www.fm-magazine.com • July/August 2013
HOLDING ALL
THE CHIPS
How Paul Pomroy helped finance
become a strategic player in McDonald’s
$27.6bn-turnover operation
MEET CIMA’S
NEW PRESIDENT,
MALCOLM FURBER
SOPHIA STEIGER
ON RISING TO THE
CHALLENGE OF
MANAGING BILLIONS
FOR CREDIT SUISSE
FIVE REASONS
WHY YOU SHOULD
ADOPT INTEGRATED
REPORTING
3
Financial Management | July/August 2013
A word from the president
�There is a critical skills shortage in many regions that’s likely to get worse’
O
Illustration: Jörn Kaspuhl/Dutch Uncle
ne of the events I am most
looking forward to as CIMA’s
new president is the final of
the Global Business Challenge
(GBC) in South Africa
next month. For me, this event embodies
all the best qualities of the institute.
The competition provides a platform
upon which future business leaders can
develop their skills and ambitions –
whatever their background.
Corporate social responsibility is also
a key element of the GBC. The integrity
shown by the finalists in past years has
given me great confidence that the next
generation will avoid some of the
cavalier mistakes made by a minority
of today’s enterprises.
The importance of providing the right
type of career support and guidance for
the next generation was recently
brought home to me when I read an
article in the Economist. The magazine
calculated that almost a quarter of the
planet’s young people are neither
working nor studying. A third of those
who are employed rely on informal or
intermittent jobs, making it difficult for
them to gain skills.
Meanwhile, there is also a critical
skills shortage in many regions around
the world that’s likely to get worse. As a
resident of South Africa, I see this
problem all around me. There are
numerous government-backed schemes
in the pipeline here that are designed to
help bring young people into work. But
How has the institute helped your
career? We’d like to hear from
members and students about how the
CIMA qualification has accelerated
their progress. Email your story to:
[email protected]
it is clear to me that South Africa’s young
people could benefit greatly from
professional qualifications that, like
CIMA’s, are both accessible to all and
specifically tailored to employers’ needs.
In such regions, the institute’s mission
of “helping people and businesses to
succeed” could not be more appropriate.
A recent report published by the
McKinsey Center for Government
highlighted the urgent need for a more
joined-up approach to this issue and a
better-informed dialogue among
governments, education providers,
employers and young people themselves.
CIMA is acutely aware of the global
shortage of skilled finance professionals
and it takes great care to ensure that its
syllabus and strategy equip members
with the skills that employers need.
With this in mind, CIMA is reviewing
a survey of nearly 130,000 young
people who are aiming for a financebased business career. The idea is to
gain an insight into what motivates
Generation Y, what ambitions are
driving them and what skills they have
acquired as they move on to the first
rung of the career ladder.
Meanwhile, our imminent
employer survey will explore what skills
are most in demand in the workplace,
what expectations companies have of
young people and how the outlooks of
these two parties can be brought
together to create a mutually beneficial
road map for success.
CIMA
LinkedIn
group:
tinyurl.com/
ahxyoda
This work will then become part of
a larger body of research, the results of
which will be presented at the World
Congress of Accountants (WCOA) in
Italy at the end of next year. CIMA and
the AICPA are the main sponsors of the
event under the title of the CGMA
designation. WCOA is the largest and
most comprehensive gathering of
finance leaders and it’s an ideal forum
in which to address this burning issue.
With such worrying youth
unemployment figures looming, it is
more important than ever that
employers understand the value of our
members in terms of their ability to
guide the predictive, evidence-based
decisions that drive sustainable – and
ethical – business success. I am very
pleased to be starting my presidency at
the launch of such an important project
and I’m certain that the results will
provide a bright beacon for young
people in a careers landscape that can
sometimes seem rather gloomy.
Malcolm Furber, FCMA, CGMA
CIMA president
4
AT A GLANCE
Inform
3-21
A word from the president
Malcolm Furber – p3
I worked on…
Growing Ireland West Airport Knock – p6
Inform p9–15 A digest of the latest
developments in management
accountancy and beyond:
Hot potato Ethical dilemmas resolved
Gen Y Product discovery
Must read The New Tycoons: Inside the
Trillion Dollar Private Equity Industry
That Owns Everything
Thinking and opinion
A critical analysis of shared-service
centres, plus Andrew Clark of The Times
on integrated reporting – p14-15
Led by finance
Hedging commodity risk at Coca-Cola’s
Bottling Investments Group – p17
Financial Management | July/August 2013
28
Resource
22
The insider view Singapore – p18
The data The rise of intangible assets as
a proportion of market value – p21
Features
45-63
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 financial
modelling techniques – p62
The institute
A view from professional standards on
the benefits of volunteering; plus CIMA’s
new tool-evaluation resource – p63
CIMA events
Dates for your diary, plus a summary
of recent institute events – p64
32
Back
65-66
CIMA CEO column
Charles Tilley – p65
Watercooler – p66
22-43
A meaty role Paul Pomroy on the
challenges facing McDonald’s UK – p22
The whole story (so far) The case for
adopting integrated reporting – p28
Gallery Stock
Management accountants offer a unique insight based
on a broad knowledge of how various functions in
their enterprises work. It’s therefore important to
spend time away from the back office and out in the
field, says CIMA’s new president, Malcolm Furber.
In this issue he urges members to “kick it and hug it”
– a call to understand their organisations better by
gaining first-hand experience of life on the front line.
The subject of our cover feature, Paul Pomroy, is a
good example of a member who has progressed by
getting to know his business inside out. On becoming
senior vice-president, finance, for McDonald’s in the
UK and northern Europe, he added property,
construction, support services and, most recently,
supply-chain management to his portfolio – just before
the horsemeat scandal swept the Continent.
Such a well-rounded approach to accounting in
business chimes well with the concept of integrated
reporting (IR) – the clear and honest assessment of a
company’s performance, its wider impact and the risks
it faces. We talk to Paul Druckman, chief executive of
the International Integrated Reporting Council, while
Andrew Clark, deputy business editor of The Times,
offers his views on the IR movement’s progress so far.
Please send your comments and ideas to
[email protected] or join the FM
feedback group on CIMAsphere at
www.cimasphere.com/groups
Furber education Introducing CIMA’s
new president, Malcolm Furber – p38
CIMA is the
Chartered Institute
of Management
Accountants
26 Chapter Street,
London SW1P 4NP
020 7663 5441
www.cimaglobal.com
Editor’s note
Lawrie Holmes
Sophia Steiger Head of IT and realestate finance at Credit Suisse – p32
8 ways to…
Improve working capital – p42
5
Financial Management | July/August 2013
Cover photograph:
Plainpicture
President
Malcolm Furber, FCMA, CGMA
Deputy president
Keith Luck, FCMA, CGMA
Vice-president
Myriam Madden, FCMA, CGMA
Chief executive
Charles Tilley, FCMA, CGMA
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
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Creative director
Michael Booth
Chief sub editor
Steve McCubbin
Deputy chief sub editor
Chris Ryder
Deputy picture editor
Louise Fenerci
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Michael Doukanaris
Account director
SiГўn Dudley
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director Rachael Stilwell
Project director
Stefanie Hinten-Reed
Global sales director
Hilton Young
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Philippa Mathers
[email protected]
Tel: 020 7775 5717
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.
В© Seven All rights reserved.
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should be in sterling drawn on a UK bank.
www.cimaglobal.com
6
Financial Management | July/August 2013
7
Financial Management | July/August 2013
[Knock by numbers]
A total of
685,000
passengers used the airport in 2012
– its busiest year to date
The airport serves
28
international destinations, with
airlines including Ryanair,
Aer Lingus Regional, Flybe
and Lufthansa operating from it
Knock is the
4th
Name Paula Roberts,
FCMA, CGMA
Company Ireland
West Airport Knock
Role Finance manager
Industry Aviation
I work on…
Growing
Ireland West
Airport Knock
Start date 2003 End date Ongoing
Location Charlestown, County Mayo, Ireland
As the finance manager at Ireland
West Airport Knock I am responsible for
keeping its costs as low as possible in
order to remain competitive in the
unpredictable aviation market. As a
senior executive, I also play a role in
strategic planning.
I have worked at Knock since 2003,
having returned from the UK, where I’d
been at companies including Cinema
International Corporation, Nortel,
Thanet Healthcare and Learning Curve.
It is classed as a regional airport, as it’s
not a hub or near a city, which makes
gaining and sustaining new routes
relatively difficult. Yet the airport has
just had the busiest year in its history,
achieving more than 685,000 passengers
during probably the worst recession to
have hit Ireland in two decades. When
I started here, annual passenger
numbers were in the region of 200,000.
Like all airports, Knock is capital
intensive and has a large proportion of
fixed costs, including for maintenance
and extensive regulatory obligations
in areas such as security and safety.
Cost efficiency is also important
Alamy
CIMA qualified 2010
because, crucially, if an airline stops
using an airport, the airport cannot
make a corresponding cost reduction.
The loss of any route means that the
business will lose both aeronautical
and non-aeronautical revenues, which
are vital in offsetting its fixed costs.
This increases the competitive
pressure on the airport and it has to
work hard to increase market share and
passenger throughput by identifying
new opportunities for growth.
The airport has succeeded in
reducing its cost base by more than
20 per cent in the past few years, which
has helped it to remain competitive.
We have used a number of measures
to improve efficiency. Nearly two-thirds
of our employees are trained in
multiple disciplines, for instance,
which increases their flexibility and
helps to limit costs such as overtime.
Procurement is a key focus to ensure
value for money, too.
Our KPIs, which are monitored closely
every month, include employee cost per
passenger and operational cost per
passenger. Managers and department
busiest airport in Ireland after
Dublin, Cork and Shannon
During September 2011 Ryanair
celebrated the airline’s
4 millionth
passenger through the airport
heads are very budget conscious and
work with finance and senior managers
to ensure that our targets are met.
The aviation business is volatile and the
loss of any route can have severe
consequences for an airport. Cash flow
forecasting is essential in order to ensure
that the airport has enough funding to
enable it to react to risks and survive.
We also use both short- and long-term
business plans, together with rolling
forecasts, to ensure that we are always
aware of our financial position and the
challenges facing us.
INFORM
9
NEWS/OPINION/COMMENT/INSIGHT/ANALYSIS
Financial leaders come
to the fore on innovation
S
Gallery Stock
enior finance professionals have moved to the centre
of discussions about innovation in business, as many
firms seek to enhance their portfolios with more
innovative products and need someone to ensure that the
right ideas are funded and executed properly.
That’s the view of a new CGMA report entitled “Managing
innovation: Harnessing the power of finance”, which argues
that CFOs and other finance leaders are no longer seen as
putting the brakes on innovation.
Instead, the report points out that management
accountants – led by CFOs – are performing a crucial and
growing role in driving advances at some of the world’s most
innovative companies.
“In those businesses the CFO and finance team are deeply
embedded in the process of innovation and have a clear
framework to let new ideas take shape,” the report states.
“They partner early with other departments to identify
concepts with market potential; replace rigid financial
metrics with staged measurements to avoid eliminating
ideas too soon; and accept that failure is a tolerable outcome
for projects along the path to commercialisation.”
The report features interviews with global finance leaders
at businesses including the Coca-Cola Company, Royal Dutch
Shell and BT Group.
Visit the CGMA website at www.cgma.org/resources
to download a copy of the report.
10
INFORM
Financial Management | July/August 2013
Blue-chip Brits
plan for growth
HOT
POTATO
S
ome of Britain’s largest companies
have indicated that the UK may
soon offer a more conducive
environment for commercial growth,
according to a survey by Deloitte.
Six out of ten respondents expect
to invest more than ВЈ50m 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
ВЈ1bn a year, only 28 per cent feel that the
next three years will be about achieving
stability rather than growth. Only 4 per
cent are focused on survival alone.
“The low-growth environment of
the past five years, coupled with levels
of consumer and government debt,
mean that big business has to take a
lead in driving a new era of wealth
creation,” said David Sproul, UK chief
This month’s dilemma
B
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.
That’s according to a new report from the
Centre for Economics and Business Research
(Cebr), a London-based economic and
business consultancy, in partnership with
analytics firm SAS.
The report, “Data on the balance sheet”,
suggests that data should be regarded as an
asset because it provides potential future
economic benefits. But it adds that,
although many European firms acknowledge
the insights that big data and analytics can
provide in helping them to improve customer
relations, streamline production and
develop new products, most are failing to
account for its value in their annual reports.
“While businesses account for the cost
of collecting, storing and analysing data,
POLL OF
THE MONTH
current accounting methods do not capture
its importance,” the report points out.
“The lack of awareness of the potential of
data hampers policy decision-making.”
According to Cebr’s CEO, Graham Brough,
what’s required is a forward-looking
integrated accounting framework that shows
investors a comprehensive view of a firm’s
value, including how it values its data.
“There are three ways to assess the value
of data: through its market value, the cost
of collecting it and the income derived from
it where markets do not exist and value is
sensitive to external competitive and
regulatory factors,” Brough said. “These
three ways have limitations when it comes
to depreciation, so we need to find systems
outside traditional accounting practices that
take into account not only financial and
physical capital but also human, social,
relationship and knowledge capital. Reports
should include a company’s future prospects
as well as a review of past performance.”
Yes: 77%
We asked…
Should companies be more
transparent about how much
tax they pay and where?
No, but they should be aware of public concern: 17%
Source: www.fm-magazine.com.
Don’t know/undecided: 0%
No: 6%
THE DILEMMA I am the finance
manager at a global charity. Some
of the members of our governing
committee travel to overseas
offices and I’m concerned about the
expenses that one of them submits.
These do not always reflect policy,
exceeding limits for hotels and
including big bar bills. But the
FD is reluctant to challenge these
and signs them off.
CIMA’S RESPONSE You may need
to consider whether objectivity is
being undermined (see section 120
of the handbook). If there is a
policy, it would be best practice for
it to be applied equally, since failing
to do so poses a threat to internal
controls (300.14). Consider
whether an informed third party
would conclude that compliance
with the fundamental principles has
been compromised (100.2). Also
ensure that you document your
concerns with the FD in writing.
FOR THE CODE AND OTHER
ONLINE ETHICS RESOURCES, VISIT
WWW.CIMAGLOBAL.COM/ETHICS
DISCLAIMER CIMA does not provide
legal, investment, professional or
career advice. No responsibility or
liability whatsoever is accepted for
any error, omission (whether or not
arising out of negligence) or for any
loss or damage sustained as a
resultВ of reliance on information
supplied or comments made.
What the poll says
Unsurprisingly, in light of recent
scandals, the vast majority of
respondents feel that firms should
be more transparent about their tax
affairs. Arguably more interesting is
the number who disagreed with that
view but acknowledged the need to
be aware of public concern in this
area – a clear reflection that
companies recognise tax issues as
aВ reputational risk.
ON
CGMA.
ORG
For CGMAs, the
following content is
now available online
Getty Images
Integrated reporting �would
demonstrate the value of data’
11
Financial Management | July/August 2013
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.
IFAC event aims
for �global unity’
T
he International Federation of
Accountants (IFAC) has
announced that the theme of its
World Congress of Accountants 2014
will be “2020 vision: Learning from
the past, building the future”.
CGMA is the primary sponsor of the
event, which will be hosted in Rome
by the CNDCEC – Italy’s national
council of chartered accountants. It
aims to explore the pivotal role of
accounting in the midst of rapid
economic, political and social changes.
Delegates will discuss best practice and
debate how accountants should lead
the way in driving innovation.
Boot the budget? Why rolling
forecasts might make more sense.
Traditional budgeting practices are
keeping finance departments from
remaining relevant in their
companies. So says consultant
Steve Player, CPA, CGMA, who
thinks that budgeting depends too
much on assumptions and is not
flexible enough. He argues the case
for replacing it with continuous
planning and rolling forecasts.
www.tinyurl.com/p2vuyw7
How work attire influences your
next promotion. “Dress to
impress” might seem trite advice,
but it rings true in the business
CGMAs are ideally placed to help
guide businesses through the difficult
economic climate, according to both
Charles Tilley, CIMA’s chief executive,
and Barry Melancon, the AICPA’s
president and CEO.
“We are honoured to sponsor the
World Congress of Accountants and
look forward to showcasing the unique
perspective that CGMA designation
holders bring to business,” they said
in a joint statement. “Professional
accountants in business are on the front
lines, navigating the challenges of
complexity and uncertainty to guide their
organisations towards sustainable market
opportunity. We believe that our growing
community of CGMA designation
holders have the skills of the future.”
IFAC’s CEO, Fayezul Choudhury,
added that the event would provide
“a unique opportunity for accountants
from around the world to network,
interact and share knowledge. We
appreciate CIMA’s and the AICPA’s
support for the congress’s goals of
fostering global unity and collegiality
among professional accountants.”
world. A survey has found that
employers still believe that what a
candidate wears could influence his
or her chances of success.
www.tinyurl.com/p7mme9t
Seven ways to improve your
delegating skills. Curbing your
inner control freak could just
makeВ those who work for you feel
happier and more empowered –
andВ you could get to free up time
toВ do the kind of big-picture work
you were hired to do.
www.tinyurl.com/njvttdg
Five ways for finance to become
an innovation partner. The finance
function isn’t just for approving
orВ monitoring strategic initiatives;
it’s becoming part of the decisionmaking team. A new CGMA report
shows how CFOs and other finance
professionals can be partners in
successful innovation.
www.tinyurl.com/op94t23
One to one: Sir Charlie Mayfield,
chairman, John Lewis
Partnership. In the latest of a
series of interviews with global
finance leaders, CIMA’s chief
executive, Charles Tilley, asks
Mayfield for his tips for achieving
long-term business success.
www.tinyurl.com/nx6w9k6
12
INFORM
Financial Management | July/August 2013
Product discovery
with tiny teams
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.
THE COURSE covered many facets of product management,
including metrics and the value of analytics. It has changed
the way we look at developing products. Before that, when
we were in development it cost quite a lot to create Moshi
Monsters because it’s a quite complex web-based game.
We have since shifted away to this more mobile
development world, whereby you can build stuff, test it
and throw it away if need be. YouВ can fail fast and you
haven’t then sunk your whole business. You can spread
HE TAUGHT US all about how products can be
developedВ in this new digital age, based on the idea that
you can spinВ them out using really tiny teams that are
incredibly agile because they’re simply sitting there
producing prototype after prototype. He also explained
the value of user testing – ie, how you determine whether
or not your concepts canВ beВ successful by bringing
customers into theВ process at a relatively early stage.
�You can build stuff, test
it and throw it away if
need be. You can fail fast’
CAGAN SAYS THAT PRODUCT DEVELOPMENT TEAMS at the
Silicon Valley Product Group ask the management for
“a little time to investigate the solution and validate that
withВ customers to ensure it has the necessary value and
usability, with engineers to ensure itsВ feasibility and
with other stakeholders to ensure that it’s viable for our
business.В Once we have come up with a solution that
works for the business, we can make an informed and
highly confident statement about when we could deliver
this and what type of result we can expect. WeВ can also
decide whether it’s even worth doing.”
your bets, develop products quickly and then see what
sticks. It’s how all very successful firms, such as Supercell,
which creates games such as Clash of Clans, have
developed the concept by creating lots of small “cells”.
Divinia Knowles,
FCMA, CGMA,
is COO and CFO
of Mind Candy
AN INITIAL PART OF THAT STRATEGY, where you put a small,
agile team together and quickly build a prototype, isВ known
as product discovery. The way mobile development is going
now, you can use this approach to run a business that’s
really small but can earn really big revenues. It’s like R&D
– but a supercharged version for this generation.
Illustration: Raymond Beisinger/Dutch Uncle
Divinia Knowles on how a US guru transformed
her firm’s approach to research and development
MUST READ
13
Private ubiquity,
less the iniquity
The influence of private
equity is everywhere, writes
the author of The New
Tycoons. Is this something
to be feared or embraced?
P
rivate equity always
seemed like a business
outside the grasp of
mere mortals, even to a
reporter covering the
industry. Part of it was
the name: “private equity” conjured up
images of dark-suited men behind
closed doors making complex
decisions about matters uninteresting
to everyday folk.
It took a family vacation to the UK to
open my eyes to the truth. After visiting
the Legoland Windsor theme park
(co-owned by private equity houses CVC
and Blackstone) with my wife and sons,
I realised that what such firms own is in
front of us practically from the moment
we wake up – the Weather Channel,
the London Eye, Toys R Us. Together
their assets under management – the
combination of their funds and the value
of what they own – exceeds $3trn.
By virtue of what these firms control,
they’re the ultimate bosses of millions of
Starstock
TWITTERATI
What business leaders have
tweeted recently on business
strategy and risk
The New
Tycoons:
Inside the
Trillion
Dollar
Private Equity
Industry
That Owns
Everything
Jason Kelly,
ВЈ23.99,
Bloomberg Press
workers worldwide, which gives them
even more influence over our daily lives.
The bulk of money committed to private
equity funds comes from public pension
schemes. Those pensions, desperate for
returns, are increasingly turning to
private equity, real estate and hedge
funds to make their money grow faster.
All of this led me to my underlying
thesis: these businesses matter – not in
an oblique academic way, but in the
context of all our daily lives.
So what do they actually do when
they buy a business? Dollar General, a
US retailer specialising in isolated rural
markets, serves as a powerful example.
In 2007 private equity firm KKR took the
struggling Tennessee company, which
had fallen out of favour with public
investors, and transformed it, hiring a
new chief executive – a man who
questioned everything down to the
amount of shelf space devoted to
candles in each store. When KKR took
Dollar General back to the public market
two years later, the stock price had more
than doubled, reaping huge profits for all
investors. More important, KKR argues,
the new owners revived an ailing
business and enabled it to expand, create
jobs and generate sustainable profits.
Private equity isn’t always pretty. In
the 2012 US presidential election,
Republican candidate Mitt Romney,
former CEO of private equity firm Bain
Capital, was assailed by critics for closing
factories and slashing payrolls.
Many remain sceptical that private
equity has anyone’s interests at heart
beyond its own. Yet even some trade
unions that once decried the industry as
cold-hearted have chosen to work with
private equity rather than fight it.
That’s in part because the influence of
private equity is only growing. As its key
players look beyond buying and selling
companies, they’re lending to businesses,
building infrastructure projects and even
buying foreclosed homes.
Everywhere we look, there they are.
Steve Forbes, editorin-chief and chairman,
Forbes Media:
@SteveForbesCEO
“When it comes to
investing, emotions
are your enemy.”
Michael Dell, CEO
and chairman, Dell:
@MichaelDell
“With every great
success there is
courage, service
and sacrifice.”
Donald Trump:
@realDonaldTrump
“Be flexibly focused.
Focus does not mean
being narrow-minded
or rigid – Think Big.”
Jeff Weiner,
CEO, LinkedIn:
@jeffweiner
“Computer science
has become the top
major at Stanford for
the first time, up 50%
from traditional rates.”
14
INFORM
Financial Management | July/August 2013
15
Financial Management | July/August 2013
Thinking
Opinion
The rise and rise of shared-service centres
is a revolution that’s going under the radar
The demand among investors for firms to adopt integrated reporting is irresistible, writes
Andrew Clark. But IR is about more than an annual document – it’s a state of mind
T
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
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 findings
of our study indicate that, far from being
a peripheral project concerned merely
with shuffling the organisational
deckchairs, the SSC model represents a
quiet revolution in back-office services.
Through its emphasis on cross-functional
process streams and business process
re-engineering, it’s reshaping the way in
which activities are done and also has
the potential to influence our thinking
about the design and operation of large
organisations and professional careers.
Although achieving cost savings is a
key objective, adding value through
improved service is also an important
goal for some of the organisations in our
study. In these cases, they see the back
office as an opportunity to make the
most of the talents of front-line staff
rather than just another overhead
burden to shed. For most of our research
subjects, the real benefit of SSCs is that
they make costs that were previously
hidden within the divisions more visible.
As well as interviewing SSC managers
and their “customers” in business
divisions, we have set up the 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 specific data and experiences.
Further information and resources
can be found on the project’s website at
www.shared-services-research.com
By Ian Herbert, senior lecturer in accounting
and financial management, and Will Seal,
professor of accounting and management,
atВ Loughborough University. They are members
of an SSC research team supported by CIMA’s
general charitable trust.
Illustration: Lyndon Hayes/Dutch Uncle
Uncritical mass
L
ife used to be so simple.
A flick through an annual
report published only a
couple of decades ago is
a trip down memory lane.
Take Sainsbury’s 1990
effort, which runs to a modest 48 pages
and features sepia montages of winsome
shop assistants dispensing crusty loaves
to bad-haired housewives. It was a year
of “outstanding” results, Lord Sainsbury
declared, devoting three terse paragraphs
to the environment and food safety.
Reporting today is an altogether dicier
affair as companies have come under
pressure to bare their souls. It’s become
impossible to ignore moves towards
integrated reporting (IR) – an idea
endorsed by the Prince of Wales, NestlГ©,
HSBC, Tata Steel and many more. In
April the International Integrated
Reporting Council (IIRC) published a
draft framework on how multinationals
Illustration: Karolin Schnoor /Dutch Uncle
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, it’s where a firm removes
support services such as finance, IT and
HR from front-line business units and
puts them in a purpose-built facility in a
cheaper part of the country or abroad.
Our research considers SSCs as hybrid
governance mechanisms that seek to
combine market principles with in-house
control. They are arm’s-length bodies
that can act in an entrepreneurial way –
outside the control of divisional
management but answerable to it
through a service-level agreement (SLA).
While outsourcing also claims to
achieve efficiency savings through
relocation and the elimination of
duplication, an SSC brings a 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.
What’s more, there is always an implicit
threat that a centre might be outsourced.
In the public sector, too, several bodies
have come together to share services
through a new organisation with its own
constitution and an objective of breaking
even or perhaps making a small profit.
should publicly discuss their finances,
governance, strategy, prospects and
challenges. At its heart the IIRC
initiative means that they need to be far
clearer about where they’re going.
Steve Gale, a partner at accountants
Crowe Clark Whitehill, explains: “The
investor community is saying: �It’s all
very well reporting on the past 12 months,
but forward-looking aspects are our key
interest.’ They want to know what the
short- and longer-term strategies are,
how the business is going to be run and
what challenges are around the corner.”
IR goes well beyond a single annual
report. It means transparency, equality
and equanimity in everyday discussions
among companies, investors, employees
and analysts, with regular progress
updates and openness – even with
regard to ugly happenings.
Sir Mark Moody-Stuart, a former
chairman of Shell, believes that any
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” firm should report in a more
sustainable way. “Companies exist to
produce goods and services for members
of society,” he says. “But it’s no good
doing that if they’re causing long-term
damage in the process.”
Why all the caring, sharing hug-talk?
Because the figures demand it. If
investors value a firm’s brand at billions
of pounds, they’ll want to know how the
management is protecting these
intangibles. BP’s Deepwater Horizon
disaster, Barclays’ admission of Libor
rigging and the discovery of horsemeat
in Tesco’s burgers have cost these
companies far more in reputational
capital than in straightforward cash flow.
A pilot run by the IIRC on integrated
reporting has involved Coca-Cola,
Microsoft, HSBC and Unilever, while in
South Africa the practice is already
enshrined into law. Even the US, where
a dour 10-K filing with a pictorial cover
tends to pass for an annual report, is
waking up to the need for reform.
But not everyone has got the message
yet: a PwC study has found that, while
77 per cent of the FTSE 350 mention their
“business models” in annual reports,
only 40 per cent offer insightful data on
these and 8 per cent combine that with
talk of future risks. But there are some
cases of good practice. Chemicals firm
Johnson Matthey and power generator
Drax, for instance, were named the best
UK companies for sustainability and
stakeholder disclosures in the 2012
awards for transparency in governance
held by the Institute of Chartered
Secretaries and Administrators and
Hermes Equity Ownership Services.
The head of communications at one
FTSE-250 company told me it was time
for firms to put old doubts aside: “It’s
actually considered a strength now to talk
about your risks and how you plan to
mitigate them. It shows you’re on the ball
and that you’re scanning the horizon for
changes that may be just out of sight.”
Financial Management | July/August 2013
Led by
finance
The finance team of Coca-Cola’s Bottling
Investments Group, under Doug Bonthrone,
ACMA, CGMA (recently retired as CocaCola’s 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 influence of speculators in commodity markets.
17
A TEAM INVOLVING the president, the corporate treasurer and the heads
of finance and procurement worked with the CEOs and the finance and
procurement managers of all of Big’s local operations to decide which
commodities to hedge, at what price and over what period. Each
operation provided local intelligence on commodities, while the group
team provided macro viewpoints on commodities and an overall
perspective on risk. Once a decision was reached, the group finance
team co-ordinated any interaction between the local operation and
corporate treasury to execute the hedges.
BIG’S GROUP AND LOCAL FINANCE TEAMS also worked closely with the
group and local procurement teams to provide related information
identifying what was hedged and its impact compared with the business
plan’s assumptions; what wasn’t hedged and its impact at current spot
prices versus the business plan’s assumptions; and the technical details
required by the controller function to determine the appropriate
accounting treatment of the hedges in Coca-Cola’s consolidated results
– eg, mark-to-market if required. Initially developed on Excel
spreadsheets, the commodity-related data-gathering and reporting
process and tools have become more sophisticated to support not only
statutory reporting, but also forecasting and scenario planning.
IN 2008 the new hedging plan proposed by Big’s finance team
was approved. Treasury would be involved in deciding what
hedging to do and how, and then executing hedges if forward
contracts/derivatives were involved. In less-developed
markets that didn’t have an approved commodity
exchange,В hedging would often be done by physical
means – ie, by buying and stockpiling commodities such
asВ sugar and resin (for use in making PET bottles).
Illustration: Mike McQuade
THE NEW APPROACH was based on buying commodities
competitively and achieving year-on-year consistency in
their overall unit cost. Hedging decisions were based on
a number of variables, including forecast commodity
requirements over several periods, as well as current
commodity prices relative to historical prices and the
outlook for prices in the short and longer term. The outlook
was developed by using data received from a range of
sources, including commodity traders, trade bodies and
investment banks. In this way, the view on commodity prices
was based on specific data and broader global themes.
IN 2010 COCA-COLA ACQUIRED a bottling business in North America,
which served to increase its exposure to commodity risk. Further hedging
and related governance were applied to cover both the new enterprise
and Big. This brought the relevant leaders from both businesses
together. In addition, relevant commodity-hedging-related information
was shared routinely with Coca-Cola’s leadership team and board.
IN FORMING AND EXECUTING a global commodity-hedging strategy,
Big’s finance team analysed the problem; recommended the solution;
developed the supporting governance, operating and reporting
processes; and applied the solution in conjunction with stakeholders at
group and local level. It then worked closely with a large number of
business partners to achieve the plan’s aims: the local operations were
able to execute their agreed commodity hedges, the board’s hedging
edicts were followed and diverse reporting requirements were satisfied
in good time. In short, finance played a key role in improving business
performance by partnering multiple stakeholders to manage a big
business risk and ensure that resources were suitably allocated across
Big’s portfolio to meet its immediate and longer-term goals.
18
INFORM
Financial Management | July/August 2013
19
Financial Management | July/August 2013
The insider
view: Singapore
[Singapore by numbers]
GDP (purchasing power parity)
in 2012
Unemployment in 2012
Singapore is the world’s
Population
$325bn
40th
FM examines how business is
carried outВ in countries around
the world, with local experts
acting as business guides
largest economy
2%
5.5 million
Source: CIA World Factbook
Real GDP growth rate inВ 2012
1.3%
CPI inflation in 2012
4.4%
Contact
Shavonne Sim, CIMA Singapore
Email: [email protected]
DOING BUSINESS
MANAGEMENT
CULTURE
Singapore can claim to be one of the
most dynamic business centres on the
planet, offering a key regional trading
venue, the world’s busiest container
transhipment port and a popular
investment destination. It is known for
being a leading financial hub, with more
than 500 big financial institutions
operating on the island, and it hosts the
fourth-largest forex trading market after
London, New York and Tokyo.
Last year the city state topped Grant
Thornton’s second global dynamism
index, an annual survey covering
aspects such as economic growth,
human capital and the financing
environment. Singapore’s leading
position reflects its favourable
conditions for business: it ranks highest
in terms of the quality of the financial
regulatory system, the level of privatesector credit and the lightness of the tax
burden (corporation tax is 17 per cent).
Grant Thornton’s research report
states: “Singapore is perfectly placed to
act as a gateway between West and East.
Business and economic growth
prospects are supported by an open,
transparent financing environment and
a well-educated workforce.”
Singapore benefits from a number of
other factors, including its multicultural
environment, pleasant climate and
relatively low political volatility,
observes Yi Cai, ACMA, CGMA, finance
business partner at Rolls-Royce
Singapore. “It has a well-developed
infrastructure and a good pool of skilled
labour,” she says. “Also, having English
as the official language here makes it
convenient for many multinationals to
set up their regional HQs here as their
base for doing business in Asia Pacific.
The government’s policies and
regulations are similar to those in the
West and they’re quite transparent.”
The government has done an
excellent job in promoting and
“reinventing” Singapore with a policy
that encourages regular foreign
investment, according to Naresh Kalani,
ACMA, CGMA, a service director at
Schindler Lifts in Singapore. “A good
example of this is the development of
the Marina Bay Financial Centre, which
has attracted leading multinationals,
banks and legal firms,” he says.
“As well as continuing to be the hub
for business across the broader region,
Singapore has invested heavily in its
financial services, manufacturing and
hospitality industries,” reports Hugo
Walkinshaw, FCMA, CGMA, executive
director at Deloitte Singapore. “When
you add to that the advantage it holds
with its infrastructure, legal system,
talent pool and favourable tax regime,
it’s no surprise that Singapore remains
a focal point.”
Gallery Stock
COMMERCIAL ENVIRONMENT
SINGAPORE’S COMPETITIVENESS
is reinforced by a strong focus on
learning, which has translated
into a steady improvement in the
standard of higher education and
training in recent years. The
combination of a skilled workforce
and large numbers of expatriate
workers at multinational
companies based in Singapore has
made for an increasingly diverse
business culture.
“While management styles
vary from business to business,
the general focus is on developing
a good team with an execution
culture,” Kalani says. “The
government is encouraging
companies to improve
productivity and reduce their
reliance on foreign labour.
Singapore also has a strong legal
framework that supports fair and
ethical business.”
Cai reports that the culture
ofВ the Singaporean operations of
aВ multinational company will
normally match that of the
parent company’s home country.
“For example, the business
culture of a US multinational here
would be typically American –
efficient and fast-moving –
whereas that of a European firm
would offer a little more work-life
balance,” she says.
This makes for a mix of styles
based on whether you are working
for a multinational corporation, a
large local company, a smaller
firm or a public body, according to
Walkinshaw, who stresses that
establishing personal contacts in
Singapore “is very much part of
the culture. In an increasingly
competitive environment,
buildingВ and maintaining
relationships is essential here.”
CIMA SINGAPORE has identified
five key factors that foreign firms
and workers should bear in mind
when operating in Singapore:
RELATIONSHIPS. It’s important to
develop a good rapport with others
before doing business with them.
This is often an unhurried process,
as Singaporeans are cautious by
nature and like to ensure that they
are trading with a trustworthy
partner. Investing time in creating
strong ties from the start should
benefit you in the long term.
HARMONY. This is about
promoting the good of the group
over that of the individual – the
family is held in high regard here.
Although the concept of harmony
is quite a collectivist notion that’s
prevalent in this part of the world,
Singapore can also be quite
individualistic in some ways.
EAST MEETS WEST. A relatively
young country, Singapore draws
influences from both hemispheres
and is well placed to do business
equally successfully with either.
The most developed country in
South East Asia, it strikes a
balance between traditional and
modern; Eastern philosophy and
Western technology.
FACE. When communicating with
Singaporeans, it is wise to heed
the importance of preserving
“face”. This is closely linked with
pride and forms the basis of an
individual’s social status. In order
to avoid losing face, Singaporeans
control their emotions and do not
criticise others directly in public.
It is wise to remember that being
overtly confrontational here can
be disastrous for a relationship.
MULTICULTURALISM. Singapore’s
diverse population is one of its
strengths. Singaporeans are
predominantly of Chinese, Malay
and Indian ethnicity and, owing to
the nation’s open immigration
policy, a third of people here have
come from abroad. But, to be
successful when doing business in
Singapore, it is important to
appreciate the many different
traditions that inform business
culture and etiquette here.
21
Financial Management | July/August 2013
The data
The increasing value
of intangible assets
O
Source: Ocean Tomo / Hay Group and mergermarket / Financial Reporting and Global Capital Markets (Oxford University Press, 2007).
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 financial accountable
assets reflected on an average company’s
balance sheet today comprises no more
than 20 per cent of its true value.
Research from intellectual property bank
Ocean Tomo shows that a significant
portion of this intangible value is
represented by patented technology.
1976
33%
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”.
When 560 executives were interviewed
for a 2010 Hay Group report entitled
“The silver bullet of success: winners
and losers in the M&A game”, the
research found that they attributed no
more than a third of an organisation’s
value to its intangible assets.
Tangible 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
Illustration by
Leandro Castelao
83%
68%
32%
20%
20%
17%
32%
68%
80%
80%
1975
1985
1995
2005
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.
22
Financial Management | July/August 2013
Financial Management | July/August 2013
23
A MEATY ROLE
Paul Pomroy counts logistics among
the responsibilities he inherited on
becoming senior vice-president, finance,
for McDonald’s UK and northern Europe.
Given all the problems surrounding
the supply of beef in Britain this year,
he has plenty on his plate
By Lawrie Holmes Photographs by Matthew Stylianou
When Paul Pomroy took the reins of
the UK and northern European finance
function for McDonald’s last November,
little did he know that the horsemeat
scandal would be sweeping the continent within weeks. Given that he’d just
assumed responsibility for the group’s
supply chain, he was on high alert as
soon as it emerged that British supermarket chains had been selling contaminated products. The fast-food retailer,
which has been operating in the UK
24
Financial Management | July/August 2013
$27.57bn
In 2012 the company’s revenues were up 2 per cent on the
previous year, enabling it to post a profit of $5.50bn
1.8 million
people are
employed in its
restaurants,
80 per cent of
which are run
by franchisees
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, who’s worked at the company for 17 years, has been
involved in many of those adaptations.
Joining from accountancy firm Smith & Williamson, where
he was an insolvency specialist, Pomroy started in McDonald’s
UK’s corporate finance department in 1996 as a real-estate
analyst. The group was growing fast at the time, opening about
100 outlets every year. But it was a move to the business 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
[McDonald’s by numbers]
Since
1955
the group has opened
34,000
outlets
The business serves
69 million
people a day on average in
118
countries
in an in-house department that
was geared to analyse performance and to help shape and
monitor the success of the
business’s long-term strategy.”
The introduction of salads
in 2004 and the Deli Choices
range of sandwiches and wraps
in 2005, acting on consumers’
enthusiasm for a healthier diet,
were pioneering successes for
the division. Then came freshly
ground coffee – an acknowledgment of increasing competition from operators such as Starbucks and Caffe Nero. For
Pomroy such new offerings represented the considerable
amount of work that the business strategy team had done in
interpreting changes in the market.
“We understand that we need to listen to what our 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 different 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 group’s four-day annual
convention in Orlando, Florida, brings together teams from
all of its territories to compare notes. Although its Big Mac,
McChicken Sandwich and fries are still core products in most
markets, there is flexibility in the system to suit different
regions, whether that’s the McAloo Tikki in India or Le Croque
McDo in France and Belgium.
�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’
Arch reformer
In 2005 the UK business decided to improve the image of its
outlets by giving them a more upmarket look. “Cash flow was
at its lowest level and we hadn’t reinvested in the estate
because our focus had been on growth, so we had taken our
foot off the pedal when it came to the look and feel of our
restaurants,” Pomroy admits. “That had left us out of touch
with our customers.”
The revamp went ahead the following year, featuring “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 McDonald’s outlets in the UK, more
than 800 are owned and run by franchisees. These 160 entrepreneurs each run an average of five restaurants, although
some have significantly more.
“Through our franchised structure we have multiple enterprises running at the heart of the public-facing McDonald’s
business. Supporting these operations with bespoke advice is
as much of my job as the top-level financial management
26
Financial Management | July/August 2013
of McDonald’s 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, McDonald’s,
which still owns all the real
estate, is keen to give them as much guidance as possible.
“All franchisees go through a rigorous recruitment process
and extremely comprehensive training, where they are advised
on how to manage their operations. Access to financial 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, finance, with
his remit extending to pricing, profitability and financial projections. At this time his team adopted several innovations,
Financial Management | July/August 2013
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 that’s become available to the company, according to
Pomroy. “There’s no doubt that the smart use of research and
customer insight forms a huge part of our strategy. Our central business strategy and insight unit plays an integral role
in generating and evaluating both qualitative and quantitative insight that’s used to help inform, update, evolve and
future-proof the business.”
He adds: “We don’t work simplistically with one piece of
software that wraps together every piece of insight we’re
gathering and produces one output a day. We take a much
more bespoke and segmented approach. Instead of pumping
the entirety of our data into one black-box generator and
working from one supposedly comprehensive output metric,
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 efficiencies across the business, even
in the recycling and conversion of used cooking oil to biodiesel to fuel our delivery fleet,” he says.
Pomroy’s current job has added responsibility for the company’s 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 McDonald’s the avoidance of such problems has largely
been down to its efforts 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.”
�Our franchisees are vital
stakeholders. They all
champion our values and
we involve them heavily in
the planning process’
�All of our raw ingredients meet the highest
possible standards of quality and safety’
27
makes McDonald’s” microsite, that allow consumers to communicate directly with the company.
“There are lots of challenges that only get bigger if we don’t
keep pace with the customer who is savvy with social media,”
Pomroy says. “We want to be able to hear consumers’ 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 haven’t paid enough UK corporation tax, despite generating huge profits in Britain. Pomroy stresses that McDonald’s
is acutely aware of the debate – and pays its fair share. “We
paid over ВЈ42m in corporation tax in 2011 and a significant
amount of additional tax is paid by our franchisees,” he says.
Looking ahead, he believes that the UK’s continuing austerity measures are bound to affect consumer spending. He
acknowledges that consumers are bound to be worried about
whether their earnings will keep pace with the increase in
living costs – and that McDonald’s needs to keep thinking
about such issues when forming its strategy.
“Our challenge is to ensure that we don’t run too fast,”
Pomroy says. “We need to be aware of what the customers
are willing to spend and to deliver the same high quality they
have come to expect. They want to feel assured about what
they’re getting.”
Getty
Images,Getty
Plainpicture
Photographs:
Images, Lay
Returns of the Mac
McDonald’s UK is proud of its long-term partnerships with
its suppliers, he adds. “This certainty is what allows them to
invest and grow their businesses as we grow ours. Our strong
and sustained sales growth in the UK means we spend more
than £360m a year on our supply chain here – £40m more
than we spent in 2011.”
In the context of the horsemeat scandal, the company’s
reputation for managing its supply chain can only have been
enhanced, Pomroy argues. “We believe that food quality begins
at the very first stage of the supply chain. All of our raw
ingredients meet the highest possible standards of quality
and safety. We use 100 per cent British and Irish beef in our
burgers – no fillers, trimmings or additives – and traceability
is important to us, just as we know it’s important to our
customers. We are able to track which farm and which herd a
certain batch is from. It’s the simplicity of our products and
supply chain, paired with the long-term nature of our 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
Mac daddy: the world’s largest McDonald’s
outlet opened in London 2012’s Olympic Park
28
29
Financial Management | July/August 2013
The integrated reporting movement is gaining
momentum as the desire to know exactly how firms
operate and where they make their money increases.
Paul Druckman, CEO of the International Integrated
Reporting Council, offers his progress report
THE WHOLE
STORY (SO FAR)
By Lawrie Holmes Illustration by Tomi Um
J
ean-Marc Huët, CFO of Unilever, recently asked: “What would be
the impact on our business strategy and our investment decisions
if we factor in the full cost of the resources we’re using?” His words
reflect a broader view in business that, in order to have effective
strategies, firms need a more comprehensive understanding
of how they make their profits, according to Paul Druckman,
CEO of the International Integrated Reporting Council (IIRC).
“To do so, they need to broaden the scope of their reporting
structure to include more than financial information,” he says.
To this end, the IIRC has launched a pilot programme involving more than 90 organisations, including Coca-Cola, Tata
Steel, Hyundai and CIMA, and over 30 institutional investors.
Druckman argues that efficient markets depend on a regular
flow of accurate information. There is a growing recognition that
firms aren’t well equipped to explain the factors affecting their
creation and preservation of value in the short and longer term.
“Reporting has in some cases been reduced to a compliance
exercise leading to ever more complex, lengthy documents that
fail to show how the company’s strategy and business plan create
value,” he says. “We need a framework that enables a business
to express its value-creation process clearly and concisely.
Integrated reporting (IR) is just such a framework. It is designed
primarily for investors and is being driven by their demand for
more value-relevant information. It also fulfils a wider need in
business to think across silos.”
Political dimension
IR is part of the broad trend towards openness in business after
the financial crisis. “This movement is coming from political
leaders and is mirrored by those at the forefront of business,”
Druckman says. “The G8 is focused on transparency. IR supports
this, as it puts awareness of an organisation’s 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
Obama’s call for extractive industries to be clearer about where
they create profits is important and it’s caused a rethink for many
in the sector. The extractive industries are one of the IIRC pilot
programme’s most active sectors, as many of these companies
are conscious that, in order to improve stakeholder relations,
they need to communicate better, especially in light of recent
high-profile incidents,” Druckman says. “Oil and gas is a sector
that has in the past been labelled as dirty – it has negative impacts
on the resources and capitals it uses. When these organisations
tell their stakeholders how they use the capitals available to them
to create value now and in the future, we will all benefit.”
Future investment
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 flow. Investors often overlook these companies because
they shun volatility.”
Druckman thinks that many investors are realising that shorttermism actually creates volatility and contributes to financial
instability, which in turn erodes long-term value. “To move away
from this, investors are seeking to increase their knowledge of the
businesses they invest in,” he says. “To make decisions for the
short, medium and long term, a finance provider needs an understanding of, and confidence in, their business models as well as
a better view of how value is created over time.”
This is evident from the 50 or so institutional investors that
have got involved directly with the IIRC, working on an 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
significant number of investors are looking at non-financial issues
that are longer term in nature and will materialise in the cash
flows of the company, so are relevant to the valuation.”
Technological advances
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 financial and non-financial 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 affect each other, it has used
innovative ways to present information that wasn’t previously
reported in order to tell its unique story of value creation.”
He continues: “Tangible and intangible information, or the
capitals as we refer to them, are at the core of this. 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.”
31
Financial Management | July/August 2013
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 IIRC’s
pilot programme, according
to Druckman. “These elements
include the Pilot Programme
Yearbook 2012 and �Building the
business case for integrated
reporting’,” he says. “They outline the benefits that businesses
have had so far on their journey towards IR.”
Quick on the uptake
Druckman says that the IR concept was adopted in a wide range
of sectors during the period of consultation on the IIRC’s draft
reporting framework, which ran for three months from midApril. The industries that took the most interest tend to be less
well understood by investors and wider stakeholders, he reports.
These include financial services, utilities and the extractive
industries, which particularly need to be able to tell their story
of value creation over time in a clearer, more concise way.
IR’s unique selling point is that it is market-led – that is, it’s
created by the business and investor communities for the business and investor communities, stresses Druckman, who lists
some of its main identified benefits:
l Establishing the basis for a more meaningful engagement with investors. IR helps a firm to fulfil its stewardship
role by placing the strategy and business model at the centre
of communications, better articulating the investment case.
l Breaking down silos. As
Bob
Laux, senior director of financial
accounting and reporting at
Microsoft, says: “IR provides a
holistic method for explaining
how the organisation is doing
and how the management
thinks it will do in future. It
takes into account the connectivity and interdependencies
between the range of factors
that have a material effect on an
organisation’s ability to create value over time.”
l Disclosing more than financial information alone. There
is a growing understanding among all stakeholders that, in order
to convey a full story of value creation, all resources and 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
effects 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.
�Obama’s call for extractive
industries to be clearer
about where they create
profits has caused a rethink’
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 it’s because the culture and future
of business in these countries – for example,
theВ G8 nations that are calling for a focus on
transparency – match the principles of IR.
“Moving to IR promises to offer any country
that adopts it a competitive advantage. As
Magnus Böcker, chief executive of the Singapore
Stock Exchange, says: �We support having a
continued discussion on IR, as we want to
participate to help share the future.’
“I recently visited Australia, a key territory for
creating awareness and promoting IR, because
the country will in 2014 take on the presidency of
the G20, where there is a keen interest in IR as
one of the supporting themes for work on
transparency. Japan’s Ministry of Economy,
Trade and Industry has established a corporate
reporting laboratory to examine how reporting
can support long-term investment. And the
AsiaВ Pacific Economic Co-operation Business
Advisory Council is seeking to establish whether
IR could significantly accelerate long-term
investment in strategically important sectors,
including infrastructure and energy financing.
“Policy-makers in the EU have also taken
steps towards IR, with Michel Barnier,
EuropeanВ commissioner for the internal market
and services, stating: �We are following with
great interest the evolution of the IR concept.’
“South Africa is the best example of early
adoption. The Johannesburg Stock Exchange
has committed to having IR as a listing
requirement as soon as we at the IIRC publish
our international reporting framework. South
African businesses are already required to
produce integrated reports under the country’s
King III corporate governance code.
“With our pilot programme operating in 25
countries, the move to take up IR is widespread,
yet there are certain regions where there are
problems. In America, for example, there are
perceived inconsistencies between IR and
restrictions on reporting on future activity.
ThereВ are also certain regions that we have yet
to reach, such as the Middle East, where
corporate reporting in the main isn’t at a stage
where it can develop into IR. But organisations
such as the Pearl Initiative, a private-sector-led
not-for-profit organisation established to
improve transparency, accountability and
business practice in the Arab world, are laying
the groundwork for the introduction of IR.”
32
Financial Management | July/August 2013
Financial Management | July/August 2013
33
Sophia Steiger has progressed from working at London’s largest
sewage plant to managing assets worth billions for a global bank.
She traces her journey from serious muck to serious money
CREDIT
RAT
A ED
AT
Sophia Steiger, FCMA, CGMA,
head of IT and real-estate
finance, Credit Suisse
What’s your role at Credit Suisse?
I’m responsible for managing a multi-billion-dollar
global cost base. This includes the costs relating to
the IT programmes that deliver the innovative
solutions for the future; the IT applications that are
relied upon every day; and the infrastructure that
we all assume will be there, such as computers,
phones and the buildings we work in.
I am concerned with both efficiency and
effectiveness, ensuring that we get the best value
from our investments. This requires a focus on
financial accounting and management reporting,
plus the ability to understand M&As and drive
programme management.
It’s a complex environment that’s similar to those
of other financial services companies, big firms
such as BP and large government departments. The
challenge is to optimise spending while ensuring
that operational risks are minimised, enabling our
people to innovate while meeting ever-extending
regulatory requirements such as Basel III.
To match up to this challenge, I have a global
team based in Zurich, London, New York,
Singapore, Pune (India) and Wroclaw (Poland). It’s a
combination of strong business partners working
across IT and real estate who understand all the
business issues. They analyse the data, providing
insight and decision support to the business with
rigorous accounting, control frameworks and
straight-through processes.
The requirement for sufficient controls and
processes to ensure that we meet all our global
regulatory requirements is significant. For IT alone
we process more than CHF300m (ВЈ207m) of
accruals monthly and manage nearly CHF2bnworth of assets on the balance sheet.
What are the secrets of managing finance
successfully for a global banking giant?
There are two key ingredients: being a subject
expert and having a great team. Genuinely, to get
to the heart of helping any business to be more
efficient and effective it’s essential that the finance
team has a thorough understanding of the business.
My degree in IT and my years with Deloitte
focusing on cutting IT costs have been key.
Persuading CIOs and COOs to trust my opinion
from day one, enabling me to challenge the status
quo, was another challenge. Weaving this trust
with that of my team is essential. I recognise that
building the best team comes from finding
opportunities for individuals to demonstrate their
full potential. Because of the hierarchies in which
we work, particularly in banking, some of the
best talents are hidden. Each quarter I ask the
whole team to gain an understanding of what they
are working on and dive deep into various topics.
This way I can really find out what people are
capable of. It does take time, but it pays dividends
over and over. Combining this with Credit Suisse’s
formal internal-mobility and grow-your-own
programmes means that we have a greater flow of
talent across all levels.
In addition, you cannot forget to have fun. For
me that happens in the office and outside. I’m
fortunate to have a very supportive husband and
kids who understand that mummy works, but that
when she is at home she is 100 per cent there. We’re
rigorous in ensuring that the weekend is for family
time, whether we spend it swimming in the lake,
skiing in the mountains or travelling across Europe.
How important is CIMA training to your team?
As we increasingly use locations such as Pune and
Wroclaw, the need for a common language becomes
more important. We’ve launched a pilot programme
to provide CIMA training to those who haven’t had
access to it. This gives everyone the chance to learn
together and gain access to a professional
qualification that they can use in my team, other
parts of Credit Suisse or elsewhere later down the
line. With internal mobility being a focus at the
bank, the CIMA qualification is like a passport that
signals the depth of the holder’s skills.
For my department it means that, whether a
member is in the business partnering team or in
accounting and controls, each person knows all
the basics. More crucially for me, it means that they
know when to ask other subject experts for help.
I don’t expect everyone in my team to be a
specialist in software capitalisation, for example,
but I do expect them to understand the concept
and know where to go for detailed answers.
How much of an impact can management
accountants make in financial services?
When the business needs to save money or be
innovative, it’s a fantastic time for management
accountants – no longer is it only about preparing
accounts or monthly reports. In today’s dynamic
environment the business is relying on our insight
and it challenges us to take decisions that make the
difference. This is when good accountants become
valued business partners.
The change agenda across financial services is
evolving continually, giving everyone the chance
Financial Management | July/August 2013
35
and having worked for two summers as a junior
accountant at the Ministry of Defence, I knew what
I was getting myself into.
In almost two years of finance rotations across
the business and studying every Saturday for
CIMA lectures, I had acquired a lot of knowledge in
group planning, internal auditing and management
accounting. My time at the sewage works was
never going to be the sexiest part of my CV, but it
was great experience. I was the only accountant on
site, responsible for everything from invoice
processing to capex programmes of more than
ВЈ200m. Thames Water certainly taught me that if
you don’t ask, you won’t get.
I have sought the full range of skills necessary
to be an exceptional CFO. One needs to have
financial accounting and management reporting
expertise complemented by experience of change
and programme management and M&As.
to develop. For most of my team that’s about
showing their potential and that they can actually
grow faster than they would have done before the
financial crisis. With increased accountability and
delegation, individuals have got more involved and
closer to the business than ever. It’s exciting to see
how much we are getting done and the tremendous
impact we are making on the bottom line.
Were you born to be a management accountant?
After gaining a first-class degree from my business
studies and IT course at the University of Kent, I
knew I could do anything. Although I was offered
the chance to pursue a PhD in neurological
programming, the lure of gaining a CIMA
qualification led me to take a “proper job” in
accounting for a public utility, Thames Water, at
the largest sewage works in London. Through my
experience with the student Industrial Society
You ran finance at a joint venture for a leading
retailer. What were the big challenges there?
I joined supermarket group Safeway in 1997 to be
head of fixed-asset accounting, responsible for
all investment accounting, processes and systems.
This was an opportunity to combine my IT
programming knowledge with my accounting
training. Being responsible for all the investment
business cases gave me a great insight into
the business strategy, the investments and the
direction of the company, whether it was building
new stores or deciding to close down its 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 first foray into M&As was a fascinating
experience. I worked closely with the CFO and
along the way I experienced everything from
complex modelling to the related media relations
that come with a joint venture.
When the deal was done I was offered the role
of financial controller with involvement at board
level. The job taught me the importance of
having a tight leadership group. From day one we
learnt lessons from moving into an unknown
market, experiencing local politics, cultures and
different employment regulations. We quickly
established that for every similarity there was a
difference. Together we had to act pragmatically as
we stepped through the first six months, making
tough decisions to drive the business towards a
36
sustainable profit. Balancing the need to focus on
operational cost reduction and supporting a
joint-venture board was developmental. Under a
great mentor, I learnt to do both while managing
the associated workload and dynamics.
How did you fare when you ran a dotcom at the
height of the internet boom?
In 1999 I was approached to join Toyzone, a start-up
with an eclectic set of shareholders. With the safety
net of knowing that Safeway would take me back,
I joined to gain experience of balancing the
rigours of finance with those of innovation and
entrepreneurship. I was 27, with no kids and no
commitments, so I stepped away from the
traditional accounting career path I had been
taking until then. As commercial director I was
responsible for the finances and had oversight
of the IT that supported the organisation. By the
time that I arrived there and drew up the firm’s first
�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 afloat.
After my experience at Safeway and Toyzone,
I had a thirst to learn more about programme
management and managing change. My move to
Deloitte in 2001 gave me the chance to build on my
Financial Management | July/August 2013
retail experience in other sectors – and the firm
had attracted some very experienced professionals
from whom I thought I could learn a lot.
What do you count as your biggest
achievements with Deloitte?
My 12 years at Deloitte, where I was a partner,
provided me with a lifetime experience and a lot of
achievements. I was lucky enough to work with
some of the biggest clients it has, including Habitat,
Vodafone, Transport for London, the Department
for Work and Pensions, Santander, Barclays,
Deutsche Bank and Credit Suisse. I was responsible
for delivering some of the largest cost reductions
and programmes achieved in Europe, designing
and executing finance transformations and
operating-model projects, undertaking global
process excellence initiatives and implementing
market-leading financial management solutions.
Recognised as a thought leader in the field by my
peers, clients and the competition, I was asked to
become a CIMA Mastercourse tutor and share my
experience with other members of the institute.
Deloitte’s recognition that diversity is a key
differentiator – notably in the search for talent and
in delivering the best results for clients – meant
that I learnt a huge amount about being mentored,
being a good mentor and promoting the career
progression of women. I developed and led the
firm’s parenting programme, providing access to
information about balancing family and work, and
tracking metrics. Internal initiatives were also key
in demonstrating the organisation’s support for its
people, including the publication of employees’
stories and the introduction of fridges to store
breast milk and in-vitro fertility medicines.
One of my early career goals was to gain global
experience. After the birth of my second child,
Deloitte offered me the opportunity to move to
Switzerland and build its financial consultancy
business. Because the office there also had a truly
international workforce, I was able to experience
many different cultures. In 18 months my
financial consulting business team had grown
six-fold and was a real contributor to the global
firm. Building something from the ground up in
banking, healthcare and manufacturing was
extremely rewarding.
After 12 years at Deloitte, I decided to return to
industry and I believe that I’m making a real
difference at Credit Suisse. I bring the rigour of
being a management accountant together with
my experience of challenging the status quo and
delivering significant cost savings.
SOPHIA
STEIGER
1992 Works during her
vacations from university
as a junior accountant in
the CivilВ Service.
1994 Recruited by
Thames Water as
management accountant.
1996 Appointed
financialВ controller at
Safeway Stores.
1999 Joins dotcom
retailer Toyzone.co.uk
asВ commerce director.
2001 Moves into
consultancy as a partner
with Deloitte.
2012 Hired by Credit
Suisse as head of IT and
real-estate finance.
Photographs by
Adrian Samson
38
Financial Management | July/August 2013
39
Financial Management | July/August 2013
FURBER EDUCATION
CIMA’s new president, Malcolm Furber, FCMA, CGMA,
is a strong believer in lifelong learning and
understanding the organisation around you
in order to stay relevant. He describes how those
values have served him well over the years
M
By Lawrie Holmes Photographs by Rebecca Hearfield
alcolm Furber’s first piece of advice to aspiring management
accountants would be “kick it and hug it”. The institute’s new
president is convinced that all members of the finance team
need to spend time in the field understanding exactly how
their organisation works – and this motto reflects his time as
a senior manager at gases company Afrox. That job involved
improving the performance of the firm’s fleet in hauling gas
cylinders across South Africa, where he’s been based since
1980. “Kick the tyres and hug a cylinder” was what Furber
would say to his staff, urging them to get out of the office and
fill a cylinder or drive a truck.
In his presidential term he will promote some of the key
principles he has championed in recent years, including
continuing professional development as the key to staying
relevant; the importance of the business partner role for financial managers; and the value of spending as much time as
possible in the field.
Furber developed these ideas in a career that took him from
Sanderson Wallpapers in the UK, where he started out as a
trainee accountant; through a long spell at ICI, when he moved
to Africa; and then to Afrox, a subsidiary of UK giant BOC
Group, which was acquired in 2006 by its German rival, Linde.
A new direction, in the form of consultancy, has since given
him the opportunity to work with many public and private
organisations around the world, helping them to tackle the
various performance challenges facing them.
Furber’s career got off to a false start when a serious injury
in a car crash put paid to his degree in computer studies. He
found himself back in his home town, Gosport in Hampshire,
working for Sanderson Wallpapers. Spending a lot of time on
the factory floor there instilled his hands-on approach to
accounting. But it was the switch to the agrochemicals arm
of ICI that really put him on track. The company supported
his CIMA training, which included a marketing course at the
University of Bradford.
Furber’s ambition and appetite for learning stood out. “In
my first two years of study I got As in every subject, so I sat seven
papers in three days the following year. In those days if you
failed one CIMA exam you failed the whole thing,” he recalls.
After qualifying in 1978 he became a marketing accountant
covering Asia Pacific, based in the UK. “This was really about
business partnering, high-level reporting and business development in the region,” says Furber, who was soon to be
assigned a project in Indonesia that was teetering towards
collapse. “They’d devalued their currency by 50 per cent 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.”
Into Africa
His move to ICI’s subsidiary in South Africa in 1980 was the
precursor to a series of senior jobs there in finance, IT and corporate planning. After talking with David Swarbrick – a former
England rugby union player who’d become a director at ICI –
Furber, a talented full-back himself, decided that the country
was the place to further his career despite its political 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
40
Financial Management | July/August 2013
skills in South Africa at the time
– people weren’t coming in –
and the business was taking
months to do its accounts. The
first thing was to set up the
function there properly so that
it could get reporting back into
the UK.”
He ended up working across
most of the subsidiary’s 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. “It’s one of the
powers of the CIMA qualification – you touch on these on
the academic side, but it’s so easy to pick up skills that build
on the qualification. That’s a real strength of CIMA: you can
build on it very easily.”
Furber moved on to Afrox in 1992. Once again, he found
himself working at the heart of operations. “I was back on the
factory floor at the main site, reporting to an engineer,” he
recalls. “They threw me in the deep end. As I was the new kid
on the block, the firm asked me: �Because they don’t know you
here, would you chair the wage negotiations?’ So I learnt Zulu
to understand what everybody was saying.”
chaired the policy committee
on lifelong learning.
In the year ahead Furber is
keen to ensure that CIMA’s
strengths are recognised more
widely. “We have a lot of 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 finance transformation, as well as sustainability and
integrated reporting.”
While building his career, Furber has also pursued an interest in flying that has progressed into aerobatics. Once he’s
back to earth, golf, archery, hiking, water sports and military
modelling are among his pastimes when he’s not travelling
around the world for CIMA or clients. One of these is a South
African bank that wants him to train its graduate intake, which
fits in well with his ethos.
“I’ve always been keen on bringing youngsters through and
getting the green from behind their ears,” he says. “I want to
get them going out – kicking and hugging.”
Visit www.fm-magazine.com/feature/qa/thoughts-cima’snew-president for an extended version of this interview.
�As I was the new kid on the
block, the firm asked me:
“Because they don’t know
you here, would you chair
the wage negotiations?”’
A veldt of difference
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. It’s still needed to some extent;
the standard of education is not quite as good as it should be.
It’s a huge country, though. You do find schools in the rural
areas, but these don’t have high-quality teachers because
they’re in the cities – and clearly not everyone can live there.”
In recognition of the poor conditions under which 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 influential in introducing the AAT programme to
South Africa.
In 2004 he started in consulting, where he has played a key
role in business improvement assignments in both the private
and public sectors, including a two-year business intelligence
project at the South African Revenue Service. This change in
direction enabled him to contribute more to CIMA’s activities.
He became a regular speaker on behalf of the institute on topics
including supply management, activity-based costing, integrated business planning and performance management. He
has been a member of Council for 15 years, getting involved
in the institute’s past four qualification reviews and its ethical code. He’s served as a membership assessor and has also
CIMA MY JOBS
Financial Management | July/August 2013
41
www.cimaglobal.com/myjobs
Job search clinic sponsored by Robert Half
Closing the deal
It’s OK to negotiate
salary with a
potential employer
I
t’s hardly surprising that some
jobseekers, when faced with a
coveted job offer, fear negotiating
for a higher salary. Most think
that doing so could damage their
relationship with a new employer
or recruiter. But, if you’re in this
category, you may be doing yourself a
great disservice by not speaking up.
It doesn’t hurt to ask, especially if you
cover the following bases.
Conduct 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 Half’s salary calculator
for the accounting and finance fields.
Consider asking past colleagues or
contacts in your professional network
for their insight as well. And don’t
forget to consider your geographic
region – it plays a significant role in
determining pay levels.
Show them your value
Getty Images
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 identification of a
payroll problem saved your company
thousands of pounds. Results such as
this help to put you in a stronger
negotiating position.
Look beyond salary
You’ve heard it before: money isn’t
everything. If an employer is unable to
meet your request for additional
compensation, consider asking for
other benefits. What would make the
difference for you? The opportunity to
work flexibly? The employer’s support
for a professional qualification or
additional training? More annual
leave? More and more firms are willing
to provide such things to secure the
best talent, especially when they can’t
offer the desired level of pay.
Say �no’ when you need to
If an offer is lower than you think it
should be, point it out politely and
then counter with your desired salary.
If the employer can’t or won’t move,
it’s up to you to decide whether or not
you can accept the terms. This will
depend on your need for immediate
employment, as well as how excited
you are about the particular
opportunity. (Note: if you’re desperate
to leave your current job, don’t tip
your hand, as it will weaken your
position in negotiations.)
responsibilities, plus any special
arrangements that resulted specifically
from the negotiations. Having
everything in writing should prevent
any misunderstandings later.
And remember: few salary
negotiations are swayed positively by
overly aggressive tactics. Regardless of
how the negotiations play out, remain
professional and courteous at all
times. While you may not get what you
ask for, you can still walk away with a
potential employer’s respect – and, in
the long run, that may prove far more
valuable to you and your career than a
larger pay slip right now.
To benchmark your salary or new
offer visit Robert Half’s new salary
calculator tool at roberthalf.co.uk/
finance-accounting-salary-calculator
Robert Half is the world’s first and largest specialised
staffing firm, with a global network of more than 350
offices worldwide. For more information about our
professional services or career advice, please visit
roberthalf.co.uk
Get it in writing
Once you agree to the terms, ask that
a letter be drawn up, outlining the
specifics of the offer: salary, benefits,
the position’s title and key
Find your next role at roberthalf.co.uk
42
Financial Management | July/August 2013
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
ВЈ1bn to 12,000 small businesses.
But bank loans and overdrafts aren’t
the only source of working capital. Firms
are turning to asset-based finance such
as invoice discounting, while others are
harnessing the power of the web to
raise finance. Rupert Honeywood, for
instance, raised ВЈ71,500 from crowdfunding sites to start his business, the
Personal Development Bureau.
8 WAYS TO…
IMPROVE WORKING
CAPITAL
3
By Peter Bartram
There’s never been a better time
for finance professionals to focus
on better ways of managing their
working capital, given the wide
range of options available. So just
how can an organisation make its
working capital work that bit harder?
1
Illustration by
Borja Bonaque
Manage working
capital actively
throughout the
organisation
It’s not the responsibility of the finance
department alone. Companies should
implement a cash-focused management
system, argues Daniel Windaus, a senior
director at REL Consultancy, which
advises on working-capital issues.
The way to make sure that 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 firms will need to
provide ongoing support in order to run
these processes successfully.”
2
Consider
alternative
funding
The banks’ unwillingness to lend,
especially to SMEs, has put a strain on
the working capital of many businesses.
John Alexander, an insolvency
practitioner and partner at accounting
firm Carter Backer Winter, says it’s best
to meet the bank sooner rather than
later to increase a credit line.
FDs who’ve had the brush-off from
one of the �big four’ banks could
43
Financial Management | July/August 2013
Pay your
suppliersВ onВ time
Now there’s a counterintuitive way of
improving your working capital. But
Clive Adolph, a partner with PBA
Accountants, argues that companies
that pay on time develop better
relationships with suppliers and are in a
position to negotiate better deals.
“If you don’t have a good relationship
with your suppliers, you could end up
not receiving goods when you need
them. And, if you can’t fulfil your
commitments, that’s not good for your
cash flow either,” he warns.
Karen Penney, vice-president and
general manager UK for American
Express Global Corporate Payments
Europe, points out that a new EU
directive requires 60-day payment terms
for commercial business transactions.
She says that firms can protect their cash
flow, while ensuring that their suppliers
are paid promptly, by using third-party
payment providers. A company can pay
its supplier, but need not settle up with
its provider for up to 58 days.
4
Negotiate
discounts with
yourВ suppliers
Firms can benefit from discounts
through early payment, bulk supply or
regular orders. FDs need to consider
what kind of leverage they can bring to
each supplier. One way of driving down
prices as far as possible is to ensure that
the firm has only one point of contact
with each supplier.
Sometimes it’s something as simple as
making sure the supplier is referred to
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
difficult for the firm to build up an
aggregate picture of its total purchasing.
That in turn made it harder to identify
opportunities for bulk purchasing and
discounts,” he says.
5
Make expenses
more visible
7
Manage the
payment process
more effectively
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.
Even expenses claims with small excess
amounts can have a cumulatively
negative impact on working capital.
The key is to set clear rules in areas such
as travel and accommodation – and then
to ensure that these are followed.
It is important to have the tools to
monitor expense claims without huge
manual effort. Penney believes that
expense management tools such as
corporate card programmes make
expenses more visible. “The detailed
reporting helps businesses to see where
costs can be consolidated, thereby
making forecasting easier and more
streamlined,” she says.
6
Manage your
stockВ actively
Holding unnecessary levels of the
wrong stock can be one of the biggest
drags on working capital. Stock
problems often result from a lack of
communication among different
departments. Regular (monthly or
quarterly) stock checks are part of the
answer. But the information emerging
from these checks needs to be reviewed
and acted upon.
“The reason that most companies shy
away from inventory management is
because they fear their safety stocks will
become dangerously low and they won’t
be able to provide the right service
level,” explains Hugh Williams,
managing director of Hughenden
Consulting, a supply-chain specialist.
His solution: analyse revenue and
sales of individual products and decide
which should be “made to stock” and
which “made to order”.
8
Investigate the
benefits of
e-procurement
Daniel Ball, a director at Wax Digital, an
e-procurement specialist, says firms that
have turned to electronic sourcing tools
to aid their buying processes have cut
costs by an average of 18 per cent. This
serves to ease their working capital.
“For example, e-auctions help to
create a competitive tension that is often
missing in traditional negotiations,”
he says, arguing that auctions also make
it easier for buyers to negotiate with
suppliers across a wider range of issues,
such as payment terms. “You could
factor one supplier’s willingness to
accept 60-day payment terms against
another similarly priced supplier’s
refusal to trade on anything other than
30-day terms.”
Ball adds: “The rigorous authorisation
process mandated by e-procurement
also stops maverick spending – the
hidden eater of working capital.”
45
Financial Management | July/August 2013
RESOURCE
STUDY & TECH NOTES/THE INSTITUTE/EVENTS
study
notes
In this issue:
Paper E1 Enterprise
Operations, p48
Paper C01 Fundamentals
of Management
Accounting, p50
T4 part B
Test of Professional Competence
in Management Accounting
What’s the difference between an ethical issue and a business issue?
This question seems straightforward enough, yet recent T4 exam
results have shown that many students find it a tough one to answer
By the T4 case study writer
T
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
on, ethical issues, it’s useful to consider
CIMA’s code of ethics. This sets out the
following five fundamental principles
for professional accountants:
l Integrity. Be straightforward and honest in all your professional relationships.
l Objectivity. Do not allow bias, conflicts
of interest or the undue influence of
others to override your judgement.
l Professional competence and due care.
Maintain your knowledge and skill at
the level required, to ensure that a client
or employer receives competent services based on current developments in
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 specific authority (unless
there is a legal or professional right to
do so) nor use the information for your
personal gain or that of third parties.
l Professional behaviour. Comply with
relevant laws and regulations, avoiding
any action that discredits the profession.
The T4 exam requires you to specify
what the ethical issue is in a given 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 justification 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 find
a second ethical issue and repeat the
Getty Images
46
process. A further five marks are available (up to three per issue) for giving
detailed and justified 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 difference between an
ethical issue and a business issue? There
is a fine line, especially when some of
the ethical issues included in the unseen
material get “mixed in” with the business issues. In general, a business issue
is one that affects an organisation’s performance, profitability or cash flow and
which needs to be addressed in order to
improve the company’s efficiency. By
contrast, an ethical issue is one where
the performance of the business (and
often its profitability) is being prioritised
above the wellbeing of its employees or
what is considered to be good practice.
Let’s consider an example of a problem with both business and ethical
aspects from the May 2012 exam, which
concerns a toy firm called Jot (bit.ly/
T4May2012). The company is having
trouble with its IT systems, which
means that incorrect invoices are being
sent to customers.
Here is an edited extract from the
unseen material: “The finance and IT
director is concerned that Jot’s different
IT systems are not integrated, which has
caused data duplication and conflicts.
Some customers have queried and not
settled their invoices, as the volume of
products invoiced for does not agree
with the volume of products received.
This is causing some conflict between
the finance department, which is chasing overdue trade debtors, and the sales
department, which is trying to keep customers satisfied. 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 effect
that Jot’s issuing of incorrect invoices
could have on its customers. This could
deter them from dealing with it again
and delay the payment of invoices, leading to further strain on the cash flow of
this small company. From the business’s perspective, there is an urgent
need to establish a more robust and professional system for controlling inventory and raising invoices.
Financial Management | July/August 2013
From an ethical standpoint, the problem is that Jot’s IT systems are clearly
failing to provide sufficiently sound
information that would enable accurate
invoicing. The justification of why this
is an ethical issue is that such an unprofessional state of affairs could reflect
badly on the company and so harm its
reputation. The lack of clear procedures
and the poor integration of IT systems
at Jot are contrary to two principles in
the CIMA code of ethics: integrity and
professional competence and due care.
Your advice on the ethical issue ought
to be that Jot’s procedure for returned
goods and faulty products should be
reviewed immediately with the aim of
ensuring that invoices aren’t raised for
replacement items. Another recommendation should be that Jot recruits
an experienced IT manager to work with
the sales and finance departments to
review the systems and improve the procedures that are causing these faults.
Furthermore, a longer-term review of
Jot’s IT systems should be conducted
with the goal of ensuring that all invoices are prepared accurately.
Let’s consider another example – this
time from the March 2013 exam (bit.ly/
T4March2013) – involving a fleet maintenance firm called BVS. This concerns
problems with ten of the company’s
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 BVS’s 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 don’t
feel confident 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 profitability.
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 affecting 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 affected before a closure decision is taken.
You have been put in a difficult situation whereby people’s jobs depend on
information that may not be correct and
which could result in an unfair decision.
In addition, it is not good practice to
make an example of underperforming
workshops by closing them without first
trying to improve their performance.
CIMA’s code of ethics states that
you must act with objectivity and fairness in your capacity as BVS’s 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 finance director, with a view to persuading PIE’s representative to defer any
closure decision until the results of the
management interventions are known.
Further reading
CIMA Official Study Text – T4 Test of
Professional Competence in Management
Accounting, CIMA Publishing, 2012.
48
Financial Management | July/August 2013
Paper E1
Enterprise
Operations
The balance of economic power has shifted dramatically towards
the world’s emerging markets in recent years, but their imminent
supremacy over the developed Western nations is far from assured
By Tharindu Ameresekere
G
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
offered 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 continent’s largest economy, South Africa, in
among the Brics. Latin America, too, has
shown promise as an emerging market.
Its proximity to the US, the world’s 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 suffered by most Western
economies, we find 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 China’s 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 financial 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 deficit 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 confidence
and spending, which in turn created a
vicious circle of reduced investment, depressed demand and further job losses.
When considering the EU, Greece’s
potential exit from the eurozone, the
lack of liquidity in Spain’s banking
system, political instability in Italy and
the public’s lack of appetite for further
austerity throughout the continent all
send worrying messages. The combined
GDP of the 27 member states trading, by
agreement, mostly without barriers such
as tariffs, is projected to have grown by
a mere 0.3 per cent last year.
It’s clear, then, that the mature 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 field, believing
that domestic firms have an unfair
advantage. Some think that corporate
political activity is a key requirement for
trading there. In 2011, for example,
General Motors (through a joint venture,
Shanghai GM) made a financial contribution to the Chinese Communist Party’s
90th-birthday celebrations. Commentators have suggested a link between this
sponsorship and the fact that GM’s
luxury model, the Cadillac, is aimed at
high-ranking party members.1
There are implications for cor porate
social responsibility, too, as there have
been labour-rights violations in some
emerging economies. Spanish clothing
giant Zara, for instance, was recently 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,
49
Financial Management | July/August 2013
The global business environment as it relates to E1
Syllabus topic
Industry example
The effects on business
ofВ globalisation, both
inВ general and in specific
areas – eg, trade.
Apple’s sales from outside the US have soared over the
past fewВ years. They increased from $14bn in 2005 to
$64bn in 2010. In 2010, 56 per cent of the company’s sales
revenue came from international markets.3
Risks to globalisation –
eg,В protectionism.
US telecom equipment providers lobbied the government
to prevent Chinese firm Huawei from acquiring 3com.
The development of
emerging economies.
The Brics’ emergence is one of the most dominant
trendsВ of globalisation. China, for instance, has become
the largest market for cars and luxury goods.
The development of
multinational companies.
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.
The growth in outsourcing
and offshoring, and their
impact on decision-making.
Nike controversially offshored production in a bid to
reduce its labour costs and gain access to developing
Asian markets, while keeping its design function in-house.
Cultural differences.
US executives are surprised by their Brazilian counterparts’
propensity for arriving late at meetings and starting them
by discussing the previous night’s football match.
Corporate social
responsibility and
corporateВ governance.
Measures such as the UK combined code on corporate
governance and the Sarbanes-Oxley Act 2002 have been
designed to prevent scandals such as Enron, which shook
confidence in the capital markets in 2001.
Government regulations on
business and corporate
political activities.
In 2012 an aviation show in China was sponsored by
European aircraft manufacturers in a bid to ease tensions
between China and EU governments concerning air access
for commercial flights. This prevented the loss of access
to one of the world’s most important aerospace markets.
The effects of NGOs on
business and perceptions of
NGOs as strategic partners.
Facebook entered a partnership with environmentalist
lobby group Greenpeace aimed at reducing the ecological
impact of its systems.
including excessive working hours, have
led to a spate of suicides among workers.
Furthermore, the mature economies
of the West cannot simply be written off.
During the last quarter of 2011 there
were signs of increased consumer
spending in the US and, since this fuels
70 per cent of the nation’s economy, it
came as heartening news for Obama.
Much of the growth was powered by a
15 per cent surge in sales of cars (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.
Many of the Brics depend on the US
and EU for their growth. Whenever these
mature markets cool down and/or their
governments tighten expenditure, the
emerging economies feel the effects –
we have already seen a deceleration in
China’s manufacturing sector and 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
government in jeopardy, since it needs
oil prices to remain high to support its
fiscal spending projects. Brazil, despite
its best efforts, is still struggling to maintain law and order, while its infrastructure has not been modified to reflect the
wave of investment heading towards the
country. (China scores well in this area
compared with the other Brics.)
Declining demand from the West has
created further threats. The outsourcing
and offshoring of manufacturing and
service provision to emerging economies
has slowed considerably owing to concerns in the developed world about
rising costs in China and other offshoring destinations. There is also a growing
recognition among Western firms that
there are more subtle challenges – for
example, in finding outsourcing partners
with the right strategic fit or the need for
better quality control. These are linked
with Oliver Williamson’s transaction
cost theory, which identified the hidden
costs of outsourcing.
There has been an obvious shift in
economic power towards the emerging
markets, but the Brics’ success brings
with it political challenges and is also
tempered by a dependence on demand
from the more mature Western 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 film”,
Washington Times, May 2011
(bit.ly/GMChina).
2. “Bangladesh: factory fire kills seven
workers” World Socialist Web Site,
February 2013 (bit.ly/BanglaFire).
3. “Apple’s overseas demand in a word:
�exploding’”, The Motley Fool, June 2011
(bit.ly/AppleExplodes).
CIMA Official Study Text – E1 Enterprise
Operations, CIMA Publishing, 2012.
50
Financial Management | July/August 2013
Paper C01
Fundamentals of
Management Accounting
to the work done in July; 4,310 is included for paint started and finished in July;
390 x 60% = 234 is included for the
mixing done in July in relation to the
closing WIP; and 50 is again included for
the abnormal loss. The two workings can
be summarised as follows:
When you’re applying process costing, it’s important to take note of the
manufacturing method used. In scenarios where ingredients are mixed
up together, the concept of normal and abnormal loss comes into play
By Grahame Steven, FCMA, CGMA
Equivalent units of work in July
Materials
Opening WIP
0
Started and finished 4,310
Output
4,310
Closing WIP
390
Abnormal loss
50
4,750
M
y previous article
about process costing, published in
the April issue of
Velocity, focused
on a company that
made finished products by assembling
components (bit.ly/ProcessCostingPart1).
In this article I’ll consider a firm in the
process industry using the first in, first
out (Fifo) method. Manufacturers in this
sector mix ingredients to make goods
such as food, paint and chemicals.
The company, Slap It On, makes paint
in batches. All of the ingredients (raw
materials) are put in at the start of the
mixing process and the normal loss
occurs during the initial stage of manufacturing. At the end of every month
some batches are partially completed
(work in progress). Unfinished batches
are finished in order of completeness –
ie, the batch closest to completion is
finished first, the second-closest is finished next and so on.
The following figures are obtained
for July:
l Opening WIP: 800kg (ВЈ1,080, 100 per
cent complete), plus mixing work (ВЈ200,
50 per cent complete), making a total
value of ВЈ1,280.
l Costs incurred: 1,000kg of material A
at ВЈ1.24 per kg (ВЈ1,240); 4,000kg of material B at ВЈ1.40 per kg (ВЈ5,600); and
ВЈ2,996 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 difference 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
many reasons. Losses occur in baking, for
instance, because it’s 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. July’s normal loss is expected
to be 5% x (1,000kg + 4,000kg) = 250kg.
In practice, this figure will be higher or
lower owing to factors such as manufacturing efficiency and material quality.
The first step towards a process account
is to work out how much of July’s output
was started and finished that month by
subtracting the opening WIP from the
total output: 5,510kg – 800kg = 4,310kg.
The next step is to work out whether
or not there was an abnormal loss (or
gain) as follows:
Determining abnormal gain or loss
Opening WIP
Material A
Material B
Normal loss
Closing WIP
Expected output
Actual output
Difference (abnormal loss)
800kg
1,000kg
4,000kg
-250kg
-390kg
5,160kg
5,110kg
50kg
The next step is to calculate the number of equivalent units for materials and
mixing. For materials, the figure 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
Mixing
400
4,310
4,710
234
50
4,994
The cost per equivalent unit for
materials is therefore ([1,000kg x ВЈ1.24]
+ [4,000kg x ВЈ1.40]) Г· 4,750 = ВЈ1.44. And
the cost per equivalent unit for mixing
is ВЈ2,996 Г· 4,994 = ВЈ0.60.
The output, closing WIP and abnormal loss can now be valued as follows:
l Output: ВЈ1,280 + (400kg x ВЈ0.60 per
kg) + (4,310kg x ВЈ1.44 per kg) + (4,310kg
x ВЈ0.60 per kg) = ВЈ10,312.
l Closing WIP: (390kg x ВЈ1.44 per kg) +
(234kg x ВЈ0.60 per kg) = ВЈ702.
l Abnormal loss: (50kg x ВЈ1.44 per kg) +
(50kg x ВЈ0.60 per kg) = ВЈ102.
The abnormal loss is valued, because
this is the cost of failing to achieve the
expected level of output in July. But the
normal loss is not valued, since Slap It
On expected to incur this.
The figures we have can now be used
to prepare the process account:
Process account for July
ВЈ
ВЈ
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.
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
51
Financial Management | July/August 2013
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 finished
first, the second-closest to completion
is finished next and so on.
The following figures were obtained
for July:
l Opening WIP: 30 component kits
(ВЈ2,460, 100 per cent complete), plus
assembly work done in relation to the
opening WIP (ВЈ1,650, 50 per cent complete), making a total value of ВЈ4,110.
l Costs incurred: 120 component kits at
ВЈ9,960; ВЈ12,096 on the assembly line.
l Output: 105 camcorders.
l Closing WIP: 45 component kits (100
per cent complete; assembly work 40 per
cent complete).
The first step in getting to the process
account for July is to subtract the opening WIP from the total output to calculate how many camcorders were started
and finished that month: 105 – 30 = 75.
The next step is to determine the
number of equivalent units for components and their assembly. For components, the figure for opening WIP is zero,
as no more component kits were used in
relation to opening WIP; 75 is included
for kits started and finished in July; and
45 is included for the closing WIP.
For assembly, 30 x (100% – 50%) = 15 is
included for the opening WIP in relation
to the work done in July; 75 is included
for camcorders started and finished in
July; and 45 x 40% = 18 is included for
camcorders assembled in July in 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 finished
75
Output
75
Closing WIP
45
120
The cost per equivalent unit for the
component kits is therefore ВЈ9,960 Г· 120
= ВЈ83. And the cost per equivalent unit
for assembly is ВЈ12,096 Г· 108 = ВЈ112.
The output and closing WIP can now
be valued as follows:
l Output: ВЈ4,110 + (15 units x ВЈ112 per
unit) + (75 units x ВЈ112 per unit) + (75 units
x ВЈ83 per unit) = ВЈ20,415.
l Closing WIP: (45 units x ВЈ83 per unit)
+ (18 units x ВЈ112 per unit) = ВЈ5,751.
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The figures we have can now be used
to prepare the process account:
Process account for July
ВЈ
ВЈ
Opening WIP 4,110 Output
20,415
Components
9,960 Closing WIP 5,751
Assembly cost 12,096
XXXXXX
26,166
26,166
Practice question on mixing
Now return to the paint firm, Slap It On,
and test yourself by producing a process
account from the following figures for
August (the solution can be found on FM’s
website at www.tinyurl.com/nt3j4t5):
l Opening WIP: 390kg (ВЈ562, 100 per cent
complete), plus mixing work (ВЈ140, 60 per
cent complete), making a total of ВЈ702.
l Costs incurred: 14,000kg of material A
at ВЈ1.19 per kg; 49,000kg of material B at
ВЈ1.37 per kg; ВЈ38,244 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.
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United Arab Emirates
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E: middleeast@cimaglobal.
com
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Financial Management | July/August 2013
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55
Financial Management | July/August 2013
technical
notes
In this issue:
Opportunities and
challenges for management
accounting in mainland
China, p57
Profiting games: the benefits
and drawbacks of Ebitda
By Ijaz Muhammad, ACMA, CGMA,
senior manager, regulatory economics, at du Telecom
E
arnings before interest,
taxation, depreciation and
amortisation (Ebitda) is
viewed all around the
world as the key measure
of a company’s performance. Managers frequently use it when
planning for both the short and long
term. It’s also often used to evaluate the
impact of strategic decisions. All this is
despite the fact that various authors
have highlighted a number of disadvantages associated with Ebitda, which is
not even required under Gaap to be included in financial statements.
A growing emphasis on Ebitda has
increased the need for firms to capitalise
their operating costs. Under certain
accounting standards it’s permissible to
capitalise fixed operating costs. In the
telecoms industry, the costs of sharing
infrastructure, for example, are capitalised on the grounds that they are proxy
for owning a network. In almost all industries, firms 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 it’s 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 Buffet said: “Does
management think the tooth fairy pays
for capital expenditures?”
This means that depreciation, being
a non-cash item, should not be ignored.
Ebitda should be adjusted to include
fixed costs (depreciation and 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 fixed costs are also important and
can be considered controllable to some
extent, as all costs are variable in the
long run. It depends how the management team views such fixed 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 profit 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.
Germany’s Metro Group uses valueadded KPIs such as economic profit
EBT is a better key performance indicator than Ebitda
Capex
Revenue
Capex
Ebitda
Revenue
EBT
56
Company A’s selected financial performance indicators
2011
2010
Ebitda (ВЈ000)
14,475
14,670
Ebitda %
31.2
32.0
Earnings per share (ВЈ)
13.7
15
Share price (ВЈ)
172
170
Operational leverage
2.98
2.88
Financial leverage
8.05 *
1.23
Total leverage
24.0
3.5
Adjusted EBT (ВЈ000)
274
1,902
2009
14,735
33.1
16
136
2.96
3.00
8.9
756
57
Financial Management | July/August 2013
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 B’s selected financial 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 fixed
costs or depreciation. The higher the
fixed costs or depreciation are, the
higher the OL will be. Financial leverage
(FL) can be expressed as operating
income after depreciation divided by
income after financial charges before
taxation. The higher the financial
charge, the higher the FL, eroding the
firm’s earning capacity. Multiplying the
OL by the FL gives the total leverage.
In the tables above I have applied the
concepts of OL and FL to the published
financial results of two big telecoms
companies. The first table shows that,
while company A’s Ebitda and Ebitda
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
percentage have been fairly stable over
the four years covered, the firm’s 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 company’s
financial health based on its Ebitda, free
cash flows and expected dividend. For
any business, a stable Ebitda and the
announcement or disbursement of
improved dividends signal a strong
financial position. This creates demand
for its shares, which leads to an increase
in the share price. Analysts should look
into the adjusted EBT and total leverage
as well as the league of companies they
are comparing – eg, an incumbent 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 fixed and variable costs. I would use
OL and FL, to see the risk associated with
the company’s earning capacity, along
with adjusted EBT instead of Ebitda.
Opportunities and challenges
for management accounting
in mainland China
By Dr Laurence Yuen, FCMA, CGMA
deputy general manager, finance, at Zhuhai Chimelong Investment
and Development Company
A
Getty Images
along with the more conventional KPIs
in its annual report. This appears as
earnings before interest and taxation
after cost of capital (Ebitac), which can
be calculated as Ebit – (capital employed
x weighted-average cost of capital).
Another important consideration is
how sensitive a company’s earnings are
in relation to its operating activities and
how this can be measured. To some
extent, the price/earnings ratio gives a
market-related external measure based
on the mix of organic growth, but it
doesn’t provide a great deal of insight
about volatility in organic earnings. Like
other KPIs, in isolation a P/E ratio can
be misleading. For instance, in the short
run a share price can be sometimes clinically maintained or improved through
a share buy-back (artificial demand) or
the excessive disbursement of dividends
from accumulated retained earnings,
thereby resulting in a disconnection
between current earnings and the resulting share price. Therefore a high or low
P/E ratio might not explain much about
possible volatility in a company’s 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 company’s
value and potential for growth.
We can apply the costing concept of
operational and financial leverage to
explore an organisation’s cost structure
and the impact of its fixed costs on earnings. These two ratios can provide an
in-depth insight into a firm’s cost structure, exposure to operating income and
income after financial charges before
investment income and taxation. Operating leverage (OL) can be expressed as
Financial Management | July/August 2013
s the result of “lost decades” Japan fell from
its position as the
world’s second-largest
economy and was replaced by China, which
posted a GDP of about $8.28trn last year.
Although China’s annual GDP growth
fell to its slowest pace in 13 years in 2012,
it was still 7.8 per cent, which surpassed
a number of forecasts. Sustainable growth
is ensuring social and political stability.
All this has encouraged private-sector investment, which has created a lot of jobs
in mainland China. The most popular
industries include financial 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-profit
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 Certified
Public Accountants has approximately
250,000 members, 100,000 of whom are
in public practice. This means that about
60 per cent of the nation’s professional
accountants are in business.
Although cost and management
accounting techniques are practised
in both state-owned enterprises (SOEs)
and the private sector, management
accounting is still a relatively new 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
affected by the global credit crunch).
This growth is expected to continue as
the stable political environment keeps
attracting money from overseas. In 2011
FDI projects were concentrated mainly
in manufacturing; wholesale and retail
trading; and leasing and business services (see table, page 59).
China’s 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
ВҐ3,166bn in 2005 to ВҐ42,164bn in 2011
(see table, below). Such figures are
impressive for a developing country.
One of the objectives of Beijing’s SOE
reforms is to induce market capital into
unitary state ownership to dilute the
state’s equity and control. This should
align SOEs to perform more according
to market forces than to administrative
directions. In future, therefore, management accounting practices will work
more to service these firms’ investors
and other stakeholders rather than
purely to satisfy the authorities’ compliance requirements.
Chinese firms continue to face issues
concerning internal control and the
problem of how to supervise an organisation to benefit 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 (ВҐbn)
42,164
3,166
2000
572
516
1,088
n/a
Source: China Statistical Yearbook.
59
Financial Management | July/August 2013
Number of foreign direct investment projects in China
Sector
Farming, forestry and fishing
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
Scientific 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 affected 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 profit of ВҐ570m.
Despite efforts 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 nation’s 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
China’s accounting law was enacted
in 1985 (and amended in the 1990s) to
ensure the accuracy and completeness
of financial information provided by
companies. Preparing fraudulent financial statements, failing to keep financial
records and altering accounting treatments at random could be treated as
criminal offences and penalised accordingly, for example. But it’s time for the
authorities to review this legislation. It
still requires all entities’ financial years
to run from 1 January to 31 December
rather than allowing enterprises to set
their financial years according to their
business needs. This state of affairs is
not practical in the long term, because
it puts Chinese accounting firms under
tremendous pressure to complete all
their auditing jobs in Q1.
Continued economic growth in China
will force domestic companies to adopt
more Western accounting concepts
and systems in order to manage their
operations effectively. This process will
necessitate training, education and perhaps even apprenticeships in offering
consistent and continuing education for
potential and existing financial 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 find themselves even
more in demand.
References
1. M Islam, J Kantor,
“The development of quality
management accounting practices in
China”, Managerial Auditing Journal,
Vol 20, No 7, 2005.
2. L Liu, F Pan, “The implementation
of activity-based costing in China:
an innovation action research
approach”, British Accounting Review,
Vol 39, No 3, 2007.
62
Financial Management | July/August 2013
What you learn on…
Mastercourses on financial modelling
D
ave Marlow qualified as a
chartered accountant with PwC,
where he helped clients to
implement change projects and
related training programmes. He later
worked in the City, developing, designing
and delivering financial courses for
bankers, lawyers and accountants.
He now looks after BPP Professional
Education’s financial modelling training.
Whether you are an accountant, a
banker, an administrator or a manager,
it is difficult to get by these days without
using Excel, Microsoft’s ubiquitous
spreadsheet software. The package has
been around for years and it’s developed
in such a way that it has become one
of the indispensable tools of office life.
Yet, as with all modern IT applications,
there is a right way to use it and a
wrong way. Not only that, but, unless
you are a professional Excel jockey,
you’re probably using fewer than 5 per
cent of its capabilities.
Maybe you are well aware of this
state of affairs, but have you ever
thought of doing something to change
it? The financial modelling training
provided by BPP will open your eyes to
some incredibly useful Excel functions.
More crucially, they will teach you
how to get the best out of the program.
You will be much better able to do your
job and your colleagues will be grateful
for the technical guidance you’ll be able
to pass on to them.
Excel in excelsis
So what is the difference between
simply using Excel and financial
modelling? Financial modelling refers
to Excel files (models) that clearly
derive an answer (output) from a
number of assumptions (inputs) via
workings. So, if you are organising a
school outing to a castle, for example,
you might build a simple model to work
out the total cost based on the number
of children on the trip, the distance
driven by the coach, the cost of entry to
the castle and any other assumptions
that would affect the cost.
Done correctly, this would tell you the
total cost of the exercise, but the real
value of the model lies in the scenario
analysis that can be performed once the
model is built. What if we take the train
there instead? What if we eat at the
castle’s café rather than taking packed
lunches? Excel can be used to give you
the total cost in any of these
circumstances, so you can better decide
how you want the day to run.
How can training courses help you
with something that sounds relatively
simple? Unsurprisingly, there is a right
way and a wrong way to go about
building such models, too. A poorly
constructed model can often produce
wrong answers and lead to poor
decisions. It may seem obvious, but a
high-quality financial model will:
l Be flexible, making it easy to trace
changing inputs through to the outputs.
l Not fall apart as the inputs change.
l Look professional and be easy on the eye.
The courses provide numerous tips
and golden rules that, if applied with
discipline and rigour, will always result
in effective, high-quality models.
The courses on offer
BPP offers a number of CIMA
Mastercourses in this area, but at the
core are “Introduction to financial
modelling” and “Intermediate
financial modelling”, both of which last
for two days. The focus of these courses
is the forecasting of an integrated set of
financial statements – ie, the income
statement, cash flow statement and
statement of financial position.
This could be done for many different
purposes – eg, budgeting, credit
analysis, business planning, financial
analysis etc. On these courses the
forecasts are used to value a business
and a sensitivity analysis is then
performed on that value. For example,
how does the value change as the
forecast interest rate fluctuates?
Both courses are suitable for
accountants and non-accountants,
but it’s helpful for delegates to have a
basic level of financial literacy. The
introductory course is for people who
are concerned about their Excel skills
(it uses a theoretical model designed for
the classroom), while those more
confident with using Excel could attend
the intermediate course straight away
(it uses a real company as an example).
Both courses have been running for
many years, developing along with each
new version of Excel, and they
invariably receive outstanding feedback.
A typical delegate leaves with the
comment: “Crikey – I wish I’d come on
this course a few years ago.”
For further details of BBP’s financial
modelling courses, available through
CIMA Mastercourses, visit
www.cimamastercourses.com/IT-skills
63
Financial Management | July/August 2013
The institute
The benefits of volunteering, plus how to choose the most appropriate management tools
View from the
professional
standards team
A
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 benefit other people? Even better,
what if you could help others and
benefit your career at the same time?
Volunteering for a charity is a fantastic
way of giving something back to the
community while simultaneously
enhancing your CV. It can also form a
valuable and enriching part of your
continuing professional development.
Owing to financial pressures, it’s
becoming increasingly difficult to obtain
budgetary approval for training and
development activities, but volunteering
gives you a chance to share your
expertise and to enhance and refine your
skills in a completely different business
setting. The challenges you’ll face are
not only valuable to you as an individual
and the charity; they can also be
enjoyable and rewarding.
Business is constantly evolving as
social entrepreneurship and corporate
social responsibility are incorporated
into the objectives and key success
factors of many organisations. There are
many opportunities out there that will
enable you to match your management
accounting skills to the business needs
of others. Perhaps you may even feel
that your skills are a little one-sided and
that you are lacking in certain technical
PRESIDENTIAL
ENGAGEMENTS
14 August Joint business conference, Zambia.
26-30 August CIMA Global Business Challenge,
South Africa.
or softer skills. If so, volunteering your
expertise should benefit you.
In troubled times many NGOs are
finding it increasingly difficult to keep
their heads above water. Many people
who work in smaller charities have
had little or no formal business
training, so this is where you could come
in. As a professional accountant in
business, you have a wealth of skills
that can help them to drive their causes
forward. Many of the skills that are in
most demand are strategic thinking,
business planning, project management
and financial guidance – a perfect
match for any CIMA member. So why
not take a minute to review your CPD
plan and see whether you would like to
try something different?
In addition, you may find it useful
to visit www.tinyurl.com/pe8gvek and
read how other CIMA members have
volunteered their management
accounting skills in the past.
CIMA unveils toolevaluation resource
There is a huge array of management
accounting practices and tools on the
market, all of which promise to help
define and manage an organisation’s
strategy, resources, customers and costs,
so improving its overall performance.
A recent Google search on
“management accounting tools”
returned nearly 13 million results. In this
context, managers can often struggle to
identify the most suitable tools and
apply them effectively. With this
problem in mind, CIMA and the AICPA
have developed Essential Tools for
Management Accountants – a book
supported by an online resource
(www.cgma.org/essentialtools) – to:
l Support businesses in evaluating
the value of the main management
accounting tools.
l Help management accountants and
their organisations to choose the most
appropriate tools for their needs.
l Provide guidance and examples of
best practice.
On the website you’ll find a summary
of the essential information on more
than 20 established management
accounting tools, ranging from the
balanced scorecard to Porter’s “five
forces” model. This explains:
l What each tool does and what value it
can offer management accountants and
their organisations.
l Factors to take into account when
implementing and using a tool.
l The actions to take – and avoid – in
order to maximise a tool’s potential.
l What best practice looks like –
including case studies.
l Where to find further information
about a tool if you want to delve deeper.
Join the debate, rate the tools’
effectiveness and help the institute to
identify which to cover in future by
visiting www.cgma.org/essentialtools
64
Financial Management | July/August 2013
Events
Your guide to recent and forthcoming CIMA 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 Certified Public
Accountants (HKICPA) after a mutual
review process. The agreement,
which took effect on 1 July and lasts
until 30 June 2018, provides mutual
exemptions for members of one body
to become members of the other.
“This agreement strengthens
long-standing links and friendships
between CIMA and the HKICPA,” said
CIMA’s managing director, Andrew
Harding. “For CIMA members it offers
access to the HKICPA qualification
programme and for Hong Kong CPAs
it provides access to CIMA membership
and the CGMA designation, which
Coming events
UK
Mini MBA for accountants
15-19 July, 9.30am-5pm
London
Cost: ВЈ599 + VAT per
workshop (ВЈ415 + VAT per
workshop for the full five-day
series with membership of
the CIMA corporate
discount scheme)
An intensive five-day course
that will introduce you to
MBA-type thinking and how
this can be applied to the
finance function.
Contact 0845 026 4722,
email mastercourses@
cimaglobal.com or visit www.
cimamastercourses.com/MBAA
Data analysis with Excel
6 August, 9.30am-5pm
London
was established through our joint
venture with the AICPA.”
Harding (pictured, third from right)
added: “We believe that businesses
across the world need strong
management accounting skills to
support their sustainable growth.
We look forward to working with our
colleagues at the HKICPA to help
maintain Hong Kong’s reputation as
a world-leading centre for business.”
Cost: ВЈ599 + VAT (ВЈ539 + 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: ВЈ999 + VAT (ВЈ899 +
VAT for CIMA members)
An essential refresher of UK
financial reporting
standards, the course covers
the main requirements of
each standard.
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
organisation’s strategy or business model?
l What is the accountant’s role with
regard to assembling non-financial data?
CIMA’s chief executive, Charles Tilley,
gave a keynote address to the round
table, which was moderated by Shalini
Dagar, editor of CFO India, and attended
by 16 CFOs. HP’s head of global business
services, Ravichandran Venkataraman,
also addressed the event.
Contact 0845 026 4722,
email mastercourses@
cimaglobal.com or visit www.
cimamastercourses.com/UGCR
South Africa
Global Business
Challenge final
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 finale.
Contact eventssa@
cimaglobal.com if you are
interested in attending or
sponsoring this event. With
regional finals still to take
place in Australia, Myanmar,
New Zealand, Singapore,
Thailand and Vietnam, you
can follow the competition 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: ВЈ799 + VAT (earlybooker rate of ВЈ699 + 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 [email protected]
65
Financial Management | July/August 2013
CIMA CEO column
�What is missing in Whitehall is strong financial leadership at a macroeconomic level’
T
Illustration: Jörn Kaspuhl/Dutch Uncle
he call for the efficient and
effective use of taxpayers’
money is a familiar one,
yet all too often governments
are failing to back up their
policies and decision-making processes
with solid performance measures.
They are fond of proclaiming the
amount of money they have spent on
public services, but this input-based
approach is flawed. It would be better to
focus on how value is achieved by
measuring the impact of their policies in
terms of outputs and outcomes.
This angle will be familiar to those of
you who have followed my thoughts on
integrated reporting (IR). Although IR’s
main focus is investors, the model can
be flexed in the public sector to
recognise alternative funding providers
and desired outcomes. In this context
it’s essential that key decision-makers
have a deep understanding of how value,
in the shape of outputs, can be measured
over time. Having reliable costing
information that identifies the financial
flows in government departments is a
building block for this process. Such a
grasp of how the costs incurred drive
value-adding outcomes is crucial at any
time, but even more so in this era of
resource constraints and spending cuts.
CIMA has been working with the UK’s
Institute for Government on a blueprint
for reform that will lead to better
decision-making and more efficient
government. Our most recent report on
this subject, “Financial leadership for
government”, highlights the lack of
development of strategic financial roles
CIMA’s “Financial leadership for
government” report can be found at
www.cimaglobal.com/leadership
in central government. The research
underlines my long-held opinion that
what is missing in Whitehall – and in
many other seats of government – is
strong financial leadership at a
macroeconomic level. Lord Browne, the
government’s “lead non-executive”,
recently called for a more businesslike
approach to government – a view that I
firmly support.
Governments need to be able to show
taxpayers exactly what they are getting
for their money. In effect, it’s about
demonstrating their return on
investment. The resulting focus on costs,
outcomes and value creation will inform
policymakers and enable ministers to
base their decisions on reliable evidence
rather than gut feeling. Policy should be
shaped on what can be delivered, and at
what cost. Longer-term strategies based
on solid management information, and
with strong performance objectives,
will ensure a strong focus on value for
money, enabling departments to control
expenditure while retaining public
services and investing for the future.
In order to achieve these outcomes,
the emerging strategic focus of finance
teams is paramount. In the private
sector the CFO is increasingly seen as an
organisational leader, rather than the
head of a team. This development needs
to be matched more closely in the public
sector. The finance function in the
public sector has a vital role to play by
increasing its emphasis on supporting
decision-making and performance
management, providing insight through
the identification and analysis of
financial and non-financial data.
Management accountants are adept
at translating facts and figures into
relevant, timely and actionable
information. The profession has an
obvious role in leading this
transformation. Strong and clear
political oversight is also needed to drive
it forward. Change must be demanded
from the top – and senior leaders must
be seen to be accountable for outcomes.
In order to drive efficiency and focus on
real priorities, rather than being
sidetracked by populist policies, they
must focus relentlessly on performance
management. This culture must
permeate through the entire structure.
Such an approach would consistently
improve the transparency and
accountability in government, leading to
greater public reassurance in an era
where change is the new normal.
Charles Tilley, FCMA, CGMA
Chief executive, CIMA
66
Financial Management | July/August 2013
I am sure that they really do love their family, but did they
really give up their annual salary, car allowance and
pension contributions to spend more time with them?
�Left to spend more time with their family’ is such an odd
turn of phrase to explain an employee’s departure
Not much time ever passes before an
email alerts you to the arrival at your
firm of his or her successor. I imagine
that’s because they’ve been spending
too much time with their family.
Managers and HR departments are
obsessed by restructuring, downsizing
and rightsizing. Employees’ cynicism
about internal communications must
surely be a given, but I wonder how
many internal communications
professionals are prepared for media
ridicule? In April a story lambasting
HSBC’s description of cutting jobs as
“demising human capital”, with 3,000
people set to be “impacted”, made the
front page of the Financial Times.
Management is riddled with double
talk. “I hear you” means: “I’m going to
waste a bit of time before disagreeing
with you.” “I’m taking your idea on
board” is a quicker way of saying:
“I’m going to pretend to have listened
to your idea when I haven’t, because
I’m just about to disregard what you said
– if I haven’t already done so.”
I blame the training
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,
we’re aiming for “maximum market
penetration”. They will suggest “giving
your ideas some oxygen as we socialise
them and then circle back for a deepdive Swot analysis”. Here’s a thought:
in parallel with the executive training,
why not offer a glossary for the delegates’
soon-to-be bamboozled colleagues?
Courses on how to manage teams,
negotiate effectively or work with
difficult people have considerable merit.
Yet core to every scenario in every hotel
training room stocked with pyramidshaped water bottles, dishes of boiled
sweets and fluorescent decanters of
cordial (when would you ever think: lime
cordial; I must have lime while I learn?)
lies the need to communicate clearly.
But trainers and “facilitators” bandy
around their faux-slang, mid-Atlantictwang-of-an-accent approach to
unnecessary sentence construction:
“Who’s seen that before, yeah? Let’s just
throw some ideas around and see where
they land, OK?” Answer: usually on a flip
chart, where some will be parked and
most will go on the back burner.
Corporate health warning: delegates,
do not let this rub off on you. Resist
the lingo, the verbiage and the
vernacular. Return to work a better
manager with perspective. Be able to
identify and understand personality
types; enjoy exploring how best to
engage with different views; understand
the need to be able to manage upwards
as well as downwards; come back more
assertive and better at presentations;
and, above all, please. Speak. Clearly.
Why? Because “key operational
strategies to drive an-order-ofmagnitude paradigm shift designed to
future-proof the outturn going forward”
undermines the very message you’re
trying to send as a newly trained
executive on the path to greatness, which
is: “I’m your manager. Have confidence
that we will succeed. Follow me.”
My favourite post-training
conversation was recounted by a junior
employee at a certain national
broadcasting corporation. Having
returned from a management training
session, her boss declared: “I’m told that
apparently I need to praise people more.
If you think you need more praise,
please do let me know.” This speaks so
clearly on many, many levels.
My book, The Lingua Franca of the
Corporate Banker, is all about corporate
jargon and includes a glossary of more
than 500 expressions. Each entry
includes an explanation of the term’s
supposed meaning and its likely origin.
Examples include:
GO, NO GO As in “what’s our go, no go
plan?” – ie, do we proceed or not? This
term has too many Os for my liking. It
looks suspiciously like an island in the
Indian Ocean: “This summer I’ll be
taking a holiday on the Isle of Gonogo.”
GET YOUR HEAD AROUND IT To consider and
understand a concept. It’s similar to
“embrace an idea” (go on, give it a
cuddle). Does not apply to all body parts
– don’t wrap your legs around an idea.
GLUE As in “he’s the glue in our team” –
the individual who holds (or drags) a
group together. Usually that’s the person
who organises the social drinks.
Julia Streets is the founder and director of Streets
Consulting, an international business development,
marketing and communications consultancy.
She is also a writer (author of The Lingua Franca
of the Corporate Banker), after-dinner speaker
and stand-up comedian. The Lingua Franca of the
Corporate Banker is available from Searching
Finance, Amazon and Barnes & Noble.
Facebook The Lingua Franca of the Corporate Banker
Twitter @streets_ julia
Email [email protected]
Illustration: Dmitry Litvin/Dutch Uncle
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Children participating in science through digital

Why did Wal-Mart fail in Germany? - Institute for World Economics

HOW TO TURNAROUND DISTRESSED COMPANIES - SmithNovak

Little Hay Golf Club Peter Betts Memorial Texas Scramble

Slides - Investors - The Royal Bank of Scotland

Writing a Report : How to Prepare, Write and Present - Class E4.9

Vol. 27, No.13 March 29, 2015

Rolls-Royce Holdings plc Annual Report 2012