Management Accounting 101

management-accounting-101

Financial Accounting provides financial reports for external stakeholders, in mandated formats, based on historic actual performance at the macro level. Management Accounting, in the first instance, provides predictive information, extending down into the micro level, for the CEO and operating management. As the reporting year rolls on, management accounts use flexible budgeting to link actual performance with predictions to provide genuine, “this is how we are doing compared with plan” information and in so doing, directs management’s attention to any factors inhibiting planned performance.

The Management Accounting process can be broken down into these building blocks:

Costing and Pricing

The overall financial performance of an organisation is the sum of the performances of all products or services sold, the performance measure being revenue minus cost.  This calls for an identification of revenues and accurate knowledge of costs by individual product.

A tabulation of these revenues and costs enables management to sort the wheat from the chaff, and given that the tabulation may comprise a substantial number of line items, the use of Pareto (80/20) analyses is usually imperative, as is the ability to query the cost composition of ostensibly, problematic line items by way of drill down into the costs.

Budgets Based on Volume and Price

Budgets should be developed from the product/service level taking into account individual product volume, pricing and costing. Likewise, when conducting variance analysis, actual volumes invoiced should form the basis of a predictive “flexed budget” so that volume, pricing and costing variances can be identified rather than a bland dollar value analysis which does not recognise changes in product mix, price and costs.

Cash Flow forecasts and Funds Flow reports should also be prepared and any variance analysis should include these funding aspects.

Return on Investment & Sensitivity Analysis

Ultimately, all businesses have the goal of generating a “reasonable return” which raises the questions of what is a reasonable return for the individual business, what is the actual return and what are the anticipated future returns?

By using sensitivity analysis, the management accountant can assist management to focus on those areas of the business that will generate the best reward for the least effort, the Pareto Principle at work again!

 Financial Management

Whilst a specialty in its own right, Financial Management forms an integral part of Management Accounting and includes funding issues, dividend policy and cost of capital.

In conclusion, practitioners can use Management Accounting to assist clients to focus on Value Creation and at the same time, reduce and eliminate Value Destruction.

Author: Geoff Storey CPA CA, Alliance Advisor with ATL Network

Building the right board

board-advisory

Video: Setting up Boards to drive performance

Video: Practitioner Panel – Providing a Board Advisory Service

To lack another set of skills is not a criticism. What is important is to recognise the value and validity of other skills in other people and to combine the people with the necessary skills to attain the collective objective.

J.B. Reid, Commonsense Corporate Governance, Sydney: AICD, 2002

Board composition is a broad term that encompasses issues such as who is on the board and the skills mix of the board. It involves both structural and cultural issues and board effectiveness depends on obtaining the right mix of skills and experience. Board composition varies significantly between organisations and is influenced by:

  • Legal requirements including the organisation’s constitution and purpose;
  • Board size;
  • The balance of executive and non-executive directors;
  • Director competencies;
  • Terms of office for directors; and
  • The structure of the shareholding or membership.

Stable boards with long-serving, committed members will have the advantage of a thorough knowledge of the organisation and its mission. However, it is important that the board represents and reflects the interests of its owners/members by injecting some new blood occasionally. Selecting new directors to build a board that is right for the organisation is not a simple task.

Director selection

More and more boards are engaging in more structured and professional processes for director selection. Such processes will generally take into account:

  • Alignment of skills with strategic direction;
  • Value added to the current board composition;
  • Cultural fit with the board;
  • Time it will take to be an effective contributor; and
  • Succession planning.

Building the right board requires an understanding of director competencies, which involves consideration of the directors’ experience, skills, attributes and capabilities. Director competencies encompass two distinct areas: technical competencies and behavioural competencies. Technical competencies are a director’s technical skills and experience (“what you need to know and are able to do”) such as accounting or legal skills, industry knowledge, experience in strategic planning and corporate governance. Behavioural competencies are a director’s capabilities and personal attributes (“how you apply what you know and your personal and interpersonal skills”) and include, for example, linkages to the “ownership”; an ability to positively influence people and situations; an ability to assimilate and synthesise complex information; time availability; honesty and integrity; and high ethical standards.

Boards often pay less attention to director capabilities that may not be evident in a CV that lists the director’s qualifications and experience. Consideration should therefore be given to whether the board needs a mix of directors who can:

  • Assimilate and synthesise complex information quickly;
  • Develop and deliver a cogent argument;
  • Be innovative and think beyond the square; and
  • Understand issues at both the detailed and “big-picture” level.

All directors need to have the ability to make points succinctly and effectively at board meetings and not be either the “silent” director who never speaks or the “loudmouth” director who seeks to dominate all discussions.

Prior to reappointing, nominating or appointing individuals as directors, the board should:

  • Consider what competencies and skills the board, as a whole, should possess, recognising that the particular competencies and skills required for one board may not be the same as those required for another;
  • Assess what competencies and skills each incumbent director possesses. Since it is unlikely that any single director will possess all the competencies and skills required, the board should be considered as a group in which each individual makes their own contribution;
  • Consider the character of directors and their fit with the current board culture. Some attributes worthy of consideration include self-awareness, integrity and high ethical standards. Boardroom dynamics will be impacted by the personalities and behavioural types present, so attention should also be paid to these qualities.

The Board competency matrix shows a simple competency matrix that can be employed to assess the board’s capability requirements against the mix of current directors.

For more information on board skills/competency analysis, see http://www.effectivegovernance.com.au/how-competent-are-your-directors/.

Author: James Beck, Effective Governance

Delivering Out-Sourced CFO Services

CFO Financial Performance

When agreement is in place for out-sourced CFO services to be delivered, it is critical to the success of the assignment that the external accountant gains as much background information about the client as soon as is practically possible as well as specific financial goals, if any exist.

A good starting point would be to analyse the most recent set of annual financial statements together with any interim financial statements that may be available. The analysis will reveal key points about the business such as sales trend, gross margin, profitability, cash flow status, working capital management, financing profile ie debt/equity etc.

Where multiple branches, departments or subsidiaries exist, similar information for each trading entity should be obtained and analysed. At this initial stage, the information may, of necessity, be high level and is intended to give the virtual CFO an insight and better understanding of the financial status, both good and bad, of the client. Being aware of any crucial issues facing the client, such as bank pressure, is also essential. As the CFO becomes more familiar with the business, he/she will in turn, seek more information by “drilling-down” into the financial records.

The more interaction the CFO can have with the business owner, CEO and senior management the better, as much relevant information can be gained via informal discussions. Likewise, walking around, observing and interacting with operating staff will gain more invaluable information, often in contradiction with what management thinks is happening.

Don’t ever overlook the value of developing working relationships with key personnel such as the CEO, GM, accounting staff and if relevant, with the bank manager.

If the client doesn’t have a current budget, encourage and assist them to develop both an operating budget and cash flow forecast. These will be extremely useful in assisting the client to monitor future financial performance. With time, these budgets can be developed around branches, departments, subsidiaries and in some cases, products.

Investigate the accounting system as to both suitability and correct operation as many systems are either out-of-date or poorly implemented. Often, if the accounting system is adequate, it often doesn’t take much tweaking to improve the reporting. Equally, most modern accounting systems have easy to use report writers allowing the CFO to obtain customised reports that will provide different insights into the financial performance. Another aspect to consider is whether the chart of accounts requires modification so as to improve the quality and content of the reports.

Encourage the management team to meet at least monthly to discuss an agenda that includes the prior month’s financial performance including variances from budget. Review and, if necessary, revise the budget for the remaining months of the current budget cycle.

A virtual CFO has a very privileged role in an organisation gaining a wide range of insights into how the business operates. Drawing on his/her broader experience, the CFO can make a significant contribution to the client’s underlying financial performance and related value enhancement.

Author: Geoff Storey CPA CA, Alliance Advisor with ATL Network

Provide Virtual CFO Services to Clients

Taste steak

 

In today’s dynamic business environment, accountants in public practice, are ideally placed to offer CFO services to their clients. As trusted advisors, accountants typically have a good understanding of their clients’ businesses and can use their wealth of experience to “add value”.

The ever changing nature of the public accounting environment necessitates that practitioners continue to diversify and to reduce their dependence on compliance on routine tax and accounting work. By offering CFO services, accountants create the opportunity of introducing a new fee stream and at the same time, introducing new and challenging work for their staff. Typically, larger and more proactive clients will be receptive – remember, if they have only tasted sausages, they don’t know what steak tastes like! If you don’t offer these value adding services, perhaps one of your competitors will! Likewise, this service can also be offered to non-clients with the possibility of them becoming clients.

Many practitioners under-estimate their own personal skills set and experience, creating an uncertainty and lack of confidence about providing non-traditional services. Whilst recognising these issues, also realise that it is not difficult to develop related financial management skills.

To this end, we suggest that practitioners “practise what they preach” by first focussing on their own practices. By systematically adopting and working through the following steps, practitioners will, not only be gaining a better insight into their own firms, but will also be preparing themselves for working with their clients:

  • Develop a Strategic Plan
  • Develop a Business Plan
  • Develop a Succession Plan
  • Develop a “Three Way” Budget and Cash Flow Forecast including Profit and Loss, Balance Sheet and Cash Flow projections
  • Conduct a Business Health Assessment identifying problems and opportunities
  • Measure Return on Investment and set realistic target
  • Assess internal systems, costing and pricing

We encourage firms to consider the above opportunity and if considered worthy, to develop a plan, including dedicating time and internal resources to achieve a positive outcome.

Author: Geoff Storey CPA CA, Alliance Advisor with ATL Network