Financial Management - CIMA Financial Management Magazine

Transcription

Financial
Management
www.fm-magazine.com • November 2011
How to play
the rating
game
The power of the world’s credit rating
agencies has never been greater. How
should your company deal with them?
Australia seizes its moment to rise
The Prince’s Accounting for Sustainability Project
How SMEs are cashing in on peer-to-peer lending
Plus:
The 2012 global
elections p14
8 ways to motivate
your team p36
The economic crisis
made simple p54
3
Financial Management | November 2011
A word from the president
Sustainability
is not just a
‘green’ issue
Illustration: Masao Yamazaki/Dutch Uncle
T
he recent CIMA World Conference
in Cape Town, South Africa provided so much food for thought
that it could have been described
as a financial feast. The conference
presented an ideal opportunity to
showcase the institute’s cutting-edge research and
share experiences with some of the most progressive organisations in the world. It was inspiring to
hear so many sharp minds debating some of the
key issues of our times.
One of CIMA’s key objectives is to ensure that
management accountants have the right tools to
help companies move towards long-term business sustainability. Although many organisations
are starting to develop sustainability strategies,
many are failing to uncover the latent value such
strategies can offer or to link it explicitly to business performance.
Without clear signposts it is difficult for companies to picture what a sustainable organisation
will look like. Our members are in an ideal position to use their unique tool box to flag up how
sustainable strategies not only help to combat
climate change, but add value at every level. The
theme of this year’s conference was, “Business
in tomorrow’s world – a sustainable future” and
keynote speaker Jan Bebbington provided a fascinating insight into what the companies of the
future might look like.
Jan is professor of accounting and sustainability at the University of St Andrews in the UK and
her report, “Strategic responses to global climate
change”, provides a well-structured road map for
businesses to consider when planning ahead. The
ten-step guide includes more than a dozen case
studies of public and private sector organisations
that are rising to the challenge. I’m confident that
Jan’s report will help make the path to businesses’
sustainability a lot less bumpy.
The conference also saw the publication of the
results of CIMA research looking at sustainability
and the CFO. Introduced by CIMA chief executive
Charles Tilley, the report, “Sustainability performance management: how CFOs can unlock value”,
was compiled by global management consultants
Accenture in conjunction with CIMA, and shows
how senior finance professionals can be the leading agents for change. Clearly, CFOs can ensure
that organisations stay on the right track by linking sustainability to business performance and
overseeing effective implementation, accurate
measurement and credible reporting. This is the
kind of top-level business partnering that CIMA
will be promoting vigorously in the future.
Although business sustainability was one of the
hottest topics at the two-day event, several other
themes dominated discussions among the 600plus delegates. The future of public sector organisations was another talking point. Even though
public sector structures vary from country to country, they often present common challenges. A third
cutting-edge CIMA report published at the conference highlighted how a policy of robust strategic performance management can help public
organisations achieve an effective line of sight
from policy formation to front-line delivery of
services. The report also provides a specific solution to one of the biggest public sector challenges
of all – the alignment of policy to outcomes. This
report will be an invaluable aid to government
bodies all over the world.
Along with the launches of CIMA’s new advanced
diploma in Islamic finance and a unique collaborative report between the marketing and finance
communities, which looks at valuing intangibles,
the steady flow of ground-breaking work presented
at the conference produced a refreshingly positive outlook at a time when it’s often hard to see
through the fog of uncertainty. In closing, I urge
members and students to check out these reports
on the CIMA website and to use them as a fasttrack route to developing their portfolio of cutting-edge tools and techniques.
Harold Baird
CIMA president
‘Our members
are in an ideal
position to
flag up how
sustainable
strategies not
only help to
combat climate
change, but
add value
at every level’
4
At a glance
Front 3-18
A word from the president
Harold Baird – p3
Update p9–13 Digest of the latest
developments in management
accountancy and beyond.
Hot potato Your ethical
dilemmas resolved. Book
in brief Fault Lines. App
of the Month Performance
management on the move.
Learn from... US firm Lowe’s
I work at...
Etimaad Engineering – p6
The data
Major power shifts in 2012 – p14
Forum
Blogs, polls and discussion – p16
Opinion
Geoff Elliott, of The Australian, on
the country’s rise – p18
Features 20
32
20–39
Q&A: Dr Jeremy Osborn, The Prince’s
Accounting for Sustainability Project – p20
Why are we rating? How to manage
your rating agency relationships – p26
Accessible finance How SMEs are
cashing in on peer-to-peer lending – p32
8 ways...
To motivate your finance
team – p36
26
Prime number Market volatility – p39
CIMA is the
Chartered Institute
of Management
Accountants
26 Chapter Street,
London SW1P 4NP
020 7663 5441
www.cimaglobal.com
President
Harold Baird FCMA
Deputy president
Gulzari Babber FCMA
Vice president
Malcolm Furber FCMA
Chief executive
Charles Tilley FCA
Financial
Management
is published for CIMA by
Seven,
3-7 Herbal Hill,
London EC1R 5EJ.
Tel: 020 7775 7775.
editor@fm-magazine.com
Editor
Scott Payton
Group editor
Jon Watkins
Group art director
Simon Campbell
Junior designer
Josh Farley
Creative director
Michael Booth
Editorial director
Peter Dean
Chief sub editor
Steve McCubbin
Senior sub editor
Graeme Allen
5
Study notes 41-49
Help for students with enterprise
operations and performance
strategy. Plus exam notices
Technical 51-55
Present value analysis for pricing;
and the current global economic
crisis made simple
Back 56-66
A look at the...
Management accountancy
Mastercourses – p56
CIMA global events
Highlights of the international
calendar – p60
The Institute
CIMA announcements – p62
CIMA CEO column
Charles Tilley – p65
CIMA versus... – p66
Head of pictures
Martha Gittens
Picture editor
Nicola Duffy
Senior picture researcher
Alex Kelly
Production manager
Mike Doukanaris
Account director
Jake Cassels
Business development
director Tina Hanks
Advertising manager
Andrew Walker
Email: Andrew.Walker@
seven.co.uk
Editor’s note
Genuine paradigm shifts in the business environment
don’t happen very often. The Industrial Revolution in
the 18th century triggered one, while the rise in relative
importance of intangible assets in the late 20th century
triggered another. Does the recent emergence of the
sustainability agenda also qualify?
I think that it does. Jeremy Osborn ACMA, the
subject of this month’s Q&A (page 20), agrees.
As he explains in the article, the commercial
response to a more resource-constrained world and
the transition to a lower-carbon economy are the
most significants shift occurring in the business
environment today. And, as the work of The Prince’s
Accounting for Sustainability Project seeks to
demonstrate, it is a shift that CIMA members can
play a central role in facilitating.
By harnessing their knowledge and expertise,
management accountants are better placed than
anyone else to help their organisations to measure,
manage, enhance and report their impact on the
environments in which they operate. In continuing
to do so during the coming years, management
accountants will not only help to transform the
business environment at large; they will also help
to transform their own profession.
Scott Payton
Please send your comments and ideas to
editor@fm-magazine.com or join the FM
feedback group on CIMAsphere at
www.cimasphere.com/groups
Tel: 020 7775 5717
Client director
Jessica Gibson
Chief executive Sean King
Chairman Tim Trotter
© Seven
Cover photography
Franck Allais
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.
All rights reserved.
Origination by Wyndeham Pre-Press Ltd.
Printed in the UK by Southernprint Ltd.
Subscriptions:
subscribe@fm-magazine.com
Tel: 01580 883841
£45 (UK), £54 (Europe), £72 (rest of world). Back
issues: £7.50 (UK) £10.00 (rest of world) including
postage, subject to availability. All payments
should be in sterling drawn on a UK bank.
www.cimaglobal.com
6
7
I work at …
Etimaad Engineering
Private Limited
Start date 1999 End date Ongoing
Pakistan is a land of opportunities. The economy is
undergoing a paradigm shift: the industrial sector
now represents a higher proportion of GDP – 26 per
cent – than the agriculture sector (21 per cent).
In this context, the importance of engineering and
construction activities can hardly be overemphasised.
Like any young and enthusiastic accounting
professional I wanted to work in a challenging role
in a mushrooming industry. I chose engineering for
these reasons. It is incredibly dynamic and offers
plenty of scope for pursuing a long-term career in
an ever-changing environment.
My role as CFO and company secretary at
Etimaad is interesting and wide-ranging. I’m
responsible for the financial management and
accounting function of the entire company, which
includes construction, engineering and capitalintensive manufacturing projects.
I’m also responsible for financial reporting and
analysis, budgeting, ERP implementation, taxation,
supervision of legal and contractual affairs, and risk
management across the businesses.
Liquidity and cash-flow management are arguably
the most complex and challenging aspects of my role.
They require highly flexible strategies to deal with
ever-changing project dynamics. The key is to grab
every profitable opportunity while ensuring that the
health of projects are never compromised.
Our projects span Pakistan, Saudi Arabia and
Qatar. We are currently working on a series of new
power projects across Pakistan, including thermal,
hydro-power and alternative energy initiatives.
I’m delighted that CIMA now has a stronger
presence in Pakistan; an office opened in Karachi in
April 2009; another opened in Lahore in June 2010
and now we have a third, in Islamabad, which opened
this year. It’s now much easier for students here to tap
into the global pool of knowledge that CIMA offers.
I certainly draw upon my CIMA knowledge in all
business activities.
i
Name: Farooq
Hussain Mughal
Role: CFO & company
secretary
Industry: Engineering
Location: Lahore,
Pakistan
CIMA qualified: 1999
9
Update
Photography: Getty Images
FRC proposes
corporate
reporting changes
Companies should improve
the way they report to
investors on the key
strategic risks facing their
businesses, according to
two new reports published
by the Financial Reporting
Council (FRC).
The FRC proposes to
ensure that company
narrative reports focus
primarily on strategic and
major operational risks,
rather than indiscriminate
lists of risks that all
companies face.
These proposals form
part of the FRC’s response
to the financial crisis of
2007 and 2008 and follow
consultation with market
participants. They are
part of a wide-ranging
set of measures aimed
at improving the quality
of company reporting
and increasing the
information provided
by audit committees
and auditors about the
work that they have done
and the judgements they
have made.
Among them is a
proposal that the audit
committee’s remit should
be extended to include
consideration of the whole
annual report and to ensure
it is fair and balanced. In
addition, there is a proposal
to amend auditing
standards to ensure
auditors always report the
outcome of their review of
the whole annual report.
This currently happens
only when they encounter
information that is
inconsistent with that
contained in the financial
statements.
Latin America
increases its
appeal to investors
Institutional investors in
North America and Europe
believe that investor relations
(IR) and corporate
governance standards in
Latin America have
improved, leading to
increasing investment in
the region, according to
new research.
However, respondents to
the survey by JP Morgan
also stressed the need for
companies to further bolster
their efforts as they continue
to compete for global capital.
The study showed that
investors in North America
and Europe are optimistic
about the opportunities that
will exist in Latin America
over the next three years. The
primary reason for this
optimism is the region’s
expected economic growth
owing to compelling
demographic trends that
should boost demand for
goods and services. Investors
are also encouraged by
improving corporate
governance standards,
the prevalence of natural
resources, low levels of
consumer debt and the
continued development
of capital markets and
infrastructure.
The survey gathered the
opinions of 40 institutional
investors holding between
them approximately
$57.3bn of actively managed
equity in Latin American
companies.
More than 50 per cent of
respondents believe that
Brazil has the best corporate
governance standards in
Latin America, primarily due
to the creation of the Novo
Mercado. Sixty per cent of the
executives surveyed believe
that a US listing increases the
investment appeal of a Latin
American company, mainly
citing the increased liquidity
that it offers.
Joe Dooley, DR executive
for the Americas at JP
Morgan, said: “Latin
American companies are no
longer just competing with
each other for capital, but
with companies in other
emerging markets, such as
China and India.”
11
Update
UK government
urged to do more
for SMEs
The UK government’s policies
to kick-start growth and
incentivise job creation are
too timid and out of touch
with the reality of the UK’s
sluggish economy, the
Federation of Small
Businesses (FSB) has said.
The FSB is warning that
while the government has
adopted many policies that
will help small firms, which
have been put at the heart of
the UK’s economic recovery
plans, few, if any of them, go
far enough to tackle the
problems they face and
belong to a time when
unemployment was lower
and spending on the high
street higher.
FSB research revealed that
37 per cent of small businesses
say insufficient work and
uncertainty over contracts
are preventing them from
employing staff. Meanwhile,
more than 30 per cent cited
the state of the economy or
cash flow as reasons for slow
job creation.
The FSB is calling on the
government to help small
businesses employ more
apprentices and interns by
slashing bureaucracy and
re-introducing the Graduate
Internship Scheme – 21 per
cent of business owners said
increased support would
encourage them to take on
an apprentice.
John Walker, national
chairman, Federation of
Small Businesses, said: “If
unemployment was lower
and consumer spending
higher, government policies
to grow the economy might
work. But they are out of
touch with reality. With
economic growth sluggish at
best, spending on the high
street low and unemployment
high, the government needs
to ratchet up its growth
agenda and send a clear signal
to the business community
that it will support them.”
Our guide to the best online tools
Oracle Business Indicators
Oracle Business Indicators is a
business intelligence application
that provides real-time, secure access
to business performance information
on your mobile. So whether you
are travelling or stuck in meetings,
you can see in real-time exactly how
things are going at the press of
a button.
i
Cost: Free
Category: Business
Updated: August 2010
Current version: 1.3.1
Size: 1.4Mb
Languages: English,
Chinese, Croatian, Czech,
Danish, Dutch, Finnish,
French, German, Greek,
Hungarian, Italian and
Japanese, among others
Developer: Oracle
Corporation
Compatible devices: iPhone,
iPod touch, iPad
System requirements:
Photography: Getty Images
iOS 3.1 or later
US expected to get
tougher on ‘going
concern’ warnings
In the US, the Financial
Accounting Standards
Board is expected to revisit
2008 proposals that would
address the knotty issue of
“going concern” warnings,
with a view to ensuring
that alarms are sounded
before companies fail.
At issue are the standard
warnings that auditors are
required to include in
annual reports when they
have substantial doubt that
a company will survive.
Auditors have been
accused of failing to flag
going concern doubts – and
the lack of going concern
warnings for banks that got
into trouble in the 20072009 global credit crisis has
triggered calls for the
original proposals to be
revisited. Only two of the
ten largest bankruptcies in
the credit crisis had going
concern opinions from
auditors, according to
members of an auditor
watchdog group.
The proposals
contemplate making
companies themselves
responsible for warning
when there is a risk
that they may not be
able to continue as a
going concern.
12
Update
CIMA funds new
university research
CIMA has awarded research grants
of more than £90,000 to four
universities.
Middlesex University Business
School, the University of
Loughborough and the University
of Portsmouth from the UK – along
with the Vlerick Leuven Gent
Management School in Belgium –
will use the money to study
management performance and help
companies around the world to
improve in this area and avoid some
of the financial pitfalls of the past
20 years.
Naomi Smith, R&D manager at
CIMA, said: “The past 20 years have
seen corporate scandals, the dot-com
bubble and the sub-prime debt crisis
and these have shifted the role of
management accountants from
reporting and controlling through
planning and analysis, to proactive
performance management. It is our
hope that this research will highlight
best practice and lessons that can be
learned by companies in improving
performance management.”
l For more on CIMA-funded research,
visit www.cimaglobal.com/thoughtleadership.
Hot potato
This month’s
dilemma:
I lead a finance team in a
company with a significant
government contract,
providing goods/services on
an open book, cost-plus basis.
I’ve been asked to reduce the
figures for internal reporting
by 15 per cent so that the costs
don’t look so high for the
group, while showing the
client the original figures.
Although I realise that we
are not actually taking more
money from our client, and
that management wants to
give the impression of lower
costs to the group, neither
myself nor my team are happy
about doing this and I have
raised this in writing with
management and also
informed HR. HR have now
called a formal meeting.
Am I overreacting?
Our response:
Overall your commitment to
the principle of integrity
(Section 110 of the code)
means you were right to raise
the issue. Your professional
standing means you must
ensure that “any reports,
returns, communications or
other information” you are
involved with do not include
materially false or misleading
statements. Giving the wrong
impression of a group’s
position does not help the
business model in the long
term, so your management is
either short-sighted or acting
with a self interest that poses
a risk to the business. You
should continue to document
all discussions related to this
matter and if need be take
legal advice or contact the
whistle-blowing helpline.
For the code and
other online ethics
resources, visit
www.cimaglobal/ethics
Tanya Barman, head of
ethics, CIMA
Disclaimer
CIMA does not provide
legal, investment,
professional or career
advice. No responsibility
or liability whatsoever
is accepted for any error,
omission or mis-statement
(whether or not arising
out of negligence) or for
any loss or damage sustained
as a result of reliance on
information supplied or
comments made.
13
Update
Illustration: Denis Carrier/Dutch Uncle, Lucas Varela/Dutch Uncle. Photography: Getty Images
Global expansion
continues with
new CIMA office
in Russia
CIMA has opened its first
representative office in
Russia.
Prior to the new opening,
the CIMA qualification had
been promoted via the
CIMA membership, tuition
providers and employers in
the region. But as demand
increased, the need for a
representative office
became apparent, resulting
in the recent opening.
Speaking at an event to
mark the opening, CIMA
president Harold Baird said
that now is the perfect time
for CIMA to promote the
value of management
accounting in the region.
“The Russian government
has made great progress
in mitigating the effects
of the global economic
downturn and although
most countries still face
uncertainty over the next
few years, Russia is poised
to further enhance its
position as a global player in
the business arena,” he told
a gathering of local CIMA
Learn from...
Lowe’s home
improvements
The virtues of using social
networks to engage customers
are well versed. But US firm
Lowe’s reaped the benefits of
an all-staff “collaborative
platform”. When a store
operative found an innovative
way to demonstrate a new
product in-store, she informed
the company’s 289,000
employees with a message on
the site. All the firm’s other
stores picked up the idea. The
result? A $1m rise in revenue.
students, members and
employers at Moscow’s
Ararat Hyatt Hotel.
“It is the right time to
build a strong framework
in Russia to ensure that
future business leaders in
Moscow and further afield
are equipped with worldclass skills.
“With a number of CIMA
employers having their
largest operations in the
country, the demand for
CIMA-qualified business
professionals in the region
is evident.”
In 2010 CIMA launched
the Diploma in Performance
Management in partnership
with the PwC Academy to
meet the high demand for
finance and non-finance
specialists in Russia. This
was the first diploma to be
available in the Russian
language that focuses on
management accounting.
The diploma was
developed to include topics
such as budgeting, cost
control and investment
appraisals. So far, more than
700 students have registered
for the diploma and this
year saw 33 students
graduate with pass rates
higher than the global
average.
Retirement change
could signal ‘golden
goodbyes’
Firms in the UK could be
gearing up to offer employees
“golden goodbyes” in light
of the official abolition of
the default retirement age,
according to research. The
default retirement age has
been fully removed after
being phased out from April
this year.
The change stops
employers from retiring
workers once they reach the
age of 65. However, research
by law firm Norton Rose
suggests one in ten firms plans
to offer financial incentives to
encourage workers to leave.
“If firms are approaching
people to retire, that could be
seen as age discrimination in
its own right,” said Paul
Griffin of Norton Rose.
Book in brief
Fault Lines
by Raghuram G Rajan
Princeton Press, £18.95
Raghuram G Rajan was one
of the few economists who
warned of the global
financial crisis before it hit.
The book, which won the
2010 Financial Times and
Goldman Sachs Business
Book of the Year Award,
argues that the causes
of the initial breakdown
were stagnant wages
and rising inequality.
Here is a brief synopsis
of his argument:
1. The crisis was the result of a
collection of individual
decisions, which together
created the financial meltdown.
2. Bankers, government officials
and ordinary homeowners made
these decisions in response to a
flawed global financial order.
3. That global financial order
provided incentives to take risks
which were out of step with the
dangers those risks posed.
4. Unequal access to education
and healthcare in the US creates
financial peril.
5. Even the economic choices
of countries such as Germany,
Japan and China place an undue
burden on America to get its
policies right.
6. We need to make
hard choices to
ensure a more
stable world
economy and to
restore lasting
prosperity.
14
Financial Management | February 2011
The Data
Major power
transitions 2012
USA
Presidential election
November 2012
GDP (Millions of US$ 2010):
$14,582,400
Mexico
July 2012
$1,039,662
Spain
March 2012
$1,407,405
Venezuela
October-December 2012
$387,852
Market stability, public debt and the
health of the global economy will dominate
election campaigns across the world during
2012 – a year of political change in many
major countries.
This graphic maps out when and where
the major power shifts are set to take place,
using GDP as a relative indicator of their
global economic significance.
Source: World Bank
Global elections of 2012
15
Financial Management | November
February 2011
2011
Finland
January 2012
$238,801
France
April-May 2012
$2,560,002
Russia
March 2012
$1,479,819
South Korea
December 2012
$1,014,483
Egypt
March 2012
$218,912
Worldmap: iStockphoto
India
July 2012
$1,729,010
China
Hu Jintao, paramount leader of the People’s
Republic of China, expected to step down as
general secretary of the Communist party in
2012, and step down as president by 2013.
$5,878,629
16
Forum
From the
blogs
How do we
address difficult
teachers?
It is a big help to have a choice
of school, distance and home
studying. Being able to attend
classes might be beneficial
for many of us. I have
experience in home and
school studying and I would
say that both are valuable.
But what should I do when,
after the careful selection of a
school and a considerable
amount of private funds spent,
I meet my disappointment in
the figure of the teacher?
It is not as easy as friends
would advise: “You should go
and talk about it with someone
at school, someone who has
authority.” Many teachers are
brilliant people with great
knowledge and experience, but
in order to pass these treasures
on to students the teacher
needs to be able to explain and
clarify difficult topics in an
accessible way and this is an
art. We all meet teachers who
have struggled to pass
knowledge to students at some
stage, but sometimes our
performance is closely
dependent on the teacher’s
potential and that makes it a
more serious dilemma.
Very often, there is an
agreement among students
You asked…
Please can you
explain the BCG
Matrix?
that the teacher is not
satisfactory. There could even
be some clear points made
about the areas in which
troubles lie, but still nobody
will speak up. It is like a
collective, silent union of the
acceptance of hopelessness.
On the other hand, there is
no easy way to tackle this
problem. Some concerns will
be expressed about the
possible future dreadful
atmosphere in the classroom
or even the meaninglessness of
a complaint at all. Sometimes
there is even a deeper
contradiction as the teacher
could be a great personality
and one would be afraid to hurt
their feelings.
Anna Lipinska is a
CIMA student at operational
level. She lives in Dublin,
Ireland, and works in the
accounts department of
Clarins Cosmetics
Poll of the month
We asked…
How would you describe the quality
of finance graduates coming into
your organisation?
Better than ever: 46%
Not as good as in the past: 31%
The same as ever: 23%
Source: Survey on fm-magazine.com, 2011
At the end of September, I
attended a presentation and
site visit at a company that
owns and develops property at
well-known sites in London.
Their finance director, a
chartered accountant, is top
drawer; she answered every
question put to her honestly
and without hesitation. I have
no doubt that she has the
ability to do all the right things
and drive the company
forward. However, thanks to
IFRS, this company’s accounts
are a problem as it is now
impossible to make a valid
judgement.
The accounts show, based
on “fair value” professional
valuation, a net asset value of
116p per share. Yet the market
value of the shares (at 30
September 2011) were 40p,
just 34 per cent of their
supposed real worth.
Obviously, the next valuation
is expected to be lower, but it
will be a long way from 40p
per share. What this tells you
is that the “market” does not
believe in the nonsense we
call “fair value”.
The concept of valuing
assets at some hypothetical
value that nobody believes is
just about as lunatic as you
can get, especially when
unrealised profits and losses
are taken into the income
statement, which manages to
distort everything. We need to
return to valuing assets at cost
in the balance sheet and
showing “fair value” as a note
to the accounts. Only realised
profits/losses should be
shown in the income
statement, unless a company
prudently reserves for
projected losses. This way we
will all have the information
we need to make effective
judgements.
Malcolm Howard, FCMA,
Surrey, England
All models are used by
managers for decisionmaking. The Boston
Consulting Group is a
strategic analysis model
whereupon managers plot
their products or SBUs to
assess which ones to invest in.
The two axes are relative
market share (your share
compared to your nearest
rival) and market growth rate
(attractive markets where
demand exceeds supply).
A problem child that has
a relatively low share of an
attractive market either
requires investment to turn
it into a star or should be
allowed to decline to a dog
with no investment.
A star will become a cash
cow – a big cash earner of the
future. Present cash cows,
while needing to generate
sufficient surplus to fund
products on the other three
quadrants will, in time,
when the mature market
cycle draws to a close,
become dogs. Products at
the dog stage will, in most
cases, not command any
investment and will be
harvested.
From the
mailbag
IFRS asset values
for companies
are ‘distorting’
Send in your own
queries to questions@
fm-magazine.com
18
Opinion
Geoff
Elliott
Geoff Elliott, business editor, The Australian
Australia is perfectly placed to benefit from the meteoric
rise of the Chinese middle class
T
here is something going on in Australia that is redefining a place that two
centuries ago was an Anglo-colonial
outpost in the Southern Hemisphere.
Australia has long been seen as disadvantaged, culturally and economically, thanks to the tyranny of distance from the North
Atlantic hegemon. It is now uniquely placed.
The economic crisis sweeping Europe and the
US will, to be sure, still have its impact in Australia,
although few are predicting an end to Australia’s
extraordinary two-decade run of uninterrupted
growth – the last recession was in 1991. And taking
the long view, the North Atlantic malaise only reinforces what has been predicted for some time: that
this century will be the Asia Pacific’s to own.
And Australia’s (relatively) stable political system,
sound legal and business environment makes Down
Under the launch pad for many businesses to tap the
extraordinary promise of growth in the region.
It’s all thanks to Australia’s ability to service the
biggest boom we’ve seen in more than a century – the
transformation of a billion-strong agricultural class
in China to the middle class.
Some caveats: the global financial crisis mark II
is still playing out and an economic slowdown will
no doubt take some heat out of roaring commodity
prices. And China’s command economy and centralisation of political power means predictions on
economic outcomes in China from one year to the
next are difficult.
But doomsayers be warned. When it comes to
economic crises, Asia has had its share, particularly
the 1997 meltdown. That was an all too familiar debt
crisis – only unlike Europe, Asia’s escape hatch was
to devalue their currencies. Since then Asia has gone
from strength to strength and China’s rapid economic
growth has been nothing short of remarkable. There
will be ups and downs, but the long-term trend
appears obvious. Australia’s extraction industries are obviously benefiting as China’s transition to a modern economy
continues apace (albeit with the tension of a very
dated political system). The other stereotype that
Australia is a big quarry to service the manufacturing
of the world’s building blocks, like steel, is, in its way,
true enough. And the China boom has, in the space
of just ten years, made some Australians wealthy
beyond anything this country has seen before.
P
‘The economic
crisis sweeping
Europe and the
US will, to be
sure, still have
its impact in
Australia,
although few
are predicting an
end to Australia’s
extraordinary
two decades of
uninterrupted
growth’
erth-based Gina Rinehart, daughter
of the legendary Lang Hancock who,
when flying over the north west of
Australia in the 50s correctly predicted the red rocks in Australia’s north
west were that colour because of rust,
now has AUS$10bn to her name thanks to her iron
ore holdings. If the China demand trajectory continues she could well become the richest person in the
world – some predictions put her potential wealth
at AUS$100 billion.
There is BHP Billiton and Rio Tinto. Anglo-Australian mining behemoths. But there are smaller firms
around the servicing of China’s extraordinary boom
that are laying the foundations for a new century for
Australia. Technology firms, legal services, accountancy, architects and banking. Some of the growth is
being tapped by the multinational services firms,
but there has been so much work to go around, home
-grown companies are emerging.
In a recent landmark report from Australia’s ANZ
Bank, the scale of the biggest economic prize in Australia’s history was laid out.
“On reasonable estimates, total commodity exports
could reach around AUS$480bn – in real terms – per
annum by 2030 from AUS$210bn in 2010,” ANZ says.
It meant an additional AUS$2.6trn in commodity exports over this period and AUS$1.8trn on investment
required to support the growth.
Considering Australia’s current annual GDP is
about AUS$US1.2trn, ranking the country 13th on
the world GDP league tables, expect to see Australia
advancing up this list in the years ahead.
Of Australia’s place in the world, geographically
and economically, ANZ rightly says it is an “extraordinary gift at a time when most Western economies
are seeing the end of an era of debt-fuelled consumption to drive growth”.
20
Q&A
Dr Jeremy Osborn ACMA
Project manager, The Prince’s
Accounting for Sustainability
Project (A4S) and the
International Integrated
Reporting Committee (IIRC)
Interview by Scott Payton
What drew you from academia to
management accountancy?
I feel like I’ve had two careers. I graduated from
Oxford with a degree in history and decided to do
a doctorate focusing on English public opinion
about the expansion of the East India Company in
the late 18th century.
After spending four years researching arguably
the most powerful company the world has ever seen,
I realised that rather than just reading about people
working in business and international trade, I’d like
to do it myself.
All this took place during the dot-com boom at
the end of the nineties. Financial management roles
in large, traditional businesses were not very
popular. Whatever I applied for, the response that
always came back was: “Have you thought about
financial management?”
I didn’t know much about the area at the time.
But I knew that Unilever was a great company, with
a strong reputation for professional development.
They also offered the chance to study for CIMA.
This seemed like a great opportunity for me to
understand how businesses worked. I believed at
the time – and still believe – that if you work with
money, you work with all aspects of a business,
because money spans everything, from buying, via
manufacturing, to marketing and sales.
If you can understand and explain what “the
money” is doing, then you can talk to anyone about
all aspects of an organisation. This is as true in the
public sector as it is in the private.
I worked for Unilever as a management trainee,
which was a great opportunity to experience
different aspects of business life, from supply chain
management to sales.
I went through a challenging period of working
in corporate life for the first time, while
simultaneously studying for and taking all my
exams in just under two years. It was tough, but it
got it out of the way and the parallel work
experience reinforced the CIMA study content.
How did you make the transition from
accountancy to management consultancy?
After three years at Unilever, I joined Australiabased Southcorp Wines. The company was in
distress – it had damaged its great wine brands
as a result of deep discounting, especially in the
highly competitive UK retail market. I became
part of a small team charged with restructuring
the UK business. This was my introduction to
management consultancy.
After a successful restructuring process,
Southcorp was acquired by the Foster’s Group
and I joined Accenture. My goal was to make it
to the position of finance manager before moving
over into management consulting. I viewed this
objective as akin to earning your stripes as
a flight lieutenant.
Once I’d achieved this, I was fortunate to be
offered the role of commercial lead for the largest
outsourcing deal in history – a global HR
transformation project sold to Unilever for just
under $1bn.
I subsequently joined Accenture’s finance and
performance management consulting practice,
focusing on enterprise performance management.
21
Photography by
Howard Simmons
23
Q&A
‘I knew that
Unilever was a
great company,
with a strong
reputation for
professional
development.
They also
offered the
chance to study
for CIMA’
At this point, Accenture was setting up a
sustainability consulting practice. By chance, I sat
next to the nascent team and we got talking and
decided to develop a sustainability/performance
management joint project. In April 2010, I was part
of the leadership team that launched the practice
as a standalone business unit. Accenture’s
Sustainability Services is now recognised as one
of the leading consulting practices in this area.
My interest has always been the role of the
accounting professional in any business endeavour
– from operations to performance measurement.
This interest encompasses the accountant’s role
in sustainability – arguably the most significant
movement occurring in business today. I decided
that this is where I wanted to specialise in my
career. This brought me to a secondment as
a CIMA Associate at The Prince’s Accounting for
Sustainability Project (A4S).
All of these projects look to address concepts that
are beyond the current paradigm of business
decision-making. Existing indices of organisational
success are measured in terms of the profit and loss
account; the balance sheet; the cash flow statement;
and so on. We have concepts of sales, revenue and
profit that are essentially Victorian. These were
appropriate to the manufacturing age – but we now
live in a different world in which intangible assets
are ever more important, and natural resources are
ever more constrained. The work of A4S is helping
the accountancy profession to adapt to this shift
– with the concepts of integrated reporting and
natural capital at the heart of this process.
What is A4S – and what’s your role there?
A4S was established by The Prince of Wales in
2004. Its raison d’être is to support the accounting
profession in helping organisations to embed
sustainability into their DNA.
The International Integrated Reporting
Committee (IIRC) was launched by A4S, the Global
Reporting Initiative and IFAC, amongst others, and
its secretariat is hosted at A4S. It’s an independent
organisation closely linked with CIMA. Charles
Tilley, CIMA’s chief executive, is on the supervisory
board of A4S and is a member of the IIRC.
In early September, the IIRC published a
discussion paper on integrated reporting as part
of the process for creating a new framework for
integrated reporting. The paper is open for
public consultation until 14 December (visit
http://www.theiirc.org). It sets out the business
case for integrated reporting – both for
organisations that adopt it and for society at large.
Public feedback on the content of the discussion
paper will be incorporated into an exposure
draft on an international integrated reporting
framework in 2012.
‘A4S’s raison d’être
is to support the
accounting profession in
embedding sustainability’
In October of this year, the IIRC also launched an
integrated reporting pilot programme. This will run
across two years’ worth of reporting cycles, in order
to put the theory of integrated reporting to practice.
Many Fortune Global 500 companies are taking
part, along with an investor group to ensure we
capture the experiences of both producers and users
of public reports. The results will be used further to
refine the integrated reporting framework.
We then hope that international standard-setters
will adopt the model as a mandatory integrated
reporting framework, within the various legal
parameters of different jurisdictions.
I work on both of these IIRC projects, as well
as a range of other activities within A4S.
In parallel to the work of the IIRC, A4S is
engaged in a range of other initiatives – all
designed to help accountants to embed
sustainability into the heart of their organisations.
For example, we are currently examining the
ways in which – and the extent to which –
companies incorporate concepts of externalities
– particularly environmental and social
externalities – into decision-making. In order
24
Q&A
to do this, we are examining specific real-world
scenarios, such as the procurement decisionmaking process.
Another new A4S project examines whether
sustainability considerations are incorporated
into capital expenditure decisions. In doing this,
we are working with curriculum developers at
accountancy bodies to produce case studies for
use by students. After all, if you truly want
to embed sustainability into our profession
you have to start with those studying at
universities and business schools and for
their professional exams.
Now the big question: what is the management
accountant’s role in sustainability?
The skills that management accountants develop
are exactly those that are required to help their
businesses adjust to a more resource-constrained
world; a world in which greater transparency is
expected and often required; a world in which
licences to operate – both literal and metaphorical
– will have an increasingly significant impact on an
organisation’s ability to sustain what it does.
What are these skills? Management accountants
are uniquely positioned to offer an objective,
well-rounded assessment of an underlying
situation. They have the best set of skills to
elucidate and discern “truth” within a business,
and within the business environment at large. And
they have the skills to communicate difficult
information effectively; accountants have to bring
the bad as well as the good news about the short,
medium and long term.
CIMA members also excel at supporting
businesses in operational and strategic decisionmaking, which is another key requirement for
helping organisations to tackle sustainabilityrelated issues.
At A4S, we are exploring how accountants’ tools
can be adapted to take into account the social and
environmental impact of an organisation. I believe
that the accountant’s tool-set is best placed to be
adapted to do this – which means that accountants
will have first-mover advantage in the global
response to embedding sustainability across all
business processes and decisions.
CIMA as an organisation has never stopped
adapting throughout its history and I’ve no doubt
that it will continue to do so as the world moves to
a lower-carbon economy and a more resourceconstrained world.
What’s your advice for today’s CIMA students?
First: soldier on. The CIMA exams can be
technically challenging, but the content becomes
much more interesting as you progress towards the
strategic level.
Second: develop the ability to narrate the story
that the numbers tell you in your day-to-day
management accounting work.
Third: remember that not everybody likes Excel
spreadsheets. Develop skills in other media, such as
PowerPoint, for communicating your story.
Fourth: grab any opportunities to develop
commercial experience early on in your career.
And finally: ask yourself the questions – “What is
my unique selling point within my organisation?
What expertise am I recognised for? What is my
individual ‘brand’ within my organisation and the
marketplace?”
To learn more about sustainability visit
www.cimaglobal.com/sustainability
‘Management
accountants are
uniquely positioned
to offer an objective,
well-rounded
assessment of
a situation’
Career
Ladder
1995: Graduated from
Oxford University with
a first class degree in
Modern History.
1999: Awarded D.Phil.
in Modern History
from Oxford
University.
2000-2003: Spends
three years at Unilever
as a management
trainee, qualifying as a
passed finalist within
the first two years.
Supports the
restructuring of
Unilever’s European
business under the
“Path to Growth”
strategy.
2003-2004: Joins
Australian winemaker
Southcorp. Supports
the creation of a new
business model for UK
business, prior to
Southcorp’s
acquisition by the
Foster’s Group.
2004-2011: Joins
Accenture. Works on
projects in financial
services and the
consumer goods
sector, becoming
finance manager and
subsequently
commercial lead for
major HR outsourcing
project. Transfers
across to finance and
performance
management
consulting, and then
joins leadership team
for sustainability
services, supporting
its launch as an
independent business
unit. Project lead
across a range of public
sector and not-forprofit clients and
author of various
“Thought Leadership”
articles (visit http://
www.cimaglobal.com/
sustainability).
2011-present: Joins
The Prince’s
Accounting for
Sustainability Project
(A4S) on a pro bono
CIMA secondment.
26
Why are we rating?
27
Economics
Standard & Poor’s recent
downgrade of the US
has put the power and
methods of credit rating
agencies into sharp
focus. How do they
work? To whom are they
accountable? And how
can your company
manage its relationship
with them effectively?
T
Photography by
Franck Allais
he financial crisis has shattered the
myth that the judgement of credit
ratings agencies is impeccable and
has brought the dangers for investors of being “blindly” and “uncritically reliant” on their findings to
the forefront.
Regulators on both sides of the Atlantic have taken
aim at the agencies, threatening to curb their power
and improve their governance. In fact, a US congressional panel described them as “essential cogs
in the wheel of financial destruction”. The industry
itself has attempted to mollify critics by beefing up
its own self-regulation and transparency. Yet while
the failings of the big three agencies – Standard &
Poor’s (S&P), Moody’s, and Fitch – have been laid
bare, governments and corporates still rely on their
views to attract investment and raise capital.
The role of a credit rating agency is to gauge
the creditworthiness of organisations issuing debt
instruments – such as corporate and government
bonds – so that investors, banks, regulators and
other market operators can use them to measure
relative credit risk. Billions of dollars-worth of debt
is issued and borrowed based on their analysis.
If a company or government is “downgraded”,
investors either feel compelled to dump their
investments, or force the organisation to change
tack – quickly.
Many companies, governments and public sector
organisations have fallen out of love with credit
rating agencies when they have either not achieved
the rating they think they deserve, or have been
downgraded. As ratings can influence banks’ willingness to lend credit and suppliers’ payment
28
Economics
In August, Los
Angeles, which
had recently
seen its $7bn
investment
portfolio
downgraded
by S&P, fired
the rating
agency after it
cut its rating
terms, organisations fear that downgrades will
freeze up affordable bank capital, thereby hindering growth plans.
At the beginning of August S&P downgraded the
US’s credit rating to AA+ from its top rank of AAA,
saying that the deficit reduction plan passed by the
US Congress did not go far enough. Greece, the UK
and Japan have also suffered ratings downgrades
within the past year.
In August, Los Angeles, which had recently seen
its $7bn investment portfolio downgraded by S&P,
fired the rating agency after it cut its rating of LA’s
general investment pool to AA from AAA. “We have
really lost faith in S&P’s judgement,” interim treasurer Steve Ongele said. Following its downgrade of
US debt weeks earlier, S&P also downgraded dozens
of other municipalities with large investments in US
Treasury notes. One of them, northern California’s
San Mateo County, decided not to renew its contract with S&P, while Florida’s Manatee County also
dropped its contract with the company.
Edward Lampert, the US billionaire majority
shareholder and chairman of Hoffman Estates-based
Sears Holdings Corp, has often complained about
ratings agencies, outlining his criticisms in his “letters” to investors. In February 2010, for example,
Lampert referred to the agencies’ “simplistic analyses” that resulted in the retailer having a lower credit
rating than rivals, even though he said it carried
less debt than many of them, had a higher market
Rating the raters
Attacks on credit rating agencies focus on two charges: firstly, their methods of rating and
categorising debt instruments do not make it easy enough for investors to see the true
levels of risks they carry. Secondly, agencies receive their fees from organisations issuing
debt and constructing debt instruments, which means that they are being paid by the
issuers whose securities they rate.
These are not the only abuses that have been raised with regards to the agencies’ work. On 8
August, William Harrington, a former Moody’s Investors Service derivative products senior vice
president, said in a 78-page filing to the US Securities and Exchange Commission (SEC) – the
financial regulator that is considering new rules to reform the agencies – that agency analysts are
pressured through a culture of “intimidation and harassment” to give clients the ratings they want
out of fear they will otherwise fire the agency and take their business to another one. He also said
that Moody’s analysts whose conclusions differed from what its clients wanted were “viewed as
‘troublesome,’ i.e. independent”, and often harassed, disciplined, transferred or fired.
Harrington, who worked for Moody’s from 1999 until he resigned last year, also wrote that, “The goal
of management is to mould analysts into pliable corporate citizens who cast their committee votes in
line with the unchanging corporate credo of maximising earnings of the largely captive franchise.”
Moody’s did not respond to a request for comment.
Yet some experts believe that credit ratings should only be used as a guide anyway and that
investors should use their own research to determine whether an investment is safe or not.
Jonathan Croft, partner at AdviCorp, an investment company that specialises in distressed debt,
says that “a credit rating agency is not a substitute for an investor’s own credit analysis”.
“How often is the information that a credit rating agency bases its opinions on out of date? More
often than not their research lags behind current events so investors and stakeholders do not get
an accurate view of the company’s position, or the macroeconomic events that may be affecting
the industry sector that it is a part of. Investors should always carry out their own checks,” he says.
capitalisation, higher earnings and a more diverse
business portfolio.
“We can understand rating agency caution surrounding economic events, the retail environment
and the potential for things to get worse,” Lampert
said in his February letter. “In our case, it turns out
that our performance far exceeded many observers’
expectations and we hope to receive credit for this
performance in the form of higher credit ratings and
more balanced analysis.”
Companies also fear that downgrades will
tarnish their reputation and drive away potential
customers. In February 2011, Manulife Financial
Corp, the Toronto-based owner of the Boston-based
John Hancock family of mutual funds, told analysts that it was having ongoing discussions with
the rating agencies following a downgrade from A
to A- a couple of months previously.
However, chief executive Donald Guloien was still
quick to criticise them for failing to pick up on what
he believed were the favourable financial trends that
the company was experiencing. “We really don’t
know when they’ll get it,” said Guloien. “Give it six
months or a year and maybe the ratings agencies
will start to notice that Manulife is substantially
de-risked from where it was before,” he added.
Companies fear that
downgrades will tarnish
their reputation and
drive away customers
Some experts believe that the criticism stems
from a failure to understand how the agencies
work and the information that they are looking for,
a reluctance to communicate with them, coupled
with a sense of “over-optimism” about an organisation’s financial standing and risk exposure.
Rick Enfield, business practice manager at Asset
Control, which specialises in data management
solutions for financial institutions, says that, “There
is a difference between achieving or wanting an
accurate rating, and one that best suits an organisation’s purposes.”
Georg Schroeder, director in the debt advisory
team at accountants Deloitte, says that, “Companies
tend to have a certain view of how their businesses
are performing. If investors and analysts don’t share
that view then they tend to be blamed for not properly understanding the business, its financials or
its strategy.”
He adds: “A lot of companies tend to only engage
with credit rating agencies a month before their
30
Economics
‘Companies tend
to make the
mistake that
they are just
being rated
according to
their own
financial
performance
and the risks
they face
individually’
ratings come up for their annual review and are then
surprised when they might not receive the rating
they were hoping for.”
Schroeder believes that companies need to have
more frequent engagement with the agencies so
that they have a better understanding about the
information they need in order to provide a rating.
“The agencies can only provide ratings based on
the information they have to hand; if information
is not disclosed or is deliberately withheld they will
tend to give a conservative rating. Regular face-toface meetings with analysts will help management
teams establish what information they should aim
to disclose.”
For example, he says, agencies are not just interested in the financial health of the company, but
they also want to know about “softer” issues, such
as corporate investment in new premises, equipment and IT infrastructure, staff retention levels,
commitment to training, corporate governance and
reputation management. Furthermore, agencies are
looking for a broader management understanding
of the sector and any macroeconomic trends that
might affect the industry, as well as their procedures
to identify and mitigate these risks.
“Companies tend to make the mistake that they
are just being rated according to their own financial performance and the risks they face individually. This is not correct. Credit rating agencies also
take into account the performance of the industry
sector – a company is unlikely to score the highest
investment rating if the sector in which it operates
is in decline, despite the company’s own financial
performance and outlook,” says Schroeder.
A closer, more communicative relationship can pay
dividends, says Schroeder. For example, if a company
is considering acquiring a competitor to increase its
Major credit rating agency
country downgrades, 2011
January: Standard & Poor’s downgrades Japan from AA to AAMarch: Moody’s downgrades Greece from Ba1 to B1
May: Standard & Poor’s downgrades Greece from BB- to BJuly: Moody’s downgrades Portugal from Ba1 to Ba2
July: Moody’s downgrades Greece from Caa1 to Ca
August: Standard & Poor’s downgrades US
from AAA to AA+
September: Standard & Poor’s downgrades Italy
from A+/A-1+ to A/A-1
September: Moody’s downgrades Slovenia
from Aa2 to Aa3
market share and service offering it could ask a credit
rating agency to carry out a “scenario assessment”.
This could involve analysing the price of the transaction, quantifying the value that the merger is forecast
to create, examining the assets being bought, providing an appraisal of the new management team, looking at how the deal is being financed and valuing staff
redundancies and disposals.
“A company that is going to embark on such a
major restructure will need to have an updated rating
and it might as well try to engage with a credit rating
agency at the earliest opportunity,” says Schroeder.
“By carrying out a scenario assessment, the management team will get a better view of how analysts will
rate the transaction, as well as having an opportunity
to address any concerns that the rating agency may
have prior to the merger going live and the rating
being awarded.”
Companies need to
have more frequent
engagement with
the rating agencies
Yann Umbricht, partner and head of professional
services firm PricewaterhouseCoopers’ treasury
group in the UK, also believes that stronger engagement is crucial. He says that companies should
arrange regular face-to-face meetings with analysts
from the rating agencies, and that these meetings
should be led by a senior member of the management team, such as the corporate treasurer, the chief
financial officer, or even the chief executive. “The
management team sets the tone for the business. It is
therefore important that it engages directly with the
analysts that will rate its performance,” he says.
Umbricht also warns organisations to make sure
that the information they present to analysts stands
up to scrutiny. All information relating to the company’s future outlook needs to be properly substantiated, he says.
“If a credit rating agency does not believe that a
projected target can be achieved it will ask for the
information upon which that projection has been
calculated. An error in the calculation may be understandable, but not having any firm figures to back
up the projections is inexcusable and will lead to
a very conservative rating as the agency will have
less faith in the financials the management team,
and the business.”
Neil Hodge
is a regular contributor to Financial Management
32
Clicks
for cash
Illustration
by Mitch Blunt
33
Finance
Peer-to-peer lending networks offer a new source of capital
for smaller businesses. Peter Bartram examines their
structure and benefits for the world’s finance teams
hen Phil Mottram wanted to
refurbish the Grade II listed office
building that his company, Sisco
Forensic Engineers, occupies, he
applied to his bank for a £40,000
loan. His bank manager told him
that the maximum secured loan he would offer was
£25,000. The killer punch was that the loan would
come at a usurious 19.9 per cent.
“I said ‘no, thank you very much’,” says Mottram.
Instead, he turned to the peer-to-peer lending network Funding Circle. After a simple auction process on Funding Circle’s website, Mottram received
a £35,000 loan over three years – enough to complete the project – at 8.9 per cent interest. “The application process was very straightforward,” he says.
“It just involved filling in an on-screen form.”
Mottram is among a growing number of owners
of small businesses who are turning to peer-to-peer
lending networks after receiving the hard word from
their bank managers.
Another is John Carr, managing director of John
Carr Motorcycles (JCM) in Derbyshire. Carr specialises in second-hand motorcycles, and after an
unprofitable attempt to sell cycles from new, he
decided to revert to his core business.
He explains: “We wanted to expand our showroom and increase our stock from 40 to 62 cycles.
The more bikes you have, the bigger the chance
that you’ve got one that the customer wants.” Carr
wanted a £75,000 loan to fund his growth plan. “But
the bank manager told me very politely that I was
wasting my time.”
Instead, Carr turned to the lending network
ThinCats and raised the loan, repayable over three
years, at 8.9 per cent. His expansion plan has paid
off; August 2011 sales are nearly double that of the
same month last year.
It’s hardly surprising that peer-to-peer lending
networks are growing fast. The record low interest rates, combined with cutbacks in bank lending, have created a perfect storm in which they can
thrive, admits James Meekings, co-founder of Funding Circle.
“Money on deposit in a bank pays something
like 0.5 per cent, but small businesses can rarely
borrow at less than 12 per cent,” points out Kevin
Caley, chief executive of ThinCats. “That leaves a
big gap in the middle and if we can provide a good
service in bridging that gap, people will prefer to
deal with us.”
W
Funding Circle and ThinCats are two key players that provide peer-to-peer lending to small businesses. Most peer-to-peer lenders focus on the consumer market.
Funding Circle specialises in unsecured loans,
typically in the low tens of thousands. As of August,
it had lent £9.4m to 280 businesses, the largest with
a turnover of £18m and the smallest with £130,000.
It has upwards of 3,500 lenders in its network.
ThinCats, which launched nationally in June after
a six-month trial period in the Midlands, specialises in loans typically in the upper tens of thousands
or low hundred thousands. Its largest loan to date is
£250,000. Caley is hoping to have completed £5m
worth of loans by the end of 2011. Unlike other peerto-peer lending networks, ThinCats loans are secured
against borrowers’ personal or business assets.
The basic principle behind business peer-topeer lending networks is the same. Individuals or
businesses offer to lend specific sums of money to
named companies at an interest rate that the lenders themselves choose. The lenders offering the
lowest interest rates are aggregated into the final
loan that is offered to the borrower.
For example, when Mottram wanted to raise his
£35,000, bids for parts of the loan started at interest
rates of around 15 per cent. As the auction period
progressed, rates steadily fell as more bidders for
loan parts joined in. “We watched the rate coming
down every day for a week,” Mottram recalls.
Funding Circle conducts credit checks on all borrowers using a credit agency and its own research.
It places each borrower in one of three risk categories – A+, A or B. Although Mottram runs a solid
and profitable company the construction industry
generally is regarded as higher risk, so his loan was
rated B. Funding Circle adds two per cent to the
interest rate bid by lenders as its own fee.
Every borrower on ThinCats needs the support
of one of the company’s accredited sponsors. These
are generally experienced former bank managers or
accountants and their role is to guide the borrower
in putting together an information pack that is used
to pitch for the loan. ThinCats is looking to extend
its network of sponsors.
Carr recalls that he had four of five meetings with
his sponsor as they worked on compiling a 21-page
information pack, which provided background
details on the business, past financials, the purpose of the loan, forward projections and so on.
“The sponsor has to be confident that you are
34
Finance
‘Although most
peer-to-peer
lending sites
specialise in
consumer
lending, that
may disguise
the volume of
funds that end
up financing a
small business
venture’
a viable business and will use the funds well,” Carr
says. “Our sponsor was very professional and struck
up an immediate rapport with us.”
Borrowers pay a non-returnable £450 fee to list
their loan application. Prospective lenders view the
information pack online and have the opportunity
to ask further questions before deciding whether to
invest. Lenders then bid for parts of the loan, quoting the interest rate they want. In Carr’s case there
were bids totalling £160,000 for the £75,000 loan.
“And this for a business that the banks wouldn’t
lend a penny to,” says Carr.
The final loan is aggregated from those offering
the lowest interest rates. ThinCats adds 1.5 per cent
to the average interest rate as its own fee. “This contributes to our own costs and covers the sponsor in
continuing to monitor the loan,” says Caley.
Although peer-to-peer loans currently represent
an almost invisible slice of Britain’s total business
lending, Caley believes the approach has the capacity to grow fast. “I think we will eventually be a first
port of call because we will be able to undercut the
banks,” he says.
Meekings adds: “I think peer-to-peer lending will
become a significant and credible alternative for the
small businesses banks don’t really care about.”
Charles Farrow, a director of family business
Welland Power Engineering, agrees that peer-topeer lending is simpler and faster to access than
bank money. When he applied to his company’s
bank for a loan to finance growth, he was told funds
would only be available if the company had its property revalued and provided other data that would
have been time-consuming to produce.
“We decided we needed something a bit quicker,” recalls Farrow. He applied for a £75,000 loan
through Funding Circle and received the money at
a competitive interest rate within 18 days. Welland
will repay a total of £84,363 over three years.
Although most peer-to-peer lending sites specialise in consumer lending, that may disguise the
volume of funds that end up financing a small business venture. “Many borrowers who have used us
borrowed the money – up to £15,000 – to help launch
or progress a business venture,” says Giles Andrews,
CAPITAL IDEA
When Alex Walker wanted funds to expand Indigo Clothing, his screen-printed
clothing business, he secured an Enterprise Finance Guarantee loan from Lloyds
TSB. But it wasn’t enough for his plans.
“We needed a little bit more capital,” explains Walker. “But the bigger the loan, the more
complicated the application process, with lawyers getting involved. It made more sense to
take the money from the bank and top it up with other borrowing.”
Walker turned to peer-to-peer lending network Funding Circle to raise an additional
£20,000. “I thought it was an interesting way of borrowing and the interest rates are good
value.” Walker has secured his three-year loan at around seven per cent.
He says: “The application process was extremely straightforward. I was surprised how
easy it was. It took about a month to get the money, but it could have been quicker than that.”
Walker plans to use the fund to expand Indigo Clothing so that it can develop turnkey
e-commerce merchandise stores and fulfilment services for its clients.
“We will definitely use peer-to-peer lending in future,” he says.
co-founder and chief executive of Zopa, the market
leader in peer-to-peer lending. “Typically, Zopa borrowers can secure a rate of interest that is 20 per cent
cheaper than they can get from a bank.”
The flip side of small business borrowing from
peer-to-peer networks is lending through them.
Welland’s Farrow first encountered the concept
when he made a personal loan through Zopa. “I
lent at a fairly difficult time in the markets but still
made a small profit,” he recalls.
‘Peer-to-peer lending
will become a credible
alternative for the small
businesses banks don’t
really care about’
Rhydian Lewis, chief executive of Ratesetter, a
consumer-based peer-to-peer network, says that he’s
noticed that some cash-rich small businesses have
started to lend money through his network. Typical sums range from £10,000 to £20,000. Ratesetter offers 4.5 per cent for a monthly access account
or seven per cent for money loaned for three years.
Ratesetter is unusual among peer-to-peer networks
as lenders loan their money at standard rates.
Ratesetter has its own fund, financed by borrowers, to protect lenders against defaults. On Funding Circle, lenders split loans between a number of
borrowers to spread risk. A typical loan has around
250 lenders. So far, Funding Circle has posted only
two defaults, totalling £44,000.
Small businesses that want to escape from the
rock-bottom interest rates offered by standard bank
deposits, but are worried about tying up their surplus cash for too long, can opt for a network that
offers a secondary market in loans.
For example, loan parts are actively traded on
Funding Circle’s website. “Lenders who get a good
interest rate in an auction sometimes choose to
sell on their loan part early and take the profit,”
says Meekings.
As for the borrowers, it’s hard to find one who’s
not delighted at finding an alternative to bank
money. “It’s working really well for us,” says Sisco’s
Mottram. “I don’t think we could have got funding
at that kind of interest rate from anywhere else.”
“Just go for it,” advises Carr. “I’m happy to bypass
the banks and let private investors benefit.”
Peter Bartram
is a regular contributor to Financial Management
36
The list
Illustrations
by Borja Bonaque
Words by
Ben Schiller
ways to...
…motivate your finance team
If you want to retain the brightest
and best people, you’ve got to keep
them keen. Here are eight pieces of
advice for doing this…
1
Partner with
operations
people
Several commentators say that what
once worked to motivate finance
professionals in the past may not work
so well today.
“The finance function has changed
enormously in the past few years so the
old talent-management approach
doesn’t necessarily work,” says Dan
Zbacnik, financial management leader
at KPMG Canada.
“Money doesn’t always cut it now.
These new types of people are looking
for on-the-job satisfaction, learning and
constantly growing. They are looking for
more partnering with operations people.
Finance people may come in with
technical skills, but they want to learn
about the operations as well.”
37
2
Beware
micromanaging
Stephen Brooks, specialist in people
management at PA Consulting, says
there are three proven ways of
motivating people: what he calls
“autonomy, mastery and purpose”. The
first of these can pose problems for
financial professionals, he thinks.
“As they develop, finance people
tend to have a controlling function, but
as you reach managerial level you need
to stop being like that. That can be
quite difficult for some people. Finance
attracts people who find it more
difficult to trust and delegate.”
Micromanaging is a big no-no,
because it saps people’s sense of
urgency and because it is inefficient,
essentially amounting to doing
someone’s work for them.
3
Let employees
‘make progress’
Managers might think they know what
motivates teams – but they may be
wrong, according to Teresa Amabile,
a professor at Harvard Business School
and author of The Progress Principle.
Amabile collected electronic diaries
from 238 people working on projects
in seven companies, looking at what
motivated people from hour to hour
over several months.
“What we found was, of things that
get people engaged in their work, the
single most important is making
progress in meaningful work. There is
a tremendous motivational effect when
people make even small, incremental
progress,” she says.
Amabile’s statement contradicts
what employers say. A corresponding
survey asked 600 managers to rank
“recognition”, “incentives”,
“interpersonal support”, “support for
making progress” and “clear goals” as
motivating factors. “Recognition” came
first, some way ahead of “progress”.
Amabile says managers should not
over-emphasise the importance of
incentives, financial or otherwise. “We
found that people rarely mentioned
incentives. Of course, when they got
recognition, that made them happy. But
they had to have done something first.”
4
Develop people,
don’t rely on
training
Brooks says development has multiple
rewards, and that money well spent will
deliver long-term advantages.
“The evidence shows that people
stay with organisations that develop
them. Sometimes you are going to lose
people if you don’t offer them career
advancement. But if you develop
people, top talent attracts top talent,
and you get into a virtuous cycle.”
That doesn’t just mean sending
someone off on a course somewhere,
though: training is only 20-30 per cent
of the puzzle, Brooks says. “Where you
get companies spending lots of money
on training and then losing people, they
are often doing other things wrong.”
5
Pay still
matters
For all the happy talk about workplace
satisfaction, progress and purpose,
money still talks for many.
“What we are seeing with finance
leaders is that compensation is the
most important thing,” says Phil
Scrivener (ACMA, 1987), a senior
director at the Hackett Group, a finance
consulting firm. “Because it is still a
very competitive market, pay is going to
be vital. Linking your payment model
to what skills you want is going to be
the key component for developing the
right organisational capability.”
Hackett recently completed a survey
of 200 financial professionals about
people management. It found that
those who made motivation and
retention a priority were the most
successful. “We measured that
companies can have a 16 per cent
improvement in performance by having
a coherent talent management
strategy,” he says.
6
Understand
everything your
team can do
Brooks says it is common for
organisations to under-use all the
talents of team members. People forget
what so-and-so did in a previous job, or
career, or university, which is a shame.
Those skills and experiences may not
only be useful, but also a way to
motivate individuals by allowing them
to do things that interest them.
“Most organisations don’t know very
much about their workforce,” he says.
“They forget that individuals did loads
of stuff before they joined. They tend
to think about people as they are now
rather than everything they have done.”
Brooks says technology, such as
workforce management systems, can
help to mine CVs and other resources
so that such skills and experiences
become useful – turning what resides
dimly in someone’s memory into
information that can be accessed in
a systematic way.
7
Parcel out
unappealing work
Moving to a centralised transaction
processing model can deliver
efficiencies, but it can also help
motivate people. “It means you are
no longer using people with developed
skills to do very mundane work, such
as gathering information and inputting
it,” says Zbacnik at KPMG.
“If you can automate, then
people can be more analytical and
transaction processing becomes
more about problem-solving, like
figuring out why a system has
rejected a transaction.”
8
Don’t overemphasise
technical skills
When hiring people to perform certain
roles there is a tendency for companies
to sometimes hire qualifications rather
than people. It may make sense to
de-emphasise what technical skills
someone has and instead look at
whether they are going to fit into the
organisation, says Brooks.
“When things go wrong it’s rarely
because of their technical abilities. It’s
more because they don’t fit into the
organisation. We need to pay more
attention to broader skills, capabilities
and cultural fit. It’s often the less
tangible skills that are important.”
39
Prime number
Market volatility over
the past five years
43.05
40.1
47.27
79.13
31.16
29.99
18.61
10
20
30
40
50
Market volatility
60
70
80
Getty Images
Market volatility
index
Market volatility has been a consistent symbol of the global financial
crisis since it began in 2007.
Often referred to as the “fear index” or the “fear gauge”, the Chicago
Board Options Exchange Market Volatility Index represents one
measure of the market’s expectation of stock market volatility over the
next 30-day period. We chart the index’s peaks over the five years to
2011, including the height of 2008.
Source: Chicago Board Options
Exchange Market Volatility Index
When Lehman Bros
collapsed, the Dow
Jones suffered its
largest single-day drop
since the 9/11 attacks...
Thousands of
protesters take to the
streets of Athens to
protest against the
government...
2008
2010
In association with
Notes
Study
Paper E1
Enterprise
Operations
Experiential marketing has its origins in snake-oil
salesmen’s medicine shows, but it has become a
legitimate, effective and increasingly sophisticated
brand management technique over the years
By Graham Cook
Partner at Godfrey Mansell & Co Chartered
Accountants and freelance lecturer
A
brand can be a name, sign, symbol,
design, unique packaging or any combination of these. According to Philip
Kotler and Gary Armstrong in Prin
ciples of Marketing (Prentice Hall,
2009), it is a powerful marketing tool
in the battle among competing organisations for
long-term consumer loyalty and it can insulate a
firm from its rivals’ promotional campaigns.
All of us would probably admit to being brand
conscious to a certain degree. When we’re grocery
shopping, for instance, there will be some specific
brands that we’ll insist on buying rather than
other products because we associate with them
the level of quality that we require. To a large
extent they represent safe ground.
Some brands have even transcended the name
of the product or service that they represent. How
many of us still “Hoover the carpet” when there
are countless other brands of vacuum cleaners
on the market, for example? Or how many of us
“Google it” rather than “do an internet search”?
‘How many of
us still “Hoover
the carpet”
when there are
countless other
brands of
vacuum cleaners
on the market?’
41
Paper P3
Performance Strategy p44
Papers P1 & P2
Performance Management p46
Brand management can even sometimes be
too successful, achieving associations that are
entirely different from what was originally envisaged. One of the reasons cited for Gillette’s 1980
withdrawal from sponsoring televised cricket in
the UK is that the success of its 17-year brand
management campaign using this medium
made the firm a household name mainly for the
Gillette Cup, rather than for its shaving products
and men’s toiletries.
Planning, control and decision-making are at
the heart of what managers do: strategic managers plan long-term objectives; tactical managers
set processes and organise resources to achieve
those objectives; and operational managers measure the extent to which the objectives are being
achieved. Brand management can therefore
be defined as developing and implementing a
strategy with the long-term objective of putting
a brand at the forefront of consumers’ minds.
This approach aims to influence the initial buying
decision and build customer loyalty, creating
a habitual purchasing relationship between brand
and buyer.
For strategic managers, this will involve aligning business objectives with consumer objectives,
which is how marketing in its purest sense is
defined – establish what consumers need and
desire, and satisfy these needs and desires profitably. The tactical managers’ role in this process
will be to ensure that appropriate marketing methods are used and sufficient resources are mustered
to meet demand while maintaining a consistent
level of quality – if a product is out of stock or falls
short of what it says on the tin, customers will
soon switch to a rival and often don’t return. Operational managers will design and implement monitoring systems to ensure that information is fed
back to senior decision-makers. This information
will be both quantitative and qualitative.
42
Study notes
Companies with a wide range of brands often
create a product management or brand management organisation. This approach was first adopted
by Procter & Gamble in 1929 when its new soap,
Camay, was struggling in the market. It appointed
an executive to focus exclusively on improving
the performance of the ailing product, which
proved to be a highly successful move. The company soon adopted this organisational structure
throughout the business. Most of P&G’s brands
have since become household names and many
companies in the food, soap and toiletries industries have copied its approach.
Implementing a strategy is widely recognised
to be inherently harder than planning one. Different firms may choose identical strategies, but
one will be more successful than another because
of superior execution. This is where the marketing toolkit that organisations use to build their
brands becomes essential. Here, too, it’s not so
much about which tool you choose; it’s how you
use it that can make the real difference.
Confucius said: “I hear and I forget; I say and
I remember; I do and I understand.” Experiential
marketing is a technique that attempts to put the
wisdom of this philosophy into practice by interacting with prospective customers, often face to
face, and encouraging them to use the product.
By engaging consumers via product trials, the marketer hopes to turn an intangible set of apparent
features into actual benefits or “satisfiers”, based
on personal experience.
Experiential marketing is not a new concept.
One of the earliest examples dates from the late
1800s when John Culpepper, a travelling salesman, touted his elixir of bitters, alcohol and
cayenne peppers around the US. He invited boys
from the gathered crowds to swing on his long
black hair as evidence of the medicinal powers of
his $1-a-bottle elixir. As you might imagine, this
was a scam, the hair in fact being that of a horse’s
tail, but experiential marketing has endured as a
popular – and bona fide – technique. In 1914, for
example, Nils Granlund, marketing manager
for Loew’s Theatres, produced the world’s first
movie trailer. Although it was designed to advertise a stage show, his idea was soon adopted by
Different firms
may choose
identical
strategies, but
one will be more
successful than
another because
of superior
execution
Hollywood as the main method for marketing new
films. This experiential approach has clearly stood
the test of time.
In practice it is rare for one marketing activity
to be used in isolation and a campaign will invariably comprise other approaches, each one providing a link in the chain towards attracting and
securing customers. Any permutation of the seven
“Ps” of marketing – price, product, place, promotion, people, processes and physical evidence –
can be used as part of an experiential approach or
to reinforce it. Here are some examples of how
they can be applied:
l Price. At their check-in desks, some airlines offer
passengers a heavily discounted upgrade to business class. The idea is that some people who take
advantage of this will remember their enhanced
flying experience and be prepared to pay a premium for it on the next occasion they book a ticket.
This approach has the extra benefit of generating
useful marginal revenue for the airline.
l Product. Many software providers offer a free
trial period so that users can try applications in a
real situation before buying. Developers build a
“time bomb” into the coding so that their programs will stop working by a certain date unless
Gallery Stock
Paper E1
Enterprise Operations
43
Study notes
the user buys an activation code. Even well-known
brands such as Adobe now offer such free trials.
l Place. Golf equipment manufacturers such as
Ping, Callaway and Taylor Made run “clinics” at
public driving ranges where aspiring amateurs can
hit shots using their latest products. This type
of marketing campaign is location-dependent,
because private golf clubs largely restrict access
to members only.
l Promotion. Ikea implemented an unusual experiential marketing campaign in 2010. It used distributors to hand out its catalogues to people in
public spaces such as railway stations and shopping centres in an effort to engage them indirectly
with its products.
l People. The Red Cross of Argentina recently used
a man integrated into a plastic sculpture in order
to raise awareness about the adverse effects of
climate change. The “melting man” distributed
leaflets urging passers-by in the Plaza Francia,
Buenos Aires, to buy eco-friendly goods, recycle as
much as possible, use public transport etc.
l Physical evidence. As individuals we tend to
give more credence to the views of other consumers than we do to sales pitches. Marketers often
enhance their promotional material with testimonials from satisfied customers. It’s not uncommon
these days for firm’s websites to have dedicated
“consumer reviews” sections.
l Processes. How we are able to acquire the goods
or services is all part of the marketing experience.
This depends on the context, so rapid service at
McDonald’s provides a positive experience, for
instance. Conversely, we tend to want the opposite
at an upmarket restaurant, where a more leisurely
and relaxing dining experience is desirable.
The benefits of successful brand management
strategies and experiential marketing campaigns
can be measured in terms of robust and repetitive
cash flows. As competition for consumers’ dis
posable incomes intensifies, particularly in regions
where austere times are evident, successful brands
cannot rely on consumers’ past behaviour to
g uarantee their future profitability. Austerity
brings with it increased price-consciousness and
consumers may be forced to sacrifice some quality in order to save money. As a result, established
brands must continually look over their shoulders
for the next rival – after all, who had ever heard
of Sony in 1968, or of Dyson in 1983?
Exam practice
‘Via product
trials, the
marketer hopes
to turn an
intangible set
of apparent
features into
actual benefits
or “satisfiers”’
Try the following question to test your understan
ding. A model answer will be published in the
December issue of Velocity, CIMA’s online student
magazine (www.cimaglobal.com/velocity).
Company F is a medium-sized family-owned
business that has engaged in root-vegetable farming for three generations and now owns four farms.
It employs 60 people, of whom 12 are members of
a field sales team covering all regions of the country. These are supported by a telesales team of
four, who sell directly and also make appointments for the field sales reps.
The managing director – the founder’s grandson – believes that F’s current business model is
unsustainable given the squeeze on farming margins. He is planning to branch out into the premium crisps market with a new product, HLF
crisps, using healthier production techniques and
organic ingredients. F has ample buildings on one
of its farms to house the production line.
While HLF crisps will carry a premium price tag,
F’s initial market research suggests that 90 per
cent of the crisp-buying population will be able to
afford them. The retail market is dominated by
large players producing household brands and by
supermarket chains with which F has no supplier
relationship, so the only realistic market opportunity is to supply independent retailers with the
product via direct contact or intermediary wholesalers, some of which it already supplies.
The firm has a relatively healthy balance sheet,
but funds for the product launch will be limited
and the MD is under pressure from other family
members not to over-gear the business unnecessarily in order to establish the HLF brand.
You are required to:
l Explain how F can develop and implement a
brand-building strategy that will enable it to establish HLF crisps in the marketplace (15 marks).
l Explain how F can use experiential marketing as
part of its brand-building implementation strategy
(10 marks).
44
Study notes
Paper P3
Performance
Strategy
The allocation of seven marks suggests that you’ll
need to suggest more than one action, depending
on whether the situation can be resolved or not.
The ASAP approach (analyse requirements, source
syllabus knowledge, analyse scenario, plan answer)
to tackling exam questions is a technique that P3
candidates would be well advised to learn and use
Source your syllabus knowledge
The relevant topics are clearly risk management
and ethics. Part A requires knowledge of the link
between how risks are managed and how often they
turn into problems – and the severity of their consequences. The control environment will influence
the quality of the council’s risk management.
Part B requires you to apply CIMA’s ethical code,
including the process for resolving conflicts. It does
not say “list CIMA’s ethical principles without
referring to the scenario”, although this was what
many candidates actually did in the exam.
By Nick Weller
BPP Learning Media’s subject-matter specialist for
the Performance Strategy paper
R
ecent examiner’s reports have highlighted the application of knowledge
and the use of scenario information as
key skills for answering questions in the
P3 paper. The ASAP approach –
explained in the June issue of CIMA’s
online student magazine, Velocity (www.snipurl.
com/uqur0) – will help you to apply these skills.
To demonstrate how ASAP works, let’s apply it
to question 2 from March 2011’s P3 paper.
Analyse the scenario
Analyse the question’s requirements
A(i) Discuss the operations director’s view that it’s
impossible for Grove Council to prevent all injuries
in the workplace (five marks).
A(ii) Discuss the CEO’s view that it is unacceptable
for the council to tolerate any injuries (five marks).
B(i) Analyse the ethical dilemma faced by the internal auditor (eight marks).
B(ii) Recommend what the internal auditor should
do if she is unable to persuade the head of internal
audit to alert the council’s senior managers to the
alleged under-reporting of injuries (seven marks).
Start with the verbs. “Discuss” entails citing
opposing arguments. Normally, you’d give at least
two points in favour of the view expressed and at
least two points against it. Both parts of A are worth
only five marks apiece. This suggests that you have
limited scope to develop points, as you may not
receive more than one mark for each. The question
features strong words – eg, “impossible” and “unacceptable” – which represent extreme views, so you
should consider whether these are realistic.
“Analyse”, the verb in B(i), means that you must
use a structured approach to explore the issue by:
l Highlighting key issues.
l Explaining the ethical problems.
l Showing how the fundamental principles of
CIMA’s ethical code apply.
The eight available marks may be weighted
towards discussing relevant ethical principles.
B(ii) requires you to recommend a clear, logical
and ethical action in light of your answer to B(i).
‘The question
features strong
words, which
represent
extreme views,
so you should
consider
whether these
are realistic’
This means ascertaining the seriousness of the risks
described. You should consider whether the risk
management measures seem appropriate and effective. You should also look out for details of the
control environment – eg, the ethical culture.
The key points are as follows:
l The council oversees a wide range of workplaces,
some with significant health and safety risks. This
variety and the divisional structure could make it
hard to ensure consistency in risk management.
l Legislation governs the council’s approach to
health and safety, but the reporting requirements
are unclear. The council’s guidelines are more specific, but don’t have the force of law. If divisional
managers comply with the guidelines, this should
indicate where the safety risks are greatest.
l The injury statistics seem high. A further concern
is that the operations director is satisfied with
these. He may believe that not all accidents can be
prevented, but he should still act to limit their frequency and severity. The CEO’s goal of eliminating
accidents is an ideal that may be impractical.
l The repair depot may have been chosen for an
audit because it conducts high-risk activities.
l The depot may not be breaking the law, but it is
breaching council guidelines. The management
would be concerned about the suppression of evidence of a poor control environment and a climate
of intimidation, as indicated by the mechanics’
unwillingness to confirm their allegations.
l The head of internal audit is trying to prevent
the internal auditor from reporting what she sees
as a serious problem. There don’t appear to be
whistle-blowing processes to protect the auditor
if she wants to raise her concerns internally.
46
Study notes
Paper P3
Performance Strategy
Plan your answer
Planning should ensure that you include all the
points you want to make and that your answer has
a logical structure. For clarity, the following plan
is more detailed than yours would be in the exam.
A(i) Points for:
l However strong the controls are, human error
will still lead to injuries.
l Policies must be realistic, or employees won’t
take them seriously.
A(i) Points against:
l Appears complacent – injuries can be reduced.
l Realistic injury-reduction measures include training for specific tasks – eg, lifting.
l May be evidence of council negligence in lawsuit.
A(ii) Points for:
l Serious consequences of safety breaches.
l Moral duty to protect employees.
l Setting elimination of injuries as target promotes
strong culture.
A(ii) Points against:
l Employees’ involvement in hazardous activities
cannot be prevented.
l Preventing risks and investigating minor breaches
costs time and money.
B(i) Key points:
l People are unwilling to change or speak out.
‘Part B does
not say “list
CIMA’s ethical
principles
without
referring to
the scenario”,
although this
was what
many candidates
actually did’
l A breach of legislation and council guidelines?
B(i) Ethical issues:
l The depot is falsifying its safety record.
l The auditor has been ordered not to report the
problem when she believes that reporting is justified because of injuries to staff.
B(i) CIMA’s code of ethics applies:
l Professional competence/care – the auditor could
be accused of negligence if she keeps quiet.
l Confidentiality – external reporting is forbidden.
l Professional behaviour – reporting internally
means ignoring instructions and an unsubstantiated report threatens internal audit’s reputation.
l Objectivity – the auditor faces dismissal if she
takes her desired course of action.
B(ii) Recommendations:
l Review evidence – if minor injuries don’t indicate
more serious risks, obey instructions.
l Try to resolve the issue – persuade the depot manager to implement guidelines and report injuries.
l If auditor still believes staff are at serious risk, raise
the issue at senior level, despite the suspension
threat. External reporting is justified only if the risks
are grave and no action is taken internally.
l Resign as last resort if effective action is not taken
internally and the auditor wants to disassociate herself from a culture that puts staff at serious risk.
Papers P1 & P2
Performance Management
Although variance analysis is not mentioned
specifically in the P2 syllabus, candidates should
always be prepared to apply techniques they
have learnt when studying for previous papers
By Janet Walker FCMA
Technical editor for CIMA exams and visiting lecturer
on the MBA programme at Cass Business School
T
he calculation of sales mix contribution
and sales quantity contribution variances was examined in the May 2011
P1 and P2 papers. Both examiners commented in their post-exam guides that
the answers to these two questions
were generally poor.
Let’s look at the relevant sections of the P1 question in detail to see how it should have been answered
and where the common errors were made in both
papers. Having completed a number of calculations
in the first parts of this question, students had the
data in table 1 (see opposite page) available to calculate the sales mix contribution variance and the sales
quantity contribution variance.
The sales mix contribution variance
This variance measures the change in the standard
contribution caused by a difference in the mix of
products actually sold from the budgeted mix of
products. Some goods earn a higher contribution
than others and, if proportionately fewer of these
more profitable products are sold, the potential contribution that could be earned will be lower.
The P1 examiner commented that candidates
often wrongly evaluated the variances by using selling price rather than contribution. But note the full
titles of the two variances: both are referred to as
47
Study notes
Table 1
Extracts from last year’s budget
Sales (units)
Selling price per unit ($)
Direct material cost per unit ($)
Direct labour cost per unit ($)
Variable overhead cost per unit ($)
Economy
180,000
2.80
1.00
0.50
0.65
Premium
360,000
3.20
1.60
0.50
0.65
Deluxe
260,000
4.49
2.20
0.50
0.65
Actual results from last year
Sales (units)
Economy
186,000
Premium
396,000
Deluxe
278,000
Table 2
Selling price Variable Contribution
Budgeted Total budgeted
per unit unit cost
per unit sales (units)
contribution
Economy $2.80
$2.15
$0.65
180,000
$117,000
Premium
$3.20
$2.75
$0.45
360,000
$162,000
Deluxe
$4.49
$3.35
$1.14
260,000
$296,400
Total
800,000
$575,400
Table 3
Economy
Premium
Deluxe
Total
Budgeted sales
% Actual sales in standard mix (units)
180,000 units
22.5
860,000 x 22.5% = 193,500
360,000 units 45.0
860,000 x 45.0% = 387,000
260,000 units
32.5
860,000 x 32.5% = 279,500
800,000 units 100.0
860,000
contribution variances and must therefore be evaluated using contribution rather than selling price.
Remember that we are monitoring the change in
contribution caused by a change in the mix or quantity of sales. Or, to be more precise, we’re monitoring
the change in the standard contribution caused by
a change in the mix or quantity of sales.
The original question also provided actual unit
costs and selling prices for each product. A second
common error committed by exam candidates was
to use the actual contribution rather than the standard contribution to evaluate the variances. This is
Table 4
Actual sales
(units)
Economy
186,000
Premium
396,000
Deluxe
278,000
Total
860,000
Table 5
Actual sales
(units)
Economy
186,000
Premium
396,000
Deluxe
278,000
Total
860,000
wrong because we are monitoring the potential extra
contribution (or loss of contribution) caused by a
change in the mix or quantity of sales. The fact that
the selling prices or costs are different from standard is monitored by the selling price variance and
the various cost variances.
The first step is to calculate the standard weightedaverage contribution per unit of the products in the
standard mix using table 2. So the standard weightedaverage contribution per unit is $575,400 ÷ 800,000
= $0.71925. This is the average contribution per unit
that should be earned if the products are sold in the
standard mix.
Next we need to look at the contribution per unit
earned from the individual products: Economy and
Premium both earn a lower contribution than the
average. If the mix of actual sales contains proportionately more of these products, the sales mix
variance will be adverse. On the other hand, if proportionately more units of Deluxe are sold, the sales
mix variance will be favourable.
We are not concerned here with whether more or
fewer units were sold than the number budgeted,
since this is monitored by the sales quantity variance. So we need to calculate how many units of each
product would have been sold if the actual sales had
been in the standard mix. The standard mix of the
actual sales is based on the budget. For example, the
total budgeted sales volume is 800,000 units, of
which 180,000 units are Economy. So 22.5 per cent
(180,000 ÷ 800,000) of sales units should be Economy and so on. See table 3 for the full workings.
Now we are able to compare the standard mix of
sales with the actual mix and evaluate the difference
in contribution using table 4.
The examiner reported that many candidates
incorrectly showed adverse variances as favourable
and vice versa. If the workings are arranged as
Actual sales in
standard mix (units)
193,500
387,000
279,500
860,000
Difference
(units): A
-7,500
9,000
-1,500
Variance from weighted-average
contribution per unit: B
($0.65 – $0.71925 = -$0.06925)
($0.45 – $0.71925 = -$0.26925)
($1.14 – $0.71925 = $0.42075)
Sales mix contribution
variance: A x B
$519 favourable
$2,423 adverse
$631 adverse
$2,535 adverse
Actual sales in
193,500
387,000
279,500
860,000
Difference
(units): A
-7,500
9,000
-1,500
Standard contribution
$0.65
$0.45
$1.14
variance: A x B
$4,875 adverse
$4,050 favourable
$1,710 adverse
$2,535 adverse
48
Study notes
Papers P1 & P2
Performance Management
Table 6
Economy
Premium
Deluxe
Total
Budgeted sales
(units)
180,000
360,000
260,000
800,000
Actual sales in
193,500
387,000
279,500
860,000
in table 4, a positive result will be a favourable variance and a negative one will be an adverse variance.
But memorising column headings is a dangerous
approach. It is much better to understand the calculations and thereby deduce whether a particular
variance is adverse or favourable. For example,
Economy earns a lower contribution per unit than
the average. Because fewer units of Economy were
in the actual mix, a favourable variance resulted.
Similarly, Premium earns a lower contribution per
unit than average, so a greater number of Premium
units in the mix resulted in an adverse variance.
Deluxe earns a higher unit contribution, but fewer
units were in the mix than standard, so the variance
was adverse.
An alternative method is available for calculating
the total sales mix variance (see table 5, previous
page). It uses the same analysis of the difference in
the sales mix, but it evaluates the differences at the
standard contribution per unit, rather than at the
weighted-average contribution, for each product.
You can see from the table that this approach results
in the same total mix variance, but different variances for the individual products.
The method was acceptable in the May 2011 P1
and P2 papers for calculating the total sales mix
variance. But CIMA’s official terminology recommends that you use the first method – ie, the one
shown in table 4 – if you are required to analyse the
mix variance for each product. This is because the
alternative approach doesn’t give meaningful
results for individual products. For example, the
variance shown for Economy using this method is
adverse. But, as we have seen earlier, if proportionately fewer units of Economy are sold, the fact that
it earns a lower-than-average contribution means
that the potential total contribution is increased.
The favourable variance for Economy using the first
method reflects this situation correctly.
The sales quantity contribution variance
This variance measures the potential change in the
contribution that could be earned as the result of a
Difference
(units): A
13,500
27,000
19,500
Standard contribution
$0.65
$0.45
$1.14
variance: A x B
$8,775 favourable
$12,150 favourable
$22,230 favourable
$43,155 favourable
change in the number of units sold compared with
the budgeted amount. In this example, the actual
total sales volume was higher than budgeted, so the
quantity variance will be favourable.
The sales quantity contribution variance is therefore (860,000 budgeted units – 800,000 actual units)
x $0.71925 = $43,155 favourable.
The quantity variance is evaluated using the average unit contribution in the standard mix, because
the effect of any change in the mix has already been
monitored by the mix variance.
An alternative approach to calculating the sales
quantity variance (see table 6) produces the same
total result, but it also provides the variances for the
individual products. This method is equally acceptable in the exams and it shows the potentially
favourable effect on the contribution of selling more
units than budgeted of each product.
What the variances indicate
‘Memorising
column
headings is a
dangerous
approach. It
is much better
to understand
the calculations
and thereby
deduce whether
a variance is
adverse or
favourable’
The two variances combined will show the effect on
standard contribution of a change in the volume of
sales compared with the budgeted amount. The
favourable quantity variance shows that contribution was potentially $43,155 higher because more
units were sold in total than budgeted. But these
units were in a less profitable mix, so the $2,535
adverse mix variance offset this gain slightly.
Note that it is possible for an adverse mix variance
to outweigh a favourable quantity variance. This
would signal to the management that, even though
the number of units sold was higher than budgeted,
proportionately more of the less-profitable products
were sold, resulting in a lower potential contribution. So selling more units does not always result in
a higher profit than budgeted.
One last point is worth mentioning about this
question and indeed all numerical exam questions:
the P2 examiner reported that some students didn’t
show a dollar sign before their calculated variances.
This is such an easy way to ensure that you earn all
of the marks available, so always remember to
include currency signs for all monetary figures.
Further reading CIMA Official Study Text – Performance Management (2011-12 edition), CIMA Publishing, 2011.
49
Study notes
Exam notice
Visit www.cimaglobal.com regularly for updates
November 2011 exams
The next exams will be held on 22, 23 and
24 November. The deadline for entries
has passed. Late entries will be accepted
only in exceptional circumstances.
CIMA will not accept cancellations or
refund fees. The deadline for changing
papers or exam centres has passed. In
exceptional cases, late changes may be
accepted if places are available. For details,
e-mail cima.contact@cimaglobal.com.
Admission advice letters
If you’re entered for the November exams
you need to log into your “My CIMA”
account, download your admission advice
and print it out (you must also download
and read the exam rules). This gives
details about your exam centre, as well as
the papers you’re taking. You must take
the admission advice with you to the exam
centre and retain it afterwards, because
it contains your candidate numbers. You
will also need to take another means of
identification – eg, a passport or driving
licence – containing your photograph,
name and signature.
Attendance slips
You must complete an attendance slip
before starting each exam. It has a tearoff section that you should retain. This is
your confirmation of attendance and it’s
valid for four months after the exam.
Pre-seen material for papers at
strategic level and T4 part B
The pre-seen material for November’s T4
part B Case Study exam can be downloaded
from www.cimaglobal.com/t4preseen.
The pre-seen material for papers
E3, F3 and P3 can be downloaded from
www.cimaglobal.com/strategicpreseen.
It is your responsibility to download
this material and familiarise yourself with
it before the exams. A “clean” copy of the
pre-seen material will be provided in the
exam, along with further new unseen
material. You cannot take any notes into
the exam with you.
Tax rules and examinable
standards for papers F1 and F2
Information on the relevant tax rules and
examinable standards for the Financial
Operations and Financial Management
papers is available to download from
the “Study resources” page for each paper
on CIMA’s website.
Question papers and answers
Students can download all past exam questions and model answers free via their “My
CIMA” accounts. The November papers
will be available shortly after the exams.
Post-exam guides
Post-exam guides can be downloaded from
www.cimaglobal.com/studyresources.
These are essential reading for unsuccessful candidates and those studying a new
subject. They contain:
l The exam questions.
l The rationale for each question.
l A suggested approach to answering
each question.
l The outline marking scheme.
l The examiners’ comments.
Exam Talkback service
You can send CIMA your observations
about the exams through its Talkback
e-mail service. This is open for comments
relating to the papers, the exam centres
and their facilities. It is open for two
weeks during and after the exams. Visit
www.cimaglobal.com/talkback for further information.
November’s exam results
The results from the November T4 on PC
exam will be released on 15 December.
The results from all the other November
papers will be released on 12 January 2012.
Log into your “My CIMA” account by 5
January to register to receive your results
via e-mail.
CIMAstudy.com
Visit www.cimastudy.com for details of
CIMA’s online learning resource, which
can be used for self-study or as part of a
blended approach.
Computer-based assessments
at certificate level
For full information about entering for
a computer-based assessment, visit
www.cimaglobal.com/certificateentry.
Queries
Visit www.cimaglobal.com or get in touch
with CIMA Global Contact or your local
office (see panel, right).
Global contact details
CIMA Global Contact
E: cima.contact@
cimaglobal.com
T: +44 (0)20 8849 2251
F: +44 (0)20 8849 2450
United Kingdom
26 Chapter Street,
London SW1P 4NP
T: +44 (0)20 8849 2251
Australia office
Suite 1305, 109 Pitt
Street, Sydney, New
South Wales 2000
E: sydney@
cimaglobal.com
T: 1800 679 996
(toll-free in Australia)
or: +61 (0)2 9376 9900
F: +61 (0)2 9376 9905
CIMA Botswana
Physical: Plot 50676,
Second Floor, Block B,
BIFM Building,
Fairgrounds Office
Park, Gaborone
Postal: PO Box 403475,
Gaborone
E: gaborone@
cimaglobal.com
T: +267 395 2362
F: +267 397 2982
CIMA China office
Unit 1508A, 15th
Floor, AZIA Center,
1233 Lujiazui Ring
Road, Pudong,
Shanghai 200120
E: shanghai@
cimaglobal.com
T: +86 (0)21 6160 1558
F: +86 (0)21 6160 1568
Hong Kong Division
Suites 1414-1415,
14th Floor, Jardine
House, Central HK
E: hongkong@
cimaglobal.com
T: +852 2511 2003
F: +852 2507 4701
India liaison office
Unit 1-A-1, Third Floor,
Vibgyor Towers, C-62,
G Block, Bandra Kurla
Complex, Bandra (East),
Mumbai 400 051
E: india@
cimaglobal.com
T: +91 22 4237 0100
CIMA Ireland
45-47 Pembroke Road,
Ballsbridge, Dublin 4
E: dublin@
cimaglobal.com
T: +353 (0)1 643 0400
F: +353 (0)1 643 0401
Malaysia Division
Lots 1.03b and 1.05, Level
1, KPMG Tower, First
Avenue, Bandar Utama,
47800 Petaling Jaya,
Selangor Darul Ehsan
E: kualalumpur@
cimaglobal.com
T: +60 (0)3 77 230230
F: +60 (0)3 77 230231
Poland contact point
Warsaw Financial
Centre, Emilii Plater 53,
XI floor, office no. 1111
00-113 Warsaw, Poland
T: +48 22 528 66 52
E: Jakub.bejnarowicz@
cimaglobal.com
Pakistan office
No 201, Second Floor,
Business Arcade, Plot
27-A, Block 6, PECHS,
Shahra-e-Faisal, Karachi
T: +92 21 3432 2387
E: pakistan@
cimaglobal.com
Russia/Ukraine
contact point
T: +7 906 091 4550
F: +44 (0)20 8849 2472
E: helen.buniatyan@
cimaglobal.com
CIMA Singapore
51 Goldhill Plaza,
#08-02, Singapore
308900
E: singapore@
cimaglobal.com
T: +65 6535 6822
F: +65 6534 3992
CIMA South Africa
Physical: First Floor,
South West Wing,
198 Oxford Road, Illovo,
Johannesburg 2196
Postal: PO Box 745,
Northlands 2116
E: johannesburg@
cimaglobal.com
T: +27 (0)11 788 8723
or: 0861 CIMASA
(0861 246272)
F: +27 (0)11 788 8724
Sri Lanka Division
356 Elvitigala Mawatha,
Colombo 05
E: colombo@
cimaglobal.com
T: + 94 (0)11 250 3880
F: + 94 (0)11 250 3881
CIMA Zambia
Physical: Plot Number
6053, Sibweni Road,
Northmead, Lusaka
Postal: Box 30640,
Lusaka
E: lusaka@
cimaglobal.com
T: +260 1 290 219
F: +260 1 290 548
CIMA Zimbabwe
Physical: Sixth
Floor, Michael House,
62 Nelson Mandela
Avenue, Harare
Postal: PO Box 3831,
Harare
E: harare@
cimaglobal.com
T/F: +263 (0)4
708600/250475
51
Study
Technical
notesnotes
Notes
Te c h n i c a l
Present value
analysis for
pricing
Ad-hoc pricing models default to using Excel, but
what happens when the model is neither robust nor
scalable to cope with new customers? This case
study offers some answers
The economic crisis made simple p54
cash outflows to suppliers. Because the investment
takes place in multiple phases, and new customers
are joining for different contract durations in each
phase, the need to share asset usage over that duration posed a particular problem. This meant that
each period of asset use could have three to five customers sharing the asset, with each customer having
a share of the asset capacity.
The largest of the recoverable assets cost £18m
and took three years to construct. For the purpose
of a present value calculation the accuracy required
in a pricing context dictated that the monthly cash
flows be captured.
Figure 1 – Long-term project payments to suppliers
By David Smith, BSc, ACMA, MBA
Consultant at Grace Advisory Ltd
3,500
3,000
2,500
£K
R
emember investment appraisal theory?
Here is a brief refresher, followed by a
digression: a project costs £1m and generates £300,000 of cash inflows annually
for five years, while the company’s discount factor is 12 per cent (before tax) –
should the board approve the investment?
This decision is clearly based on assumptions,
owing to the incomplete nature of the information
available: i) that the investment is a single cash
flow, ii) tax is too difficult, so keep it simple and
avoid capital allowances, iii) inflation in the discount factor will be constant over the project life,
and iv) when the project ends, there will be no terminal cash flows.
When it comes to investment appraisals we
are happy to make broad assumptions. But when
it comes to pricing, will our customers be equally
happy to assume? If not, what are the implications
for the pricing experts in the finance function?
The following example is based on a subsidiary of
a large utilities company. The subsidiary invested
£1bn to provide new facilities and expand capacity. Commercial contracts deemed that part of the
investment was to be recovered from customers at a
post-tax real rate of return of, say, six per cent over
the life of the contract. Excel was initially used as
a price calculation tool. A process improvement
project team then reviewed this and established
how it would be improved.
The recoverable investment comprised 13 different assets, each with unique project start dates and
4,000
Actual
PV
2,000
1,500
1,000
500
0
(500)
1
3
5
7
9
11
13
15
17
19 21
Month
23
25
27
29
31
33
35
37
Calculating monthly discount rates
The nominal discount rate is the sum of 1/ [(RPI n /
RPI o) * (PTROR ^ M)], where:
l RPI n is the retail price index actual or forecast for
the month of calculation.
l RPI o is the retail price index in the month of the
first project cash flow.
l M is the month number from the month of the first
project cash flow.
l PTROR is the post-tax real rate of return per month
or 1+6%^(1/2).
Taxation
The taxation treatment of the investment arises from
the capital allowance rules, which replace depreciation in the calculation of taxable profits. The sum
of the annual amount invested by asset is a capital
allowances asset that is written off on a reducing
balance basis (main pool WDA 20 per cent 201011). Each year’s capital allowance, multiplied by the
prevailing rate of corporation tax, is the value of tax
saved (the company was chargeable).
52
Technical notes
250
200
150
£K
Nominal
PV
100
50
0
1
10
19
28
37
46 55
64 73
82 91 100 109 118 127 136 145 154 163 172
Month
In a similar way to a mortgage, any delays in
making due payments resulted in the accumulation
of interest. This meant that the outstanding principle, at a point in time, was repayable in equal, realterms monthly payments over the remaining contract
term. However, while this met the contractual need
to achieve the real terms rate of return, inflation was
then added to future payments so as to achieve the
rule. Bear in mind that mortgage payments have a flat
profile in nominal terms, while these payments were
flat in real terms and increasing in nominal terms
and the nominal payments changed subject to the
customer’s future asset usage profile.
When it comes
to investment
appraisals we
are happy to
make broad
assumptions.
But when it
comes to
pricing, will our
customers be
equally happy
to assume?
reporting and testing of the results used Excel. An
ODBC data source was created to supply data from
the database to Excel pivot tables and lists. A small
number of calculations were performed in Excel.
These took the PV of future payments required by
asset, divided this by the remaining payment periods,
inflated the answer and applied the customer volume
splits so as to share the nominal payment required
across the customers in a given period – this final
amount being used to populate customer invoices.
Ongoing model maintenance
The goal of the model is to calculate prices that
achieve the real rate of return over the life of the asset.
This requires annual updates to reflect the actual
rates of RPI, taxation and the timing and value of
cash payments made by customers. RPI over the
past two years has varied between one per cent negative in 2009 and five per cent positive in 2011. For
this reason, future required payments will change
when the forecast RPI data is replaced with actual
data. Agreeing a practicable re-pricing interval with
customers makes sense.
Figure 3 – Asset 1 – Present value waterfall as a
control check
2.0
0.0
(2.0)
(4.0)
£M
Customers had been paying for use of the assets
on a monthly basis in arrears. To account for payments made before the pricing revision, each payment was discounted from the asset start date to
give the PV of payments received. The tax outflow
resulting from the payments received was calculated
at the prevailing rate of corporation tax.
Figure 2 – Payments required by month
(6.0)
(14.3)
2.2
2.6
(0.6)
10.3
(2.5)
Capex
CT on WDAs
Payments
made
CT on
Payments
made
Payments
required
CT on
Payments
required
(8.0)
(10.0)
Permutations
When considering a modelling question it is essential to ask enough questions to determine the permutations involved;
l Assets: 13.
l Customers: 5.
l Investment payments: up to 37 per asset.
l Nominal discount rates: up to 276 per asset (20
years of asset use, three years’ construction).
l 280 monthly rates of RPI (actual and forecast).
l Payments received: 240 per asset.
l Future payments required: 240 per asset.
l Capital allowance amounts: up to 60 per asset.
l Customer volume shares: up to 1,200.
The calculations and raw data used Excel, with the
initial testing using three customers and four assets.
However, the size of the model reached 17mb and to
scale up to the full number of customers and assets
would have presented performance issues. The decision was made to migrate the model into a Microsoft
Access database. Its ability to perform calculations
quickly and hold the raw and calculated data with a
much smaller file size has proven valuable. In addition, Access provides functionality for control forms
that provide a simple and clear user interface. The
(12.0)
(14.0)
(16.0)
Cash flow
Recommendations and insights
1 Apply a wide scope at the initial requirements-gathering stage of a modelling project. Narrow the scope
later so as to deliver the benefits that add value.
2 Get a handle on the permutations quickly. Excel is
the default modelling tool, but it will struggle with
large volumes of raw data and calculations.
3 Write a user guide/quality manual during the
model build. Everything the model does and how
to run the core processes can then be referenced by
users. Edit and re-issue up until you go live.
4 Don’t underestimate Access as a modelling tool.
Integrating it with Excel as a reporting tool results
in a low-size solution that is scalable.
5 Bear the customer in mind. Where contracts provide for information, sharing with customers, having
the documentation and process in an explainable
format can defuse potentially problematic information requests.
6 Don’t be tempted to use multiple copies of an Excel
model to break down the problem, ensuring a single
version of the truth.
Please note the amounts in this article have been changed to protect confidentiality.
54
Technical notes
The economic crisis
made simple
for every pound borrowed there is a pound lent.
There is much borrowing and lending between individuals, companies and financial institutions within
a country. However, where lending is the result of
saving, and borrowing is used for investment, this
is a healthy activity and is contained within the
nation’s economy. The problem arises where borrowing exceeds the resources of a nation – and is
only matched by lending from outside the country. In the current world economic environment it
is the emerging nations such as China, Brazil and
the sovereign wealth funds of the Middle East that
provide the lending. This is where the relationship
between lender and borrower becomes key and, as
we shall see later, is potentially dangerous.
The world economic crisis is often portrayed as
too complicated for most people to understand.
This article strips out the complications and
presents a simple analysis of its cause, the main
strategies adopted to deal with it and the key
factors determining their success
By Richard Bull MA (Oxon) ACMA ACMI
Regular contributor to Financial Management
The problem
There are many problems with western economies
which, through world trade, have knock-on effects
for economies all over the world. However, the one
that attracts most attention and is potentially most
serious is the level, and growth, of national debt.
Public sector net debt in the UK was £944bn at the
end of June 2011, equivalent to 62 per cent of gross
domestic product (GDP).
Such numbers are difficult to comprehend and I
will not bombard the reader with volumes of data or
technical jargon to complicate the issue further. As
management accountants, we need to understand
the principles and dynamics behind what is going
on in our economies. We can then anticipate and
respond to actions taken by governments and enable
the organisations we work for to be part of the solution
and not part of the problem. I have therefore set out
to reduce the complexities of the economic crisis to
simple terms. In so doing we may learn the lessons of
the dot-com bubble, Enron, and the recent financial
crisis by understanding the reality of the situation
and not be misled by jargon and fancy formulae.
The following simple analysis applies to any
nation that has got into debt and is seeking to get
out of it. It applies to the UK and the US and, in particular, to countries in the eurozone such as Portugal,
Ireland, Greece and Spain, which are limited in being
able to follow independent monetary policy through
changes in exchange and interest rates. The analysis
shows the basic options available to any debtor country and the conditions under which these will work
– or fail. It also highlights the relationship between
nations that have debt to those that have surplus. It
is also important for creditor nations, such as China,
to understand the impact on them of different strategies taken by debtor nations to clear their debt.
As we know from the principle of double entry,
The cause
Where lending
is the result of
saving, and
borrowing is
used for
investment,
this is a healthy
activity and
is contained
within the
nation’s
economy
So how did countries get in this situation? Essentially, it is because for some years they have been
consuming more goods and services than they have
been producing. They have been able to fill the
shortfall in production by importing from abroad
– more than they have been exporting – and thereby
creating a debt to those nations. Such debt may be
held in cash, government bonds or other forms, such
as loans to companies or financial institutions. Over
the years this debt has risen to the level it stands at
now; in some cases at a level at which creditor countries could buy out the equivalent of more than a
year’s production by a debtor country, leaving them
with nothing to live on. Alternatively, debtor countries could seek “one-off” sales of national assets.
This process has already begun through privatising energy supplies and transport infrastructures
and is due to accelerate as the crisis becomes more
chronic and acute. Some sales may not be transparent. For example, it is difficult to assess how much
of the companies listed in the UK’s FTSE 100 or the
US Dow Jones index are already in the hands of
foreign shareholders.
The objective
If countries are to free themselves from this hold over
their production and assets, they need to repay their
burden of debt. To sell their entire production abroad
for the time being or offer a “fire sale” of national
assets to their foreign creditors would get rid of the
debt in the fastest possible way. But the former is not
practical and the latter does not address the underlying problem. So what is the answer?
55
Technical notes
The solution
finances may well fall short if welfare benefits have
to be paid to the unemployed. The result is that debt
actually increases – the vicious spiral of recession.
Similarly, if an increase in production generates
higher income which in turn is spent and not saved,
standards of living may increase, but it does nothing to reduce the national debt.
Indeed, if increases in production are achieved
through borrowing for investment, it makes the situation worse. What is key is that the surplus generated in each case by production exceeding consumption must be exported. Otherwise the outcome
is uncertain.
There are two possible long-term solutions for a
debtor nation. The first is to consume less than
it produces; the “austerity” strategy of cutting
public expenditure and raising taxes. The second is
to produce more than it consumes; the “growth”
strategy. However, in either case, the resulting
reduction in consumption must be achieved
through lower imports or the increase in production must be exported in order to pay down the
foreign debt.
If production exceeds consumption and is not
exported, like tomatoes left on the vine, it will be
wasted. Whether counted as wasted consumption or valueless production, it does not contribute to reducing the debt. Indeed, either reducing
consumption or increasing production may not
reduce debt if, in turn, they only reduce production or increase consumption.
The lesson
Alternative strategies
Of course, there are alternatives which avoid the
pain of sacrificing standards of living or working
harder for the same reward. These may or may not be
deliberate strategies, but are ones that many countries around the world are now facing or are engaged
in. One is to default on loan repayments or to declare
bankruptcy. Another is to promote or allow a combination of inflation or a weaker exchange rate
(denied to individual countries tied to the euro) to
reduce the real value of a country’s loan in the lender’s currency.
If this can be achieved alongside low interest
rates, as has been the case in the UK over the past
few years, the cost of servicing the loan is also minimised. There are other, more radical and provocative strategies, such as privatising assets held by
foreign creditors at below market value or creating
trade barriers that artificially limit imports or apply
duties to them. These strategies all amount to the
same thing: reducing or eliminating the value of a
nation’s debt. And they all run the risk of generating
hostile responses, including reciprocal trade wars,
a breakdown in trading relationships or even actual
war if access to key resources is denied.
The outcome
Thus, if public expenditure cuts lead to redundancies and unemployment, the reduction in expenditure is matched by a reduction in production and
Any strategy
to reduce
consumption
or increase
production
will only be
effective in
reducing that
debt if it leads
to a reduction
in imports or
an increase
in exports
So what are we to make of this analysis and how does
it affect the organisations we work for or with? One
simple lesson is that it is unhealthy to allow debt to
other nations to increase unabated. It increases the
claim and ultimate threat those nations have over
one’s productive resources and limits the policy
options governments have to manage the economy.
Secondly, national debt, by definition owed to foreign nations, can only be repaid through exporting
more than one imports.
Therefore, any strategy to reduce consumption or increase production will only be effective
in reducing that debt if it leads to a reduction in
imports or an increase in exports. To be effective,
any such strategy needs to be targeted to achieve
this. Tax increases should be applied where there
is a high propensity to import so that a reduction
in disposable income leads to a greater than proportionate reduction in imports. Similarly, cuts in
public expenditure should be applied where services
lost will not be replaced by foreign providers. And
growth incentives should be targeted at those areas
that will result in the higher exports of goods and
services rather than generating increased domestic demand.
If a country is to reduce its burden of debt so that
it can be eliminated over time, together with its
attendant threats, the firms and industries that will
contribute to it, and thereby likely to benefit, will
be those that generate exports or provide domestic
substitutes for imports.
This should be a key consideration in developing a business strategy and one which management
accountants can facilitate through understanding
these simple principles.
Further reading Vince Cable: The Storm – the world economic crisis and what it means.
John Lanchester: Whoops – why everyone owes everyone and no one can ever pay.
56
What you learn from the…
CIMA management
accountancy Mastercourses
Course speaker: Richard Mallett, former technical director
of CIMA and a course presenter at BPP
Management accounting and
reporting best practice
Companies are increasingly presenting their annual reports and accounts
in a more transparent manner, owing to
a combination of new legal requirements,
changing best practice and rising shareholder pressure.
As a result, internal management
reporting is increasingly being used for
external reporting.
This course examines best practice in
this area. For example, Tesco has adapted
the Kaplan and Norton Balanced Scorecard to create a “Steering Wheel” comprising five segments, which is used
internally as well as in its report and
accounts (see diagram).
The course also provides an update on
recent and imminent changes affecting
narrative reporting proposed by the UK
government. For example, the Department for Business, Innovation and Skills
recently published a consultation document entitled “The future of narrative
reporting”. Delegates on this course will
get an insight into the implications of
developments like these.
Information, insights
and impact
This course draws on the work that CIMA
has been conducting during recent
years examining the development of
the finance function and the rise of the
“business partnering” role of the finance
team. It’s designed to help delegates to
improve the quality and effectiveness
of reporting to boards of directors and
other decision-makers.
The course examines the entire
“supply chain” of information, from
defining useful raw data, via analysing
it, to ensuring that it is communicated
effectively – and appreciated – at board
level. Delegates will gain an insight into
the steps they can take to ensure that
their finance team is seen as adding value
rather than cost to an organisation.
Investment appraisal –
introduction
This course is designed for those – both
inside and outside the finance function
– who have not undertaken an investment appraisal recently, or ever, and
who need a reminder of what the process involves.
It covers basic investment appraisal
techniques, including discounted cash
flows and how to take account of reallife complications in an investment
appraisal. The course also offers examples and case studies designed to help
delegates to put the techniques covered
into practice.
Investment appraisal
in practice
This courses focuses on the behavioural
aspects of investment appraisals, decisionmaking traps and other issues relevant to
delegates who are already familiar with
the mechanics of the process. It also gives
those taking the course an appreciation of
how to account for risk and uncertainty
in an investment appraisal.
i
Visit www.cimamaster
courses.com for more details
about this and all CIMA
Mastercourses.
Getty Images, Tesco
U
nlike their financial
reporting and taxrelated counterparts,
our management
accountancy courses
do not directly cover
areas subject to specific rules and regulations.
Management accountancy is constantly evolving and as such members
need to keep up to date with current
practice.
This course, which is updated every
year, is designed to bring delegates up
to speed with the latest developments
in management accountancy.
For example, current course content
focuses on topics such as activity-based
costing and the impact of sustainability
on both corporate reporting and internal
decision-making.
The course encourages a discussion
among delegates about emerging concepts and ideas rather than being a oneway lecture.
We invariably attract a diverse group
of delegates, which is to everyone’s benefit as they bring different perspectives
and backgrounds to the discussion.
The course is suitable for everyone
from recently qualified accountants right
up to those approaching retirement.
Advertorial
To discuss our recruitment solutions call us on +44 (0)20 7775 5590
59
www.cimaglobal.com/myjobs
Job of the month
Commercial
analyst
Jason Brown, manager of
the part-qualified division
at recruitment consultancy
Robert Walters, explains more
about a role that requires
strong business acumen and
excellent forecasting skills
Illustration: Denis Carrier/Dutch Uncle
C
ommercial analyst positions are currently very
popular roles. This is
because they incorporate an opportunity to
bring your opinion into
your work. So although reconciling and
closing are a key part of the job, it is
also about looking at the business and
making informed judgements and predictions about the market.
With businesses now thinking of
investing in the future more than they
were, we are seeing more commercial
analyst opportunities become available
at the part-qualified level. Employers
are currently looking to maximise their
investments and need people who can
act as a business partner, but who are
also cost-effective.
Although the job will vary depending on the organisation, the main
objective is to maximise savings and
minimise spending. As part of this, you
will have constant meetings with
stakeholders, reviewing daily and nondaily KPIs (both financial and nonfinancial) and monitoring cash flow
within the business.
The job is not for everyone though.
Making future predictions is not an
exact science – no-one can read the
future, after all – so you have to be
confident in trusting your gut instinct
to a degree. Your forecasts need to be
underpinned by a solid understanding of current market conditions. As
part of this you’ll need to take into
account your competitors’ performance
and external regulatory developments,
while considering dividends and shareholder pressure.
To be successful in securing one of
these jobs, strong systems experience
and analysis skills are essential. You’ll
also need to be confident in dealing
with other people in the business. For
example, part of the job will be convincing sales directors of your arguments
when they may not be fully on board
with what you initially have to say. You
will need to demonstrate on your CV
where you have made savings and managed projects of this nature.
Recruiting managers value people
with a CIMA qualification because they
realise that it arms them with the technical and business understanding to
make a difference in this role. Indeed,
most senior commercial analysts are
CIMA-qualified.
For part-qualified accountants, these
roles offer very exciting opportunities
in themselves and, beyond that, excellent career development potential. The
natural next step is into a full-on business analyst role and, from there, you
can specialise in a niche area (e.g. procurement, M&A etc) and really progress
your career forward in that way.
If you are interested in becoming a
commercial analyst or are looking
for any other
accountancy role,
contact Jason
on +44 (0)20 7509
8816 or jason.
brown@
robertwalters.
com or visit
www.robert
walters.co.uk
60
CIMA global events
Past events
New members welcomed
CIMA president Harold Baird welcomed more than 160 newly qualified
CIMA members and guests to the second new members’ celebration of
2011, held at Aspire in Leeds on 27 September. With speeches from Oliver
Laird, FD of UK General Insurance, Harold Baird and Charles Tilley, CIMA
CEO, (all pictured below), the new members were congratulated on their
achievements on completing the CIMA qualification and welcomed into
the worldwide community of chartered management accountants.
Accounting for Sustainability
forum takes to Wales
9 September, Wales
The Accounting for Sustainability Wales Forum
(A4SW) was launched by HRH The Prince of Wales
in September 2010 to provide a platform for the
development and understanding of sustainability
issues within the finance profession.
It brings together the UK’s leading accountancy
bodies – CIMA, ACCA, CIPFA, ICAEW and AAT – as
well as the Welsh government and the Prince’s
Accounting for Sustainability Project.
This key event heard from organisations
which are already developing reporting frameworks
and analysis of some of the challenges for the
finance function in gathering and presenting
information.
It was an informative event for finance
professionals across the public and third sectors
to network and exchange best practice.
CIMA Club event: The
role of youth in a nation’s
development
30 August, Chennai, India
Teams consisting of four members
each discussed how young people
can add more value and help
develop the Indian economy at
a recent event in Chennai.
Each team was given ten minutes
for discussion, and judged on
presentation, creativity, fluency,
grammar and professionalism.
CIMA member Ram Prakash was
the judge for the event and spoke
to the CIMA Club members (200
students) on the importance of
choosing the right qualification for
consistent career growth and the
relevance of CIMA across industries.
David Harris
holds workshops
6-10 September,
South Africa
David Harris, FCMA and
a former CIMA examiner,
was in South Africa to
facilitate students’
workshops in preparation
for the November exams.
He conducted the following
sessions: exam techniques,
scenario-based questions,
strategic-level common
case, T4B case study and E1
and E2 revision session.
All events were held at the
Protea Hotel Midrand, with
a total of 130 students
attending sessions on
different days.
David Harris held the
workshops for 130 students
over a three-day period
Industry
interaction
session at TCS
30 August, Mumbai, India
An industry interaction
session was conducted for
TCS BPO employees as a
part of their ILLUMINE
programme. Around 35 TCS
employees attended the
event. The host was Dinesh
Jain TOC, who shared his
industry experience around
the PE equity industry.
This was followed by a
presentation by Murali
Sundaram CIMA’s national
head of enterprise relations.
61
Coming
events
South Africa
CIMA Gauteng 2011
annual dinner
12 November, 6pm to 12am
The Country Club
Johannesburg Woodmead
Cost: R600 per couple (inc
VAT); or R400 per person
(inc VAT)
Black tie only
Join the Gauteng branch for
a festive night of elegance,
with live entertainment and
dancing to celebrate the
achievements of CIMA and
its members in 2011.
Contact johannesburg@
cimaglobal.com
UK
Achieving effective
business recovery in the
current economic climate
3 November, 6.30pm
Hilton Hotel, Bristol
What can be done when a
company is in financial
difficulty? At this event you
will learn the solutions and
strategies used to create an
effective recovery and
provide future growth.
Contact Suzanne Allen on
0117 9 609 734 or email
region.two@cimaglobal.com
Business partnering –
what does it mean in the
real world?
8 November, 6.30pm
Ramada Leicester, Leicester
www.cimaglobal.com/
eastmidlandsandeastanglia
CIMA healthcare
conference
9 November, 9am to 4pm
CIMA, 26 Chapter Street,
London SW1P 4NP
This Mastercourse is
designed to introduce
delegates to current hot
topics in the management
accounting field.
Cost: £250 plus VAT (£195
plus VAT for bookings
made before 19 October)
One-day conference for
finance professionals
working in the healthcare
sector on the impact of
consortia on health finance.
Contact 0845 026 4722,
email conferences@
cimaglobal.com or visit
www.cimaglobal.com/
executive
Bank of England – view of
the economy in 2011 and
outlook for 2012
15 November, 6.30pm
Willis Group, Ipswich
www.cimaglobal.com/
eastmidlandsandeastanglia
Smarter thinking,
smarter working
Manchester
plus VAT for CIMA members)
This Mastercourse will help
those wanting to know how
to use both halves of their
brain to get more from it and
think both logically and
strategically.
www.cimaglobal.com/
mastercourses/STSW or
email mastercourses@
cimaglobal.com
Personal impact events
24 November – London
8 December – Manchester
These day-long events
feature a mix of modules
covering key competencies
in first impressions, active
listening, dress code, public
speaking, assertiveness,
negotiation, executive
presence, “elevator pitching”
and personal brand
development. Presented by
top speakers this is the
perfect event to learn how
to make your impact.
Email kathryn.stubley@
cimaglobal.com
Pricing strategies
and value
Glasgow
Cost: £599 plus VAT
(£539 plus VAT for CIMA
members)
This Mastercourse aims
to help management
accountants and others
understand more fully the
complex interactions
between accounting,
psychology, economics and
marketing factors.
www.cimaglobal.com/
mastercourses/PRST or
cimaglobal.com
Data analysis – with Excel
London
plus VAT for CIMA members)
This Mastercourse offers
quick tips to better utilise
the power of Excel.
It involves analysis,
reporting, data manipulation
and searching, scenario
analysis and simple
automation.
www.cimaglobal.com/
mastercourses/DAWE or
cimaglobal.com
CPD Winter Academy
5-6 December, 9am to 5pm
CIMA, 26 Chapter Street,
London SW1P 4NP
(early booker rate of
£649 plus VAT on all
bookings received by
21 November)
This two-day event will
cover a wide variety of
topics. It also incorporates
a case study and time for
networking.
Contact Suzanne Allen on
0117 9 609 734 or email
region.two@cimaglobal.com
IFRS – a comprehensive
refresher
7 December, 9am to 5pm
London
members)
This two-day Mastercourse
provides an overview of all
the current standards.
www.cimaglobal.com/
mastercourses/IACR or
cimaglobal.com
Internal audit
14 December, 9am to 5pm
London
members)
This Mastercourse
will help increase
delegates’ understanding
of what the 2011 internal
standards require and why.
www.cimaglobal.com/
mastercourses/IIAU or
cimaglobal.com
Payroll, CIS and
employment law update
(joint event with AAT)
Village Hotel, Coryton,
Cardiff CF14 7EF
At this joint event
there will be three
sessions throughout
the day, running
simultaneously, on the
topic of payroll, CIS/IR35
and employment law.
www.cimaglobal.com/
mastercourses/IIAU or
email region.two@
cimaglobal.com
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 michaela.lambert-beresford@cimaglobal.com
62
The Institute
C
IMA recently announced
the results from a
successful third
sitting of the pilot re-sit
examinations.
Papers P1 (Performance Operations), P2 (Performance Management), E2 (Enterprise Management),
E3 (Enterprise Strategy), P3 (Performance Strategy), F2 (Financial Management) and F3 (Financial Strategy) were
offered via a number of quality tuition
partners, including BPP, Kaplan and
First Intuition, which allow students to
re-sit their exams and progress through
the qualification.
Additionally, papers E1 (Enterprise
Operations) and F1 (Financial Operations) were offered for the first time,
making all ten professional papers
available. T4 Part B Case Study on PC
was available for both first time and
re-sit students globally.
Robert Jelly, executive director
of education at CIMA, said: “CIMA is
pleased to note some strong student
performances, which prove that dedication and focused study can produce
exemplary results. While the results in
many papers were good, particularly
in the Case Study, there is considerable scope for improvement in Paper P2
(Performance Management).
“As of September 2011, CIMA began
offering examinations four times a year
in all ten papers in the professional
qualification, which will significantly
benefit all stakeholders. Also, CIMA will
be reviewing the scope of the pilot with
a view to making the March 2012 exams
available in more centres.”
Examination results letters will
include a breakdown of marks by question. This, together with the post-exam
guides, will provide students and tutors
with valuable feedback. Exam pass rates
Presidential
engagements
15 November IFAC meeting in Berlin
22 November CIMA Annual Awards
for September 2011 were as follows:
Operational and management
levels
P1 – Performance Operations 59%
P2 – Performance Management 31%
E1 – Enterprise Operations
75%
E2 – Enterprise Management
64%
F1 – Financial Operations
54%
F2 – Financial Management
50%
Strategic level
P3 – Performance Strategy
E3 – Enterprise Strategy
F3 – Financial Strategy
T4 – Part B Case Study
56%
49%
59%
65%
Elections to council 2012
Notice is given that, as the term of office
of the council member in each of the
following CIMA electoral constituencies
(EC) expires at the end of the annual
general meeting in June 2012,
elections will be held in February 2012.
Nominations for candidates (fellows) to
fill the vacancies may be made by six or
more members (three of whom must be
fellows) whose registered addresses are
in the EC concerned.
Nomination forms for candidates may
be obtained from Maggie Heasman, head of
corporate affairs at CIMA (+44 (0)20 8849
2235 or maggie.heasman@cimaglobal.
com). Forms may also be downloaded from
the CIMA website at www.cimaglobal.
com/About-us/Governance-charter-andbyelaws/Elections/, where further details
regarding the ballot process and the role of
EC
EC1 – Performance Operations EC2 – Performance Management
EC3 – Enterprise Operations
EC3 – Enterprise Management
EC4 – Financial Operations
EC5 – Financial Management
EC6 – Enterprise Management
a council member may be found.
Nominations must be received
on the prescribed form by noon on
Monday 9 January 2012, and should
be clearly marked for the attention of
the head of corporate affairs at 26
Chapter Street, London SW1P 4NP. Faxes
or scanned copies are acceptable, but
must be followed immediately by the
signed original.
The Corporate Affairs department will
acknowledge receipt of the nomination
form within 48 hours of delivery. It
is however the candidate’s responsibility
to ensure that their nomination form
has been submitted correctly and on
time, and that receipt of the form has
been acknowledged.
In the event that there are more
candidates than the number of vacancies
for each constituency, a ballot will
be conducted.
Current Member
R Bellis-Jones
R I Wilson
S T Stapleford
A R Wood
S M Hoof
J H Whitehead
F Windsor*
J D Callander
M Agate
H R Janagol
S M K Clackworthy
* Members who have indicated they do not wish to stand again
Illustration: Dmitry Litvin/Dutch Uncle
CIMA announces results
for September 2011 exams
63
Opinion
Family
matters
Mark Goyder, founder director of Tomorrow’s Company
New research looks at the special attributes of family businesses
W
hen riots hit the UK
in August 2011, everyone in the country was shocked
to hear that a furniture business in
Croydon, London, had been destroyed
by fire. The shock was intensified by the
knowledge that this was a business that had
been built up and nurtured by the Reeves
family over five generations. Ordinary
people have an instinctive and emotional
bond with family business because they
value this kind of stewardship.
In “Family Business Stewardship”, a
report published in June 2011, the Institute
for Family Business (IFB) and Tomorrow’s
Company describe the four principles of
stewardship and draw on some examples
from the UK and beyond to illustrate and
analyse the ingredients of successful family
business stewardship. The report concludes
with an agenda that family firms could use
to assess their stewardship. Tomorrow’s
Company defines stewardship as “the active
and responsible management of entrusted
resources now and in the longer term, so as
to hand them in better condition”.
Family businesses inherit key assets or
types of capital.
l First, family capital – an attachment to
their businesses that goes beyond a mere financial relationship and actually consists
of a personal identification between the
owners and the business. As a result the
business can have a clear identity and personality. As Alex Scott, chairman of Sand
Aire, puts it: “This business is me. It is in my
guts and it is in my demeanour and I live it
and I breathe it and I sleep it.”
l The second is people capital – the
strength of knowledge, skills, behaviours,
energy, loyalty and commitment that
exist within the non-family employees.
The people who work in a family business
often appear to feel a stronger identification with it, a sense of belonging that can
be reinforced by relationships and outlast
a single generation. As Jonathan Wild,
chairman of Betty’s and Taylors, puts it:
“Such is the strength of the culture that
sometimes non-family behave more like
family than family.”
l Thirdly, there is financial capital –
prudence combined with a sense of financial responsibility towards future generations. This can be manifested in dividend
restraint or ambitious investment timescales. Another benefit is a greater freedom of the owners and boards to define success in their own terms. As Peter Gordon,
chairman of William Grant & Sons puts it:
“Being unquoted allows us to make utterly
unique decisions.”
By their stewardship successful businesses also build social capital – the trust
and reciprocity embedded in relationships
through which is grown a deep and enduring link between the business and all those
around it – a link that was so evident in the
response from Croydon and beyond to the
Reeves fire.
L
ike all businesses, successful family businesses are
distinguished by their leadership, with a clear vision
and values, good governance and succession planning. There are four principles of stewardship and from these, IFB and Tomorrow’s
Company have developed an agenda to help
owners consider the extent to which they act
as stewards and identify areas for change.
Stewardship starts with clarity – about
why we are here; where we are headed, what
we stand for and what the shareholders
expect of the directors. That’s why Tomorrow’s Company calls Principle One “Setting
the course”. Many family businesses have
a charter. Owners define what they expect
from the family, the board and the management. We therefore ask family business
leaders whether their people are clear on
how they should behave.
Next comes the restlessness that marks
out all the great athletes. Principle Two
is about “Driving performance”. How do
family business owners benchmark themselves against the best is a challenging question that steward family business leaders
should ask themselves.
Principle Three is called “Sensing and
shaping the landscape”. How do they scan
and improve the environment around them
to the mutual advantage of the business and
its key relational stakeholders? Have they
built in the rising importance of carbon
costs into their model?
The best businesses manage the present
while investing in the future. They think
about succession as well as performance
management, capital as well as revenue,
reputation as well as results. We call Principle Four “Planting for the future”. They
put more money into training, infrastructure and marketing.
Family businesses are the first to admit
they are not perfect. With families, when
things go wrong, they can go painfully
wrong. However, that pain can be avoided, allowing firms to make best of what the
present generation of owners have inherited – with one eye on the next generation.
• For more, visit www.ifb.org.uk and
www.tomorrowsstewardship.com
65
CIMA CEO column
Accountants
must be allowed
to use judgement
Illustration: Masao Yamazaki/Dutch Uncle
A
ccountants are professionals and as
such should be expected to apply
professional judgement. Seeking
so-called simple, straightforward
guidance as to how to account for
and report on a particular set of
circumstances, rather than overarching principles
that can be applied across a range of transactions,
challenges this claim to professionalism. A rules
-based style of accounting guidance may seem initially attractive, but consider the position when the
exact circumstances of the transaction do not match
the example in the accounting standard. We are
left in a position of effectively having no guidance.
Better, in my opinion, to have a set of principles to
apply that may require some thought to select the
best accounting and reporting solution, but which
have widespread applicability.
For example, take leases – a simple standard for
lease obligations would say: “If you have a financial obligation arising from a lease arrangement,
then that obligation should appear on your balance
sheet.” What else do we need? How do we measure
the obligation? Make a judgement and disclose the
basis. Is it worth capitalising short leases that really
represent equipment rental? Probably not, as they
are likely to be immaterial, but again form a view.
These are all issues that the professional accountant should be able to make their own mind up about
based on some guiding principles. However, a mixture of distrust from standard-setters and a desire
to look for definitive answers and illustrative guidance in standards means that we have a standard
that is considerably longer than the sentence outlined above.
Of course, this is a significant simplification, but
my point is that professional accountants have to
be prepared to stand back from the formulaic
accounting solution and ask: “Does this treatment
best represent the underlying transaction?” This
theme was picked up by the UK Financial Reporting Council’s recent paper “True and Fair”. Issued in
response to questions about the applicability of this
fundamental principle to international accounting
standards, the paper emphasises that the concept is
as valid now as it has ever been.
The FRC paper quotes an opinion obtained from
Martin Moore QC, in which he states: “It does not
follow... that the preparation of financial statements
can now be reduced to a mechanistic process of
following the relevant standards without the application of objective professional judgement applied
to ensure that those statements give a true and fair
view or achieve a fair presentation.”
Some might wonder why I (and the FRC) refer
to the true and fair concept as there are those that
believe it has no place in a regime governed by international accounting standards. However, the principle does apply. For example, IAS 8 states that for
information to be reliable, it must be reported in
accordance with economic substance, rather than
strictly in adherence to its legal form. IAS 1 requires
departure from an IFRS if it does not faithfully represent the transaction.
So the true and fair concept is alive, but does
require application. Accountants should not hide
behind the rules, they should apply professional
judgement in the choice of accounting policies when
making valuations and determining materiality.
And in this respect materiality must be judged on
the basis of whether the item in question is likely to
impact the key decisions of the user of the accounting information. Finally, question your reporting –
does it faithfully represent the substance of transactions? If not, would additional disclosures help
readers of the accounts to better understand the
underlying transactions? But beware obscuring the
relevant facts with unnecessary disclosures.
Charles Tilley
Chief executive, CIMA
‘A rules-based
style of
accounting
guidance may
seem initially
attractive,
but consider
the position
when the exact
circumstances
of the
transaction do
not match the
example in the
accounting
standard’
66
CIMA and an entrepreneur answer your questions
This month... ‘CIMA offers courses in macroeconomics. I think the
subject sounds fascinating, but is it useful to know about GDP forecasts
and the balance of payments? Most senior managers don’t seem to care.’
CIMA versus Greg Marsh
It could be that the term puts
them off. “Macroeconomics”
sounds very academic
and theoretical. However,
senior managers would be
familiar with and use SWOT
analysis in their strategic
planning. Since half of this
framework – opportunities
and threats – arises from the
external environment, SWOT
analysis draws heavily on
macroeconomic data, such
as unemployment, GDP
or inflation. As do other
corporate planning tools
such as PEST or PESTLE.
Macroeconomics is
fascinating. It’s the study
of what influences an
economy, what makes it
fluctuate in the short term
and grow in the long term.
Many macroeconomic
indicators are very
informative. Leading
indicators help predict
what is likely to happen in
the economy – for example,
a slowdown in the housing
market seems to predict
a recession is looming.
Lagging indicators reflect
the impact the economy
has (after a few months)
on unemployment or
business failures. It will be
several months after the
economy has hit rock bottom
that these two indicators
are at their worst. Again,
useful to know.
Organisations base their
strategies (exploiting their
strengths and ensuring their
weaknesses barely matter)
on the opportunities and
threats they face. Analysis
of the macroeconomic
environment enables
organisations to appreciate,
and to an extent predict,
how investors, lenders,
suppliers, customers and
competitors will react to
interest rates, inflation,
stock market indices or
measures of productivity
and new orders. For
example, just think how
useful the Purchasing
Managers’ Index is – a basket
of measures which include
productivity levels,
employment and new
orders from customers and
is therefore really
informative about current
activity and confidence in
the manufacturing and
service sectors.
The best primer is CIMA’s
one-day Masterclass course:
Economics, An Introduction.
Louise Ross, CIMA technical
expert.
A. Greg
CEOs of big businesses have
good reason to worry about
fiscal policy, yield curves
and the like – they sell
papers, for one thing.
The challenge of
macroeconomics is that
it’s an abstract domain,
approached discursively.
At times that makes it feel
more like astrology than
meteorology. (Certainly
economists are about as
good as soothsayers at
predicting storms.) Unless
they start young, scrappy
entrepreneurial types rarely
have the patience for it.
I got lucky. Niall
Fergusson joined the faculty
at my business school just
as I arrived. An excellent
communicator with a svelte
line in corduroy suits, he led
the class through a series
of case histories on ailing
economies. It was dense,
dry, and abstruse. I found it
so interesting that I seriously
considered doing a PhD.
Whether or not I ever
end up running a company
large enough to need to
worry about big waves, what
I gained from studying
macroeconomics was
familiarity with a set of
concepts for understanding
complex, dynamic systems
– ideas I apply in various
contexts on a daily basis.
In that respect economics
is quite like another broad
and seemingly unrelated
academic field, empirical
psychology. That has also
unexpectedly helped me
understand how and why
people make decisions, and
in turn how to sell to them
more effectively.
So if you prefer freighters
to dinghies, if it’s an
intellectual hinterland
you’re after, or if you just
look good in corduroy,
you’ve nothing to lose except
your marbles.
Greg Marsh is the co-founder
and CEO of onefinestay,
a fast-growing start-up
which turns your home into
a hotel while you are away
on holiday (onefinestay.com).
He is a former venture
capitalist with Index Ventures.
He was a Fulbright Scholar
at Harvard Business School,
where he graduated top of
his MBA class.
Do you have a question
you’d like to pose to CIMA
and a top entrepreneur?
Tell us at questions@
fm-magazine.com
Illustration: Dmitry Litvin/Dutch Uncle
A. CIMA

Financial Management - CIMA Financial Management Magazine

Transcription

Similar documents

ACCA Tax Dialogue with Dr. Choong Kwai Fatt CIMA takes root in

ACCA launches a new name for its sustainability awards CIMA signs

Cima - Biodiversity Journal

engagement - Malaysian Institute of Accountants

May 2012 - CIMA Financial Management Magazine

Management Accounting Qualification

Jimcor Agencies - Montvale, NJ - I

Debt Service - Rocky Point High School

November 8, 2015 - Sacred Heart Catholic Church