gaining a CIMA qualication 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

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sustainable prot. 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 nance 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 nances and had oversight of the IT that supported the organisation. By the time that I arrived there and drew up the rms rst

retail experience in other sectors and the rm 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 nance transformations and operating-model projects, undertaking global process excellence initiatives and implementing market-leading nancial management solutions. Recognised as a thought leader in the eld 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. Deloittes recognition that diversity is a key dierentiator 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 rms parenting programme, providing access to information about balancing family and work, and tracking metrics. Internal initiatives were also key in demonstrating the organisations 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 oered me the opportunity to move to Switzerland and build its nancial consultancy business. Because the oce there also had a truly international workforce, I was able to experience many dierent cultures. In 18 months my nancial consulting business team had grown six-fold and was a real contributor to the global rm. 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 Im making a real dierence at Credit Suisse. I bring the rigour of being a management accountant together with my experience of challenging the status quo and delivering signicant cost savings.

SOPHIA STEIGER
Works during her vacations from university as a junior accountant in the CivilService. Recruited by Thames Water as management accountant. Appointed nancialcontroller at Safeway Stores. Joins dotcom retailer Toyzone.co.uk ascommerce director. Moves into consultancy as a partner with Deloitte. Hired by Credit Suisse as head of IT and real-estate nance.

Building something from the ground up in banking, healthcare and manufacturing was extremely rewarding
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 aoat. 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

Photographs by Adrian Samson

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FURBER EDUCATION

CIMAs 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
By Lawrie Holmes Photographs by Rebecca Heareld Furbers career got o 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 oor 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. Furbers ambition and appetite for learning stood out. In my rst 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 Pacic, based in the UK. This was really about business partnering, high-level reporting and business development in the region, says Furber, who was soon to be assigned a project in Indonesia that was teetering towards collapse. Theyd devalued their currency by 50 per cent overnight. 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 marketing director asked me to come back to present to the board.

alcolm Furbers rst piece of advice to aspiring management accountants would be kick it and hug it. The institutes new president is convinced that all members of the nance team need to spend time in the eld understanding exactly how their organisation works and this motto reects his time as a senior manager at gases company Afrox. That job involved improving the performance of the rms eet in hauling gas cylinders across South Africa, where hes been based since 1980. Kick the tyres and hug a cylinder was what Furber would say to his sta, urging them to get out of the oce and ll 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 nancial managers; and the value of spending as much time as possible in the eld. 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.

Into Africa
His move to ICIs subsidiary in South Africa in 1980 was the precursor to a series of senior jobs there in nance, IT and corporate planning. After talking with David Swarbrick a former England rugby union player whod 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 isolation 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 partnering concept. There was a severe shortage of management

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skills in South Africa at the time people werent 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 subsidiarys operations, including petrochemicals and pharma ceuticals. Once I had established the management accounting function, I drifted into corporate planning and IT, where they found other things I could do, Furber says. Its one of the powers of the CIMA qualication you touch on these on the academic side, but its so easy to pick up skills that build on the qualication. Thats 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 oor 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 rm asked me: Because they dont know you here, would you chair the wage negotiations? So I learnt Zulu to understand what everybody was saying.

As I was the new kid on the block, the rm asked me: Because they dont know you here, would you chair the wage negotiations?

A veldt of dierence
It 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. Its still needed to some extent; the standard of education is not quite as good as it should be. Its a huge country, though. You do nd schools in the rural areas, but these dont have high-quality teachers because theyre in the cities and clearly not everyone can live there. In recognition of the poor conditions under which accounting 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 inuential 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 CIMAs activities. He became a regular speaker on behalf of the institute on topics including supply management, activity-based costing, integrated business planning and performance management. He has been a member of Council for 15 years, getting involved in the institutes past four qualication reviews and its ethical code. Hes 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 CIMAs strengths are recognised more widely. We have a lot of intellectual property and resources that are going to grow, especially 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 nance transformation, as well as sustainability and integrated reporting. While building his career, Furber has also pursued an interest in ying that has progressed into aerobatics. Once hes back to earth, golf, archery, hiking, water sports and military modelling are among his pastimes when hes 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 ts in well with his ethos. Ive 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-cimasnew-president for an extended version of this interview.

Financial Management | July/August 2013

CIMA MY JOBS

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www.cimaglobal.com/myjobs
Job search clinic sponsored by Robert Half

Closing the deal Its OK to negotiate salary with a potential employer


ts hardly surprising that some jobseekers, when faced with a coveted job oer, fear negotiating for a higher salary. Most think that doing so could damage their relationship with a new employer or recruiter. But, if youre in this category, you may be doing yourself a great disservice by not speaking up. It doesnt hurt to ask, especially if you cover the following bases.

Conduct research

Be 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 Halfs salary calculator for the accounting and nance elds. Consider asking past colleagues or contacts in your professional network for their insight as well. And dont forget to consider your geographic region it plays a signicant role in determining pay levels.

meet your request for additional compensation, consider asking for other benets. What would make the dierence for you? The opportunity to work exibly? The employers support for a professional qualication or additional training? More annual leave? More and more rms are willing to provide such things to secure the best talent, especially when they cant oer the desired level of pay.

Say no when you need to

Show them your value

Be 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 identication of a payroll problem saved your company thousands of pounds. Results such as this help to put you in a stronger negotiating position.
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If an oer is lower than you think it should be, point it out politely and then counter with your desired salary. If the employer cant or wont move, its 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 youre desperate to leave your current job, dont tip your hand, as it will weaken your position in negotiations.)

responsibilities, plus any special arrangements that resulted specically 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 employers 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 oer visit Robert Halfs new salary calculator tool at roberthalf.co.uk/ nance-accounting-salary-calculator
Robert Half is the worlds rst and largest specialised stang rm, with a global network of more than oces worldwide. For more information about our professional services or career advice, please visit roberthalf.co.uk

Look beyond salary

Youve heard it before: money isnt everything. If an employer is unable to

Once you agree to the terms, ask that a letter be drawn up, outlining the specics of the oer: salary, benets, the positions title and key

Get it in writing

Find your next role at roberthalf.co.uk

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8 WAYS TO IMPROVE WORKING CAPITAL


By Peter Bartram

consider moving to one of the up-andcoming 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 arent the only source of working capital. Firms are turning to asset-based nance such as invoice discounting, while others are harnessing the power of the web to raise nance. Rupert Honeywood, for instance, raised 71,500 from crowdfunding sites to start his business, the Personal Development Bureau.

by the same name. Jon Asprey, vicepresident 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 dicult for the rm 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.

Manage the payment process more eectively

Make expenses more visible

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.

Pay your suppliersontime

Theres never been a better time for nance 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?

Manage working capital actively throughout the organisation

Illustration by Borja Bonaque

Its not the responsibility of the nance 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 cashfocused 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.

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

Now theres 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 dont have a good relationship with your suppliers, you could end up not receiving goods when you need them. And, if you cant full your commitments, thats not good for your cash ow 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 rms can protect their cash ow, 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.

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 eort. 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.

Manage your stockactively

Investigate the benets of e-procurement

Consider alternative funding

Negotiate discounts with yoursuppliers

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 rm Carter Backer Winter, says its best to meet the bank sooner rather than later to increase a credit line. FDs whove had the brush-o from one of the big four banks could

Firms can benet 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 rm has only one point of contact with each supplier. Sometimes its 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 dierent 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 wont 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 rms 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 suppliers willingness to accept 60-day payment terms against another similarly priced suppliers 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.

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RESOURCE
study notes
T4 part B Test of Professional Competence in Management Accounting

STUDY & TECH NOTES THE INSTITUTE EVENTS


In this issue: Paper E1 Enterprise Operations, p48 Paper C01 Fundamentals of Management Accounting, p50

Whats the dierence between an ethical issue and a business issue? This question seems straightforward enough, yet recent T4 exam results have shown that many students nd it a tough one to answer By the T4 case study writer
on, ethical issues, its useful to consider CIMAs code of ethics. This sets out the following ve fundamental principles for professional accountants: l Integrity. Be straightforward and honest in all your professional relationships. l Objectivity. Do not allow bias, conicts 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 services based on current developments in

he T4 assessment matrix indicates that 10 marks are available in the exam under the ethics criterion for identifying, discussing and advising on ethical issues raised in the unseen material. But candidates in every sitting have been confused about what constitutes an ethical issue and what distinguishes it from a business issue. Before I clarify the difference and explain what the exam requires with regard to your discussion of, and advice

practice and legislation, and act diligently in accordance with the available technical and professional standards. l Confidentiality. Respect the confidentiality of information acquired as the result of professional and business relationships, so neither disclose any such information to third parties without proper and specic 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 scenario; 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 immediately and in the longer term, along with your justication for that advice. Between one and three marks are available for identifying an issue and justifying why you think it has an ethical dimension. Because of this mark allocation, you would be well advised to nd a second ethical issue and repeat the

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process. A further ve marks are available (up to three per issue) for giving detailed and justied recommendations. Demonstrating a good understanding of what an ethical issue is and why, together with providing sound advice, should therefore earn you up to 10 marks under the ethics criterion. So what is the dierence between an ethical issue and a business issue? There is a ne line, especially when some of the ethical issues included in the unseen material get mixed in with the business issues. In general, a business issue is one that aects an organisations performance, protability or cash ow and which needs to be addressed in order to improve the companys eciency. By contrast, an ethical issue is one where the performance of the business (and often its protability) is being prioritised above the wellbeing of its employees or what is considered to be good practice. Lets consider an example of a problem with both business and ethical aspects from the May 2012 exam, which concerns a toy rm 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 nance and IT director is concerned that Jots dierent IT systems are not integrated, which has caused data duplication and conicts. 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 conict between the nance department, which is chasing overdue trade debtors, and the sales department, which is trying to keep customers satised. One of the problems is that Jot appears to have invoiced customers for a number of products that have been supplied as replacements for faulty or damaged goods. The business issue here is the eect that Jots issuing of incorrect invoices could have on its customers. This could deter them from dealing with it again and delay the payment of invoices, leading to further strain on the cash ow of this small company. From the businesss perspective, there is an urgent need to establish a more robust and professional system for controlling inventory and raising invoices.

From an ethical standpoint, the problem is that Jots IT systems are clearly failing to provide sufficiently sound information that would enable accurate invoicing. The justication of why this is an ethical issue is that such an unprofessional state of aairs could reect 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 Jots procedure for returned goods and faulty products should be reviewed immediately with the aim of ensuring that invoices arent raised for replacement items. Another recommendation should be that Jot recruits an experienced IT manager to work with the sales and nance departments to review the systems and improve the procedures that are causing these faults. Furthermore, a longer-term review of Jots IT systems should be conducted with the goal of ensuring that all invoices are prepared accurately. Lets consider another example this time from the March 2013 exam (bit.ly/ T4March2013) involving a eet maintenance rm called BVS. This concerns problems with ten of the companys managed workshops, which are experiencing low utilisation levels and producing 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 BVSs board has insisted that two of the ten under-

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 dont feel condent that your information is robust enough to justify this decision. The business issue here is that management action needs to be taken to improve the quality of vehicle servicing, workshop utilisation and protability. From a business perspective, therefore, replacement managers could be transferred 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 aecting the jobs of employees at two workshops hinges on data that you have been asked to provide. There have been no clear guidelines 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 aected before a closure decision is taken. You have been put in a dicult situation whereby peoples 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 rst trying to improve their performance. CIMAs code of ethics states that you must act with objectivity and fairness in your capacity as BVSs management accountant. On this ethical issue, therefore, you should advise against any immediate closure. Instead, the managers 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 nance director, with a view to persuading PIEs representative to defer any closure decision until the results of the management interventions are known.

Further reading CIMA Ocial Study Text T4 Test of Professional Competence in Management Accounting, CIMA Publishing, 2012.

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Paper E1 Enterprise Operations

The balance of economic power has shifted dramatically towards the worlds emerging markets in recent years, but their imminent supremacy over the developed Western nations is far from assured By Tharindu Ameresekere
lobalisation has meant that all but the smallest and most local of businesses 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 business 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 reference points. For many organisations in the developed world, their expansion plans in the past ten to 20 years have usually taken them towards Asia. China and India have oered them promising opportunities, as have the so-called tiger economies of Hong Kong, Taiwan, South Korea and Taiwan, and, latterly, Indonesia, Malaysia, the Philippines and Thailand. There are also opportunities in Africa some authors even bracket the continents largest economy, South Africa, in among the Brics. Latin America, too, has shown promise as an emerging market. Its proximity to the US, the worlds largest consumer, makes the region attractive, 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, especially in manufacturing. These investments 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 suered by most Western economies, we nd two nations, each with populations of over two billion, with huge economic growth and a growing appetite for consumption. In 2011 the economies of the Brics grew at an average of 7 per cent compared 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 Caterpillar, threatened by a decline in the US building industry, was secured as the result of Chinas construction boom. 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.

Despite remaining the largest economy in the world on paper, the US lost status after the 2007-08 nancial crisis triggered by sub-prime mortgage lending, 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 decit of $51.8bn. In addition, unemployment reached 8.1 per cent in April 2012 from a low in May 2007 of 4.4 per cent. Such changes led indirectly to a reduction in consumer condence and spending, which in turn created a vicious circle of reduced investment, depressed demand and further job losses. When considering the EU, Greeces potential exit from the eurozone, the lack of liquidity in Spains banking system, political instability in Italy and the publics 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 taris, is projected to have grown by a mere 0.3 per cent last year. Its clear, then, that the mature economies of the West are still faring relatively poorly, but a total shift in power from West to East in terms of trade, investment, 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 eld, 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 nancial contribution to the Chinese Communist Partys 90th-birthday celebrations. Commentators have suggested a link between this sponsorship and the fact that GMs 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 criticised for contracting with Bangladeshi factories with fatally poor safety standards.2 And Apple attracted negative publicity for its use of Foxconn, a Chinese manufacturer whose poor conditions,

The global business environment as it relates to E1


Syllabus topic
The eects on business ofglobalisation, both ingeneral and in specic areas eg, trade. Risks to globalisation eg,protectionism. The development of emerging economies. The development of multinational companies. The growth in outsourcing and oshoring, and their impact on decision-making. Cultural dierences.

Industry example
Apples sales from outside the US have soared over the past fewyears. They increased from $14bn in 2005 to $64bn in 2010. In2010, 56per cent of the companys sales revenue came from international markets.3 US telecom equipment providers lobbied the government to prevent Chinese rm Huawei from acquiring 3com. The Brics emergence is one of the most dominant trendsof 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 oshored 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 nights 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 condence 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 ights. This prevented the loss of access to one of the worlds most important aerospace markets. Facebook entered a partnership with environmentalist lobby group Greenpeace aimed at reducing the ecological impact of its systems. 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 eects we have already seen a deceleration in Chinas manufacturing sector and lowerthan-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

Corporate social responsibility and corporategovernance. Government regulations on business and corporate political activities.

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

government in jeopardy, since it needs oil prices to remain high to support its scal spending projects. Brazil, despite its best eorts, is still struggling to maintain law and order, while its infrastructure has not been modied to reect 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 oshoring of manufacturing and service provision to emerging economies has slowed considerably owing to concerns in the developed world about rising costs in China and other oshoring destinations. There is also a growing recognition among Western rms that there are more subtle challenges for example, in nding outsourcing partners with the right strategic t or the need for better quality control. These are linked with Oliver Williamsons transaction cost theory, which identied 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 economies, which clearly have several problems of their own. While the US and EU have seen increased competition from imports and are still suffering the effects 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-tobe released Chi-Com propaganda lm, Washington Times, May 2011 (bit.ly/GMChina). 2. Bangladesh: factory re kills seven workers World Socialist Web Site, February 2013 (bit.ly/BanglaFire). 3. Apples overseas demand in a word: exploding, The Motley Fool, June 2011 (bit.ly/AppleExplodes). CIMA Ocial Study Text E1 Enterprise Operations, CIMA Publishing, 2012.

including excessive working hours, have led to a spate of suicides among workers. Furthermore, the mature economies of the West cannot simply be written o. 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 nations economy, it came as heartening news for Obama. Much of the growth was powered by a 15 per cent surge in sales of cars (considered a key eco nomic indicator in the US) and of other long-lasting manufactured 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.

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Financial Management | July/August 2013

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Paper C01 Fundamentals of Management Accounting


When youre applying process costing, its 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 play By Grahame Steven, FCMA, CGMA
y previous article about process costing, published in the April issue of Velocity , focused on a company that made nished products by assembling components (bit.ly/ProcessCostingPart1). In this article Ill consider a rm in the process industry using the rst in, rst 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 manufacturing. At the end of every month some batches are partially completed (work in progress). Unnished batches are nished in order of completeness ie, the batch closest to completion is nished rst, the second-closest is nished next and so on. The following gures 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 material 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 complete; mixing work 60 per cent complete). The main dierence between Slap It On and the component manufacturer in my Velocity article is the assumption of a normal loss. Losses occur in manufacturing processes that mix ingredients for

to the work done in July; 4,310 is included for paint started and nished 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 Opening WIP 0 Started and nished 4,310 Output 4,310 Closing WIP 390 Abnormal loss 50 4,750

many reasons. Losses occur in baking, for instance, because its impossible to transfer 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 expects a normal loss of 5 per cent, which will occur early in the manufacturing process. Julys normal loss is expected to be 5% x (1,000kg + 4,000kg) = 250kg. In practice, this gure will be higher or lower owing to factors such as manufacturing eciency and material quality. The rst step towards a process account is to work out how much of Julys output was started and nished 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 loss Opening WIP Material A Material B Normal loss Closing WIP Expected output Actual output Difference (abnormal loss)

Mixing 400 4,310 4,710 234 50 4,994

800kg 1,000kg 4,000kg -250kg -390kg 5,160kg 5,110kg 50kg

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 abnormal 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 gures we have can now be used to prepare the process account: Process account for July Opening WIP 1,280 Output 10,312 Material A 1,240 Ab loss 102 Material B 5,600 Closing WIP 702 Conversion 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.

line whenever another camcorder has to be assembled. There are partially completed camcorders (WIP) at the end of each month. Incomplete camcorders are assembled in order of completeness ie, the one closest to completion is nished rst, the second-closest to completion is nished next and so on. The following gures 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 complete), 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 rst step in getting to the process account for July is to subtract the opening WIP from the total output to calculate how many camcorders were started and nished that month: 105 30 = 75. The next step is to determine the number of equivalent units for components and their assembly. For components, the gure for opening WIP is zero, as no more component kits were used in

relation to opening WIP; 75 is included for kits started and nished 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 nished in July; and 45 x 40% = 18 is included for camcorders assembled in July in relation to the closing WIP. The two workings can be summarised as follows: Equivalent units of work in July Component kits Opening WIP 0 Started and nished 75 Output 75 Closing WIP 45 120

The gures we have can now be used to prepare the process account: Process account for July Opening WIP 4,110 Output 20,415 Components 9,960 Closing WIP 5,751 Assembly cost 12,096 XXXXXX 26,166 26,166

Assembly 15 75 90 18 108

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.

Now return to the paint rm, Slap It On, and test yourself by producing a process account from the following gures for August (the solution can be found on FMs 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 complete; mixing work 80 per cent complete). Grahame Steven is a lecturer and teaching fellow in accounting at Edinburgh Napier University.

Practice question on mixing

GLOBAL CONTACT DETAILS


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The next step is to calculate the number of equivalent units for materials and mixing. For materials, the gure for the opening WIP is zero, as no more material 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, because this must be valued. For mixing, 800 x (100% 50%) = 400 is included for opening WIP in relation

Worked example on assembly

A company called Picture This assembles camcorders from parts bought in from suppliers. A camcorder component kit is issued from stores to the assembly

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Exam notice
May exam results

Visit www.cimaglobal.com regularly for updates


The results for all paper-based exams were sent out by rst-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 oces. marks (between 20 and 24 credits in T4 part B) in the exam for which you want a review. An administrative review service will be available for all Operational, Management and Strategic level papers. The application deadline for all services 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. or exam centres, you will need to email exam.changes@cimaglobal.com 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 B

Attendance receipts

You 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 question

Your 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 answers

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

Post-exam guides

Post-exam guides will be available in early August on the Study resources pages of CIMAs website. These are essential reading for unsuccessful candidates and those studying a new subject.

The September extra exams will actually 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 paperbased exams without being charged the usual late-entry fee will, after receiving their results, have from 20 to 25 September to submit their entries online via their My CIMA accounts. There is no option to enter any later.

Extra exam sittings

The 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 downloaded now from www.cimaglobal.com/ strategicpreseen. A new case study for the November exams will be available in mid-October. Its 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 provided in the exams. You cannot take any notes with you into the exam hall.

CIMAsphere

Visit www.cimaglobal.com/sphere, CIMAs online community, to ask questions, share information and seek expertise and support from students, members and alumni. The site also features useful blogs.

Computer-based assessments at Certicate level

November 2013 exams

Script and administrative review services

A script review service will be available for Mays 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

These exams will be held from 19 to 21 November. Online entries will be accepted from 1 August enter by logging in to your My CIMA account. The standard 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

For full information about entering for a computer-based assessment, visit www.cimaglobal.com/certicateentry. If you wish to sit Operational or Management level exams in November, you must have completed the Certificate level by 12 September.

Queries

Visit www.cimaglobal.com to see if your question is answered there, or get in touch with CIMA Contact (cima.contact@ cimaglobal.com) or your local oce (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 months Hot Potato, page 10.

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technical notes
Proting games: the benets and drawbacks of Ebitda
By Ijaz Muhammad, ACMA, CGMA, senior manager, regulatory economics, at du Telecom

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

arnings before interest, taxation, depreciation and amortisation (Ebitda) is viewed all around the world as the key measure of a companys performance. Managers frequently use it when planning for both the short and long term. Its also often used to evaluate the impact of strategic decisions. All this is despite the fact that various authors have highlighted a number of disadvantages associated with Ebitda, which is not even required under Gaap to be included in nancial statements. A growing emphasis on Ebitda has increased the need for rms to capitalise their operating costs. Under certain accounting standards its permissible to capitalise xed operating costs. In the telecoms industry, the costs of sharing infrastructure, for example, are capitalised on the grounds that they are proxy for owning a network. In almost all industries, rms replace operating expenses such as leasing costs by acquiring longterm 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 its questionable how such a KPI can be used to compare companies. Some people argue that firms may have low or high depreciation depending upon their capital expenditure, so the depreciation charge distorts intercompany 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 Buet 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 xed costs (depreciation and amortisation, as well as interest) to make it meaningful. This gives us earnings before tax (EBT) without other income from associated 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 xed 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 management team views such xed costs, particularly when the emphasis is on incurring 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 economic prot before tax, which is calculated after considering all explicit and implicit costs. Adjusted EBT captures all operating expenses, whether paid or to be paid, and it also removes any creativity in managing operating costs through capex. Adjusted EBT is therefore a better KPI than Ebitda. Germanys Metro Group uses valueadded KPIs such as economic prot

EBT is a better key performance indicator than Ebitda

Capex

Capex

Revenue

Ebitda

Revenue

EBT

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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 companys 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 doesnt 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 clinically maintained or improved through a share buy-back (articial demand) or the excessive disbursement of dividends from accumulated retained earnings, thereby resulting in a disconnection between current earnings and the resulting share price. Therefore a high or low P/E ratio might not explain much about possible volatility in a companys current earnings or its future earning ability. Almost all such analyses based on the Ebitda and P/E ratio may lead to incorrect conclusions about a companys value and potential for growth. We can apply the costing concept of operational and nancial leverage to explore an organisations cost structure and the impact of its xed costs on earnings. These two ratios can provide an in-depth insight into a rms cost structure, exposure to operating income and income after nancial charges before investment income and taxation. Operating leverage (OL) can be expressed as

Company As selected nancial performance indicators 2011 2010 Ebitda (000) 14,475 14,670 Ebitda % 31.2 32.0 Earnings per share () 13.7 15 Share price () 172 170 Operational leverage 2.98 2.88 Financial leverage 8.05 * 1.23 Total leverage 24.0 3.5 Adjusted EBT (000) 274 1,902

2009 14,735 33.1 16 136 2.96 3.00 8.9 756

2008 14,490 35.3 8.8 127 2.13 3.04 6.5 1,186

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

Company Bs selected nancial performance indicators 2011 2010 Ebitda (NOK000) 30,526 29,221 Ebitda % 31.0 30.8 Earnings per share (NOK) 4.4 8.7 Share price (NOK) 105 90 Operational leverage 2.01 2.23 Financial leverage 1.17 1.16 Total leverage 2.3 2.6 Adjusted EBT (NOK000) 13,010 11,262 operating income before depreciation divided by operating income after depreciation. It explains how sensitive earnings are in relation to operating xed 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 nancial charges before taxation. The higher the financial charge, the higher the FL, eroding the rms 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 rst table shows that, while company As Ebitda and Ebitda

2009 30,670 33.8 5.2 87 2.00 1.20 2.4 13,677

2008 30,304 31.2 7.8 39 1.87 1.23 2.3 13,342

Opportunities and challenges for management accounting in mainland China


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

Getty Images

percentage have been fairly stable over the four years covered, the rms earning capacity has been falling consistently owing to an increase in OL. Bearing 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 company B, earnings and total leverage are almost stable. A consistently higher percentage increase in total leverage means that earnings are volatile. Many analysts evaluate a companys nancial health based on its Ebitda, free cash ows and expected dividend. For any business, a stable Ebitda and the announcement or disbursement of improved dividends signal a strong nancial 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 operator 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 controlling xed and variable costs. I would use OL and FL, to see the risk associated with the companys earning capacity, along with adjusted EBT instead of Ebitda.

s the result of lost decades Japan fell from its position as the worlds second-largest economy and was replaced by China, which posted a GDP of about $8.28trn last year. Although Chinas 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 investment, which has created a lot of jobs in mainland China. The most popular industries include nancial services (including 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 concepts such as capital budgeting, justin-time inventory, cost-volume-prot analysis and total quality management have become increasingly important.1 This creates demand for more highquality 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 Certied Public Accountants has approximately

250,000 members, 100,000 of whom are in public practice. This means that about 60 per cent of the nations 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 profession in mainland China. People could see some internationalisation of its accounting 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 aected 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 services (see table, page 59). Chinas encouragement of public listings over the past decade has improved the transparency and corporate governance 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 Beijings SOE reforms is to induce market capital into unitary state ownership to dilute the states equity and control. This should align SOEs to perform more according to market forces than to administrative directions. In future, therefore, management accounting practices will work more to service these rms investors and other stakeholders rather than purely to satisfy the authorities compliance requirements. Chinese rms continue to face issues concerning internal control and the problem of how to supervise an organisation to benet all stakeholders.

The number of publicly listed companies in China and their combined turnover 2011 2005 On the Shanghai Stock Exchange 931 834 On the Shenzhen Stock Exchange 1,411 547 Total number 2,342 1,381 Combined turnover (bn) 42,164 3,166

2000 572 516 1,088 n/a

Source: China Statistical Yearbook.

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Number of foreign direct investment projects in China Sector Farming, forestry and shing Mining Manufacturing Supply of electricity, gas and water Construction Transport and logistics Information technology Wholesale and retail trading Hospitality and catering Financial intermediation Real estate Leasing and business services Scientic research and technical services Environmental management and public facilities Services to households and other services Education Health, social security and welfare Culture, sport and entertainment Public management, social and international bodies Total Investment actually utilised ($bn)

2011 865 87 11,114 214 215 413 993 7,259 513 156 466 3,518 1,357 151 212 15 11 152 1 27,712 116

2010 929 92 11,047 210 276 396 1,046 6,786 579 85 689 3,418 1,299 143 217 12 12 168 2 27,406 106

2009 896 99 9,767 238 220 395 1,081 5,100 502 52 569 2,864 1,066 183 207 20 18 158 0 23,435 90

2008 917 149 11,568 320 262 523 1,286 5,854 633 25 452 3,138 1,839 138 205 24 10 170 1 27,514 92

Source: China Statistical Yearbook.

For instance, relatively low returns on equity are not uncommon in SOEs, while private enterprises have been adversely aected by fraud. The key management accounting challenge is to ensure integrity and uphold professional 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 reporting of a prot of 570m. Despite eorts to improve corporate governance and internal control frameworks, there have been other dramatic cases over the years involving organisations as diverse as Euro-Asia Agricultural, 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, coordinated accounting misconduct at the company. Cultural factors represent another big challenge to the development of management accounting in China. These include the nations hierarchical ideology. 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 indicated that support from the most senior

Continued economic growth in China will force domestic companies to adopt more Western accounting concepts
managers is the predominant success factor in ensuring the implementation of management accounting systems in a Chinese enterprise.2 Chinas 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 nancial statements, failing to keep nancial records and altering accounting treatments at random could be treated as criminal oences and penalised accordingly, for example. But its time for the authorities to review this legislation. It still requires all entities nancial years to run from 1 January to 31 December rather than allowing enterprises to set their nancial years according to their business needs. This state of aairs is not practical in the long term, because

it puts Chinese accounting rms 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 eectively. This process will necessitate training, education and perhaps even apprenticeships in oering consistent and continuing education for potential and existing nancial managers so that management accounting can develop as a profession in China. As globalisation 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 strategic role. This means that management accountants may nd 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.

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Mastercourses on nancial modelling

What you learn on

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

The institute

ave Marlow qualied 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 nancial courses for bankers, lawyers and accountants. He now looks after BPP Professional Educations nancial modelling training.
to Excel les (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 aect 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 castles caf 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 nancial model will:

l Be exible, 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 eective, high-quality models.

View from the professional standards team


s 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 benet other people? Even better, what if you could help others and benet 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 nancial pressures, its becoming increasingly dicult to obtain budgetary approval for training and development activities, but volunteering gives you a chance to share your expertise and to enhance and rene your skills in a completely dierent business setting. The challenges youll 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 courses on oer

Whether you are an accountant, a banker, an administrator or a manager, it is dicult to get by these days without using Excel, Microsofts ubiquitous spreadsheet software. The package has been around for years and its developed in such a way that it has become one of the indispensable tools of oce 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, youre probably using fewer than 5 per cent of its capabilities. Maybe you are well aware of this state of aairs, but have you ever thought of doing something to change it? The nancial 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 youll be able to pass on to them.

BPP oers a number of CIMA Mastercourses in this area, but at the core are Introduction to nancial modelling and Intermediate nancial modelling, both of which last for two days. The focus of these courses is the forecasting of an integrated set of nancial statements ie, the income statement, cash ow statement and statement of nancial position. This could be done for many dierent purposes eg, budgeting, credit analysis, business planning, nancial 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 uctuates? Both courses are suitable for accountants and non-accountants, but its helpful for delegates to have a basic level of nancial 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 condent 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 Id come on this course a few years ago. For further details of BBPs nancial modelling courses, available through CIMA Mastercourses, visit www.cimamastercourses.com/IT-skills

or softer skills. If so, volunteering your expertise should benet you. In troubled times many NGOs are nding it increasingly dicult 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 nancial 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 dierent? In addition, you may nd it useful to visit www.tinyurl.com/pe8gvek and read how other CIMA members have volunteered their management accounting skills in the past.

CIMA unveils toolevaluation resource


There is a huge array of management accounting practices and tools on the market, all of which promise to help dene and manage an organisations 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 eectively. 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 youll nd a summary of the essential information on more than 20 established management accounting tools, ranging from the balanced scorecard to Porters ve forces model. This explains: l What each tool does and what value it can oer 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 tools potential. l What best practice looks like including case studies. l Where to nd further information about a tool if you want to delve deeper. Join the debate, rate the tools eectiveness and help the institute to identify which to cover in future by visiting www.cgma.org/essentialtools

Excel in excelsis

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

So what is the dierence between simply using Excel and nancial modelling? Financial modelling refers

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Your guide to recent and forthcoming CIMA events

Events

Past events
CIMA/Hong Kong agreement signed 7 June, Hong Kong CIMA has signed a mutual exam paper exemptions agreement with the Hong Kong Institute of Certied Public Accountants (HKICPA) after a mutual review process. The agreement, which took eect 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 CIMAs managing director, Andrew Harding. For CIMA members it oers access to the HKICPA qualication 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 Kongs reputation as a world-leading centre for business. Making big data work for you 6 June, The Oberoi, Bangalore CIMA 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 organisations strategy or business model? l What is the accountants role with regard to assembling non-nancial data? CIMAs 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. HPs head of global business services, Ravichandran Venkataraman, also addressed the event.

UK Mini MBA for accountants 15-19 July, 9.30am-5pm London Cost: 599 + VAT per workshop (415 + VAT per workshop for the full ve-day series with membership of the CIMA corporate discount scheme) An intensive ve-day course that will introduce you to MBA-type thinking and how this can be applied to the nance function. Contact 0845 026 4722, email mastercourses@ cimaglobal.com or visit www. cimamastercourses.com/MBAA Data analysis with Excel 6 August, 9.30am-5pm London

Coming events

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 mastercourses@ cimaglobal.com or visit www. cimamastercourses.com/DAWE UK Gaap a comprehensive refresher 14-15 August, 9.30am-5pm London Cost: 999 + VAT (899 + VAT for CIMA members) An essential refresher of UK nancial reporting standards, the course covers the main requirements of each standard.

Contact 0845 026 4722, email mastercourses@ cimaglobal.com or visit www. cimamastercourses.com/UGCR South Africa Global Business Challenge nal 28-29 August Maslow Hotel, Sandton, Johannesburg The international business competition designed to bring out the best in the young business leaders of tomorrow reaches its exciting nale. Contact eventssa@ cimaglobal.com if you are interested in attending or sponsoring this event. With regional nals still to take place in Australia, Myanmar, New Zealand, Singapore,

Thailand and Vietnam, you can follow the competition at www.cimaglobal.com/ events-and-cpd-courses/ globalbusinesschallenge CIMA CPD autumn academy 23-24 September, 9am-5pm CIMA, 26 Chapter Street, London SW1P 4NP Cost: 799 + VAT (earlybooker 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 conferences@ cimaglobal.com or visit www.cimaglobal.com/ autumn

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 ben.jackson@cimaglobal.com

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T
Illustration: Jrn Kaspuhl/Dutch Uncle

What is missing in Whitehall is strong nancial leadership at a macroeconomic level


decision-making and performance management, providing insight through the identication and analysis of nancial and non-nancial data. Management accountants are adept at translating facts and gures 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 eciency 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 CEO column

he call for the ecient and eective 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 nancial leadership at a macroeconomic level. Lord Browne, the governments lead non-executive, recently called for a more businesslike approach to government a view that I rmly support. Governments need to be able to show taxpayers exactly what they are getting for their money. In eect, its 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 nance 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 nance function in the public sector has a vital role to play by increasing its emphasis on supporting

They are fond of proclaiming the amount of money they have spent on public services, but this input-based approach is awed. 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 IRs main focus is investors, the model can be exed in the public sector to recognise alternative funding providers and desired outcomes. In this context its 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 identies the nancial ows 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 UKs Institute for Government on a blueprint for reform that will lead to better decision-making and more ecient government. Our most recent report on this subject, Financial leadership for government, highlights the lack of development of strategic nancial roles CIMAs Financial leadership for government report can be found at www.cimaglobal.com/leadership

Charles Tilley, FCMA, CGMA Chief executive, CIMA

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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 employees departure
Not much time ever passes before an email alerts you to the arrival at your rm of his or her successor. I imagine thats because theyve 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 HSBCs 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: Im going to waste a bit of time before disagreeing with you. Im taking your idea on board is a quicker way of saying: Im going to pretend to have listened to your idea when I havent, because Im just about to disregard what you said if I havent already done so. dicult people have considerable merit. Yet core to every scenario in every hotel training room stocked with pyramidshaped water bottles, dishes of boiled sweets and uorescent 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-Atlantictwang-of-an-accent approach to unnecessary sentence construction: Whos seen that before, yeah? Lets just throw some ideas around and see where they land, OK? Answer: usually on a ip chart, where some will be parked and most will go on the back burner. Corporate health warning: delegates, do not let this rub o 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 dierent 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-ofmagnitude paradigm shift designed to future-proof the outturn going forward undermines the very message youre trying to send as a newly trained executive on the path to greatness, which is: Im your manager. Have condence 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: Im 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 terms supposed meaning and its likely origin. Examples include: GO, NO GO As in whats 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 Ill be taking a holiday on the Isle of Gonogo. GET YOUR HEAD AROUND IT To consider and understand a concept. Its similar to embrace an idea (go on, give it a cuddle). Does not apply to all body parts dont wrap your legs around an idea. GLUE As in hes the glue in our team the individual who holds (or drags) a group together. Usually thats 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 Banker Twitter @streets_ julia Email julia@streetsinthecity.com

I blame the training

Illustration: Dmitry Litvin/Dutch Uncle

Seemingly 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, were aiming for maximum market penetration. They will suggest giving your ideas some oxygen as we socialise them and then circle back for a deepdive Swot analysis. Heres a thought: in parallel with the executive training, why not oer a glossary for the delegates soon-to-be bamboozled colleagues? Courses on how to manage teams, negotiate eectively or work with

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