(Originally published on the OUBS Blog)
This is not really a summary of the books content but only a summary of the terms used and their definitions.
Management by Objective
defines and analyses the objectives of an organisation in such a way that they become specific targets for managers.
- clear reporting structure
- consensus on objectives
- budgetary control system not as constraint but as guideline to achive company goals
- measurement and reporting system with joint discussion
- regular periodic reviews
Contribution or Marginal Costing
What each sale contributes towards the overheads.
Providers a more flexible approach and good to look into relationships on price, cost and volume.
These help to ensure that the information used for formal accounting records is complete and accurate and that the assets of the organisation are properly looked after.
- arithmetic and accounting
- auth and approval
- sgreagation of duties
- supervision and training
-organisation and management
Cash flow versus matching principle
A cashflow statement is prepared by comparing the cash figure on the opening day with that of the last day of a period, and detailing all the pluses and minuses that will cause or have caused the cash balance to change.
This is far less subjective as recording tangible inflows and outflows in relation to the matching principle.
Matching principle statement are possibly “truer and fairer” but are based on a mix of actual amounts and subj. values.
Analysis of survey data
cross-tabulation: data that falls into two dimensions, break it up into smaller tables
frequency distribution: frequency the data points fall in one category
grouped frequency distribution: group some values, easier to read
discrete (only specific values) and continuous data (should not overlap)
cumulative frequency distribution is a running total and should be treated complementary
Generating outputs required inputs:
Tangible assets and intangible assets, which are inputs that organisations need to create outputs.
Long term and short term resources
Inputs are transformed with all of those.
Different kinds of budgets
There is a natural tendancy to start with preceeding year’s firgures = incremental budgets. It’s simple and cheap. Imperfections are carried on to future years and compounding occurs.
As people tend to exagerate => at the end money left and suddenly you spend it => hockey stick effect
ZBB (zero base budgeting) tells budget holders to forget last year, identify new targets and the level of resources. Prepare several budgets for minimum and higher levels.
This includes a high level of learning and commitment, enhances innovation, is responsive to change but expensive in management time.
Rolling budgets are very flexible, come from day-to-day part of pyramid as day-to-day should not need to worry 1 year ahead. 12 months broken down in 4/4 and end of month 1 you revise month 4 … no big bang.
Make or buy
Should a service or product be bought in or provided in-house. This involves relevant/non-relevant costs.
Stop printing internally, e.g. opportunity costs because machines not sellable, but what could be gained that is possibly non-financial
Working capital rations
Current ratio = current assets / current liabilities = too few assets after meeting liabilities is bad as well is wasting resources and risk of theft and storage space or products obsolete
Quick ratio = liquid current assets / current liabilities
Stock turnover = annual cost of stock sold / average stock balance
Deptors turnover = annual account sales / average deptors ballance
Creditors turnover = Annual account purchases / average creditors ballance
deptors turnover should be higher than creditors turnover
Managers should be held responsible for those costs and revenues they are able to influence/ control.
Managers should also have an influence on budgets for those items for which they should be held accountable.
Problem: charge for office space without control on the rent?
Reponsibility centers are used:
Cost center: office manager
Revenue center: e.g. fund raiser
Profit center: e.g. project manager
Investment center: e.g. divisional manager
Gear everything to achieve organisations goals.
Budgets require operating objectives that are SMART. Carefully set a level of performance that each manager is expected to reach, pay attention to monitoring and react… control loop.
Budgetary control system should be flexible to allow budgets to be changed if necessary
Operational leverage / gearing
This is the relationship between fixed costs and total costs.
High fixed costs are an opportunity and the threat.
The lower the fixed costs the higher the contribution. the higher the fixed costs the more fluctuation you have in your profit/loss when volume changes.
Degree of levelrage = contribution / net profit
Gross, Operating, net reported profit
Gross profit = sales from products – cost for raw materials (variable costs)
Gross profit / items sold = gpm
Operating Profit = Gross profit – (operating expense + depreciation) ) = the surplus you make on your day-to-day operations
Net Profit = Operating profit – bank loand interest (financing costs) = because bli is not classed as an operational expense
Net profit => owners (dividends) + profit taxation, repayment of loand capital + retention
Cost of stock sold / sales = cost of sales
100 – cos = gross profit margin
Financial performance ratios (secondary)
AUR (Asset utilisation ration) = Sales / Operating Assets
0.94 woiuld mean 94 cents for every $1 employed. opperating assets include fixed assets
ROS (return on sales ratio ) = Operating Profit / Sales
With good cost control the ROS would increase.
Data versus Information
Data has little purpose on it’s own.
Information is data that has been made usefull.
It is the interpretation of data in the context of someone’s task that turns data into information (or fails to do so)
Situations: one off + regular, open or closed
Problems: not gathered, not passed on, lost, corrupted, delayed
Relevant: style, urgency, complexity, sensitivity, let the necessary through
Example: A good example is statistical analysis which turns raw data into information and gives it meaning
Hard v. Soft Information
Hard: results, statistics, procedures, trends, producitivty levels
=> well defiened scale stored with precision
Soft: Estimates, feelings, opinions, judgements, values
Very little is 100% hard or soft
The point at which an activity generated neither profit nor loss.
Total fixed costs / contribution per unit = number of units sold to break even
In a graph you would put:
A: sales line
B: variable cost line
C: fixed cost line
D: total cost line
cross between sales and total cost line is break even. There can be several (stepped costs).
Margin of Safety is assumed level of activity – BEP
Fixed, Variable, Stepped Costs
If you have fixed costs you need to generate more units of products or services to keep unit costs down taking adv. of the economics of scale.
Cash is no different from other resources and needs to be managed.
Working capital = net current assets = Current assets – current liabilities
The Working Capital Cycle reflects the investment of cash in current assets and current liabilities. In this cycle the amount of cash invested need to be, as far as practible, minimised and the speed at which cash moves through the cycle be maximized.
- Managers: planning, controlling, decision making, stewardship
- Employees: Future job prospects, comparison with other corps.
- Management Board / Governors: Responsibility and accountability to stakeholders for financial performance
- Owners/shareholders: Calculate return on invested capital, holding management accountable for financial performance
- Lenders / Financiers: repayment and interest
- Suppliers: Likelihood of being paid, future growth/survival prospects
- Customers / Clients: prospects for getting stuff
- Government: Taxation, Statistics, Regulations
- Local Communities: Source of employment, Pollution
- General Public: context of employment or environment
- Competitors: Knowledge to inform their own strategies
Three shaping factors exist
- connect each manager to financial performance of the company
- internal control
- interest of different stakeholders
Correlation and Regression
Connected to scatter diagrams to look for a relation, both identify and quantify
Correlation: when a relationship exists between the factors in which an increase in one variable gives a corresponding increase in the other, this is known as a positive correlation.
scatter diagram: dependant value on y and independant on x
correlation does not mean causation, for that you need to discover the mechanism
Regression analysis is used to describe a realtionship between two sets of data in terms of a mathematical equation, e.g. linear, to predict future events.
Direct v. Indirect Costs
Direct costs are those associated with a specific activity or output.
Indirect costs (= Overheads) are those that cannot be identified with or allocated to a specific unit of acitivty or output and needs to be shared between different ones.
Arithmetic Mean = sum of Xi devided by i.
Example average visitors, potentially misleading with extreme data
Mode = the data that occurs most frequently; two most populor = bimodal; 3 = trimodal; gives typical value; e.g.: modal waiting time; limit: only one typical value; advantage: can work on categories
Median = arrange all recorded values in order of magnitude and take the middle one; unaffected by extremes; e.g.: roles of bakery
Requirements for information provision to customers
The better informed the public is about your services, the more satisfied they will be.
1 Quality is good to you
2 Assessing the information requirements
4 Collaboration with others in information provision
5 Equal opportunities
6 Management policy
Input is transformed to an output and you have a feedback loop
Being involved => building of trust
info gathered as part of the work in which staff is involved
Input: buildings, staff, money, products
Output: satisfied customers, balanced books
Information system is data transformed to information
Tabulation and Aggregation
Tabulation is the arrangement of data in the form of a table or an orderly scheme.
- being methodical is important
- you make it accessible for further analysis
- why collected and what to do influences layout
- possibly use graphs or charts to convince others
Aggregation is the totalling of figures. A problem can be that you went too far and will no longer convey useful information. e.g.: the total number of sick people on a given day,
Something missed out due to taking the opportunity
e.g. you loose your salary if you become independant
Costs that cannot be retrieved if you take the decision or not.
e.g. feasibility study.
Source of finance and resources
The bs is a snapshot in time of the net worth of the company
The balance sheet uses the mathin principle for matching sources of finance to the resources founded by those sources
Why do we need balance sheets?
- management information and control
- information to outside parties
- stewardship responsibilities
When any resource is scarce, managers should maximise the contribution from using that scarce resource
Budgeting (Budget , Budgets)
Budgeting is a management function not a simple financial function.
Responsibility is sometimes delegated to the budget officer sometimes you have a budget committee then budget officer is the secretary to that one.
Purpose: planning, controlling, communicating, co-ordination, motivation
A budget is a clar statement of an organisation financial plans, which provide a sense of direction for its staff
Why are ratios usefull
Ratios can be compared to other ratios:
- predetermined standards or targets
- same in other period
- same in other organisation
- or best practice benchmarking
The four Es
Economy: how cheap can an input be purchased, cost factor
Efficiency: relation between inputs and outputs, ratios, doing things right
Effectivenesss: measure of outputs, ability to meet customer needs, doing the right thing
Ten qualities of good information
1 Relevant: interesting does not equal relevant; remove self evident
2 Clear: clear to those who use it
3 Accurate and Precise: sufficiently accurate related to level of decision making
4 Complete: enough for a rounded picture of the situation
5 Trustworthy: have an idea about the level of uncertainty
6 Concise: free from all elaboration and superfluous data
7 Timeliness: available when it’s needed, when decision taken
8 Communicated to the right person
9 via the right channel
10 less costly than the value it provides
Charts, Graphs, Diagrams
Bar chart: number of seperate bars whose heights correspond to the sizes of each of the groups being illustrated
Component/Stacked bar chart: allows an extra dimension; straightforward (when totals are important) or percentage (for relative comparison)
Line diagrams are usefull to identify patterns and trends. If x=t then it is called time series; these are easy to understand and ideal for direct comparison, but can get confusing if there are too many lines.
Comparing to a benchmark = indexation
Pie chart: proprtions that make up a whole.
Scatter diagrams: Used when suspected that connection between two sets of data exists.
The spread around the middle.
The range are the relevant extreme points
IQR is the inter-quartile range: devide the distribution into quartiles (quarters) and then only consider the span of the middle two quarters. Attention: do not use e.g. temp over 75 to be avoided.
standard deviation: s = sqare root ( sum of x^2 devided N) where x is the deviation.; this shows how much variation you have in your data.
This reflects changes in the level of activity, e.g.: budget done for 10k sales but real sales are at 15k => flex budget to 15k
Overall variance = original budget – Actual budget
Spend variance = Flexed budget – Actual budget
Activity variance = Original – Flexed = overall – spend
By comp. flexed with actual you are comparing in activity terms, like with like. Diffs can only be expenditure based not activity based in that case.
Financial performance ratio (primary)
ROCE (primary ration, return on capital employed) = profit before interest and tax / total capital employed
Total capital emplyed is owners investments (capital + reserves) and long term liability loans (bank loads and other long term)
Measure the surplus (return) earned on commercial activity.
ROCE improvable by more pfoti per item or more goods sold.
AUR X ROI = ROCE
elevant and non-relevant costs
If you take a decision you need to look at all relevant cost, those cost/loss of revenue, you would have/not have if you were to take the decision.
non-relevant costs: sunk costs
+ cash inflow
+ cash outflow
- cash inflow
- cash outflow
Allocation = assign to one cost unit (e.g. beds)
Approtionment = spread over several cost units
cost centers to group indirect costs
in absorption costing each product, serivce or activity receives charge for overheads
Activity based costing (ABC)
attempts to charge overheads to costs on the basis of activity relationship. Activity that results in overhead is the cost driver and the activity related to product or service is the activity driver.
Pyramid of Purpose
The broad strategic purpose of the organisation as a whole, but that this needs to be supported by a series of sectional aims.
Company has a mission, vision and values which are long terms
Then we have a few aims and goals and objectives which are medium term as well as targets for our day-to-day activities.
Reasons for why people don’t get involved in budgets
Lack of influence
Building in slack
Lack of understanding
Constraint on initiative
Bitter past experience
Budget Planning Cycle
Preperation: all budget holders make their targets
Collation and iteration: check between budget holders and overall company financial goals, revise… can be frustrating
Normally this is done every year, internal there should be shorter periods. Continuous or rolling budgets so that you always have a full year budget.
Achievalbe sales are first limiting factor = 1. sales budget which includes market size, growth, selling price, competition, effectiveness of ads, …
Also by sales manager do a selling expenses budget.
Then production plan, provided machines there, no stock from outside => Budget level of production = budget level of sales – planned reduction in stock
=> cost of production budget (include labor, materials, overheads) + planned addition to stock
=> Capital budget (possible new machines)
=> Master budgets: cash budget, profit and loss budget, forecast balance sheet
Why managers need financial info
- decision making
is likely based on absorption costing
1. calculate unit cost at normal capacity level
2. Add “mark-up” for reasonable and sustainable profit margin
used when there is no available market price or when there is a preferred supplier
rate of return pricing = the percentage surplus an investement makes, e.g. interest
resources employed x required rate of return / unit of output cost x sales value = percentage mark-up
4: Prudence, consistency, going concern, accruals
These govern the construction and presentation of financial statements
Mix between legally enforcable regulations set by governments and quasi-legal guidelines set by accountancy bodies.
Prudence: anticipate no profit or surplus and provide for all possible costs and losses
Consistency: do it the same every time or explain change
Going concern: we presume the company continues operation
Accruals concept / matching principle: rev. and cost accrued, recognized when earned
True and Fair
If a method of attaching a monetary value is widely recognised and can be checked it can be said to be both true and fair.
financial statements will include such items, e.g. FIFO, LIFO, depreciation
Formal public financial standards of what is truth and fairness.
Accountants only establish a cost not the cost based on judgement and assumption
Depreciation can be straight line or reducing or declining balance method.
remaining value = net book value
estimated useful life = how long is it more cost-effective not to replace
Estimated residual or scrap value = what can it be sold for
pattern of expected benefits = how should it be depreciated