Table for Understanding Qualified Phrases

PHRASE	EXAMLE	MEANING
“SUBJECT TO”	“Subject to continuing support from its bankers or funders…”	Without support from its banks the business will fail
“EXCEPT FOR”	“Except for the valuation of certain stock items…”	There has been a fundamental disagreement between the auditors and management about something.
“DO NOT”	“The accounts do not…”	The accounts have not been properly prepared.

Reading Directors’ Reports

When annual accounts are published the company’s directors often make comments on the results. Because the law of disclosure is strict, whatever is said must be objective rather than propaganda-led. Pay particular attention to salaries because companies are very sensitive about what they pay their directors since salaries must be commensurate with overall corporate performance. (Fat Cat Syndrome).

Focusing On Accounts

Copious notes are usually attached to the main financial statements; e.g. the balance sheet, profit and loss account, cash flow, recognised gains and losses, and movement in shareholders’ funds. Read them together with actual financial statements even if they are daunting because they are part of the integral message that you must understand. 465.

Tips for examining Directors’ Reports

1 Examine reports and notes carefully to uncover important details.

2 The larger the organisation the greater the scope for information.

3 Read reviews by key directors’ optimism about company prospects.

4 Dig into the notes for interesting further details and information.

Broadening your Knowledge

Modern organisations operate internationally, yet despite increasing globalization, accounting practices and formats still differ significantly around the world. Understand these differences in order to pinpoint where problems can arise. Because accounting measurements are dependent on rules of individual countries, this is often a hindrance to international business transactions, because investors must negotiate cross-border obstacles where there are differences in the concept of profits and taxation that result in economic distortions. 466.

Continental Europe has strong legal framework of accounting plans and commercial codes that contrast with the UK and US which combine legal principles with a separate set of accounting rules.

Some countries require the figures in financial accounts to be the same as for tax purposes, while in other countries no such connection is needed. The need for open information for shareholders has ensured that appropriate financial statements have been evolved.

Political and historical factors also play a part in former colonies that were influenced by the UK system.

The Pragmatic UK & US Approach The European Controlled Approach

UK Influenced US-Influenced Tax-based Law-Based

UK US Italy Germany

Ireland Canada France Japan

New Zealand Belgium

Australia Spain

Countries influenced by the UK and the US tend to have a more pragmatic approach to accounting because there the onus (duty) to inform shareholders. In other parts of the world and in Japan, strict taxation and legislation rule out subjectivity or deviation so that accounts are less useful and informative to interested outsiders.

Harmonising Accounts

There is now pressure to harmonise accounting in the world. For the last ten years, an international accounting body has been working to produce International Accounting Standards (IAS). The IAS now provides the accounting bench-mark world-wide that is now used by many multinationals. Some companies even use a second Version to prepare their accounts.

The first version will comply with GAAP (General Accepted Accounting Principles) of the country in which the organisation is based, and the second version will be in accordance with (IAS) International Accounting Standards. The EU (European Union) is a useful example where law-based harmonisation has taken place, but no GAAP convergence has occurred. 467.

Advice to you as a Manager on Accounting

Accounting is technical by nature and there are many complex issues facing accountants. You as a manager however its useful to know where problems of accounting can occur and how to deal with them.

Tips for you as a manager

1 Grasp the essentials, not the details of technical accounting to help you understand accounts.

2 When dealing with unfamiliar technical issues, seek advice from expert accountants.

3 When the cost of a future event will seriously hit profits alert users of accounts. 469.

4 If significant financial impact is pending on the balance sheet alert users of accounts.

Recognising Creative Accounting. 470.

An accountant is expected to present company figures in the best possible light, while at the same time being accurate and truthful. You as manager, you must be able to tell when figures are being manipulated, because manipulation of figures is a sign of creative accounting (cooking the books).

Every organisation has its own agenda for creative accounting, e.g. a large company wants to report bigger profits and a smaller company wants to pay less tax.

Creative accounting does not necessarily involve adjusting (changing) figures, because choosing an accounting a particular date can paint a rosy picture, or extending an accounting period can bolster profits or even confuse the true financial picture; failing to file accounts in time can hide the truth. Which method is used will determine the intention

“Smoothing the Ride” is the jargon used for Creative Accounting

Making profits is unlikely to be a smooth process, therefore, a creative accountant will “smooth out” peaks and troughs to show a steady well-managed line of company profitability. On the profit and loss account, “watch out” for high number of invoices at the end of the year; this is a method of boosting profits and postponing invoicing until the start of a new accounting period ensures that tax payable later.

A business can lower income by recognising too many costs, or raise its income by not recognising enough costs. To determine disproportionate activity (cooking the books), look at the first month of the next accounting period; discrepancies will usually be compensated for in this first month after cooking the books. 470.

Points for you to remember

1 You should always strive to form an opinion on the financial health of your organisation.

2 Provisions have traditionally been devised for “smoothing out” the fluctuations in profits.

3 Appreciate the principal accounting logic behind each technical treatment of accounts.

4 Accounts should give a picture of the whole business entity and its subsidiaries.

5 Accounts of groups of companies are sometimes called “consolidated” accounts. 469.

6 Accounts can be based on slightly cooked books to completely burned books. 471.

7 Always seek technical advice if you suspect cooked books, don’t take that Risk.

8 Remember that the balance sheet and the profit and loss work together.

9 Check if creative accounting is suppressing or increasing profits.

10 Check the first day of the next accounting period to see whether large cheques are subsequently dispatched to suppliers.

11 Remember the principle that when profits increase, the balance sheet increases too, because what affects the profits also affects the balance sheet. (Ying and yang principle).

Benefiting from Management of Flexible Accounts 472

The fact that management accounts need not follow any rules makes them flexible but more open to error. You must recognise the draw backs of internal accounts and you, as manager, can improve the information they contain. Prepared and distributed internally within the organisation, management accounts are governed by the needs of managers.

They are used to help keep control of, and make decisions regarding the everyday running of a business and they often contain more than just financial information. They generally focus on four main areas of: Past-Score-Keeping; Present Problem Solving; Present Controlling and Future Planning, whereas, auditors and accountants focus on the financial viability and health of the company as going concern.

The content of management accounts should reflect what managers want them to show, namely how well the business has performed according to plan and what corrective action should be taken if that is necessary

Table for Comparing External and Internal Accounts

EXTERNAL ACCOUNTS	INTERNAL ACCOUNTS
These are published externally and available for anyone in public to read	These are distributed internally within an organisation and kept confidential
They must conform to legal requirements and GAAP principles	They are not bound by any rules or regulations and can follow any format
These are generally published once or twice a year and look backwards at the past year’s results.	They are produced on a regular basis and focus both on previous and future period’s results
They reflect the financial reality of what has happened in an organisation.	They provide a means of controlling the financial side of an organisation now and into the future

Drawing Financial Conclusions on External and Internal Accounts

A useful exercise is to attempt to reconcile External and Internal figures because external financial statements will inevitably be more accurate. However, if external differ seriously from internal statements, you must be concerned.

Tips for managers

1 Understand the purpose and use of management accounts.

2 Always remember that management accounts have no standardised rules.

3 Reconcile external to internal accounts by examining your company’s aims.

4 Ensure that accounts are accurate and more than just invoice adding tools.

Assessing the Quality of your management Accounts

It is essential for managers to have excellent user-friendly financial documents. If your management accounts are substandard, take steps to improve them immediately. Think of the quality of management accounts as a spectrum with, at one extreme, traditional accounting statements, and midway containing targeted management, and at the opposite end, with manage-led accounts containing indicators tailored specifically to your particular needs.

Make sure that your organisation is evolving in the right direction by asking your accountant what information is available internally that will help you in your role as manager. Discuss ways of presenting the accounts to make it easy for you to use. 474.

Using Performance Indicators

To ensure that the information you receive from your accountants is valuable, use (Key Performance Indicators) such as sales per employee, cost of sales per customer, marketing costs per new customer, labour cost per euro sales revenue and percentage leads converted into sales. These will enable you to judge if the accountant’s financial documents are good enough to help you manage your company successfully.

Advice to managers

1 Consult with colleagues to decide which indicators would be most valuable in helping you to monitor and improve your performance.

2 Your traditional financial accounting information should be up to date and bullet-proof.

3 Take responsibility for improving management information.

4 Consider using score-card-type performance and other performance measures.

5 Under customers, think whether you are pleasing them, do they come back, and what is your market share

6 Internal business processes; how can you improve them to better serve customers?

7 Learning and growth; are you equipped to deal with customer and business demands?

8 Financial; what is the financial health of your organization?

The score-card method suggests that if the first three aspects in this list are right, the financial health will be right too. 475.

Making Financial Decisions

For a business to succeed it must use focus on using accounting concepts and techniques that that look forward to the future. To do this you need to rethink the way the way that you look at figures. Managers must learn to learn to adopt a new forward-looking mindset.

Traditional accounting uses historic costs and bases all analysis on those figures. However, when looking at decisions into the future, just adding up figures does not give the right answers, it involves envisioning the future with the eyes of the mind rather than the eyes on your face.

Table for Comparing Past and Future Accounting Needs

PAST NEEDS	FUTURE NEEDS
Traditional accounting uses historic costs and what has happened in the past.	Future decisions ignore sunk costs and what has already happened.
Traditional decision-making uses the concepts of profit and return on assets	Future decisions use the concepts of incremental cost and opportunity.
Traditional measurement treats all money as being the same value whenever it arises.	Future decision-making looks at discounted cash flows rather than simple profits.
Historic accounting arrives at a simple result of euro profits.	Future-looking decision-making compares projects and the option of doing nothing.

Accept that future looking decisions of most companies are flawed and that they require use of incremental costs that are relevant in business.

There are three golden rules to consider when deciding which costs to take into account:

a) Ignore “sunk” costs e.g. costs that have already been paid and cannot be recovered, that’s why they are called “sunk” costs, b) Disregard irrelevant costs, c) Count only incremental costs. 477.

Tips for you as manager

1 Ask your accountant what the cost of money is to your company.

2 Beware that future cash flow predictions need not be accurate.

3 Remember your decision is only as good as your estimated figures.

Assessing your Accounting Skills. Exercise 480.

End of course

Cyprian Lunga.

II Part of Course

Marketing Successfully 284

Definition

Marketing is the streamlining of company policy, approach, manner and practices that focus on encouraging and persuading customers to buy its products and services by manipulating its price indices and advertising processes; and Effective Marketing is often described as “making what you can sell, NOT selling what you can make.”

Organisations that sell what can make are product-led, i.e. they make the product first and consider customers afterwards and such organisations view marketing as a way of persuading customers to buy their products.

However, the most successful organisations make what they can sell; they are customer-led in creating products and services in response to customer needs; they make customers their prime focus and they reap the rewards of high success in business.

Focusing on every aspect of marketing not just on promotion and sales techniques and you will reap the benefits of satisfied, a growing base loyal customers, successful popular products, increased turnover, more (WOM) recommendations, repeat sales as well as fewer complaints.

Tips for Marketing Managers

1 Gather as much information as possible on the requirements of the potential new market.

2 Design your whole business around your customers’ needs, not your need to make money,

3 Develop an outward-looking marketing approach not an insular marketing approach.

Marketing Company Types

Type of Company	Company Characteristics
Fore-Fronter: consistently anticipates customers’ needs and gets its products to the market first.	Is innovative and proactive and truly understands marketing, invests in research and product development.
Follower: dislikes taking risks, waits to see which way the market will go before deciding whether to take action.	Lacks pioneering spirit will always achieve minimum success because its attitude will always limit its achievement.
Fossil: Conducts business in the same old fashion and sees no reason to change	It is conservative, insular and complacent; this company will soon join dinosaurs.

Strategic Marketing (Marketing Mix). 286

Market mixing refers to proportional use of:

P= products (producing the right products that meet customer needs),

P=prices (setting the right product price that delivers profit and keeps customers happy),

P=place (getting the product where customers can buy it and

P=promotion (to encourage customers to buy the product).

PR=public relations to enhance the image and perception of your reputation.

Customer sensitivities vary in different places and the marketing mix strategy can be used to adjust any of the ingredients of the mix to suit the market concerned.

Tips for successful Marketing Mix.

1 Create the right balance between price and quality of the product.

2 Concentrate on key elements of the marketing mix.

3 Re-examine your mix regularly from time to time.

4 Compare your mix to that of your competitors and make sure you know what they charge.

5 Employ market research to find out how you are perceived by your customers.

6 Use research and not gut feeling to assess customers’ needs.

Points to Remember about Pricing

1 Low price is often equated with low quality. Customers may prefer to pay more for an identical product because they are convinced that if it is more expensive it is better than a cheaper product.

2 Customers do not simply buy a product because it is cheap; they buy because they need the product. Therefore, customers will not buy something even if it is cheap unless they need it.

3 Customers are sometimes less aware about price than you expect. Therefore find out about your customers’ buying habits and whether they shop around for the best price or not.

4 What value you are offering customers in terms of saving them time and effort.

5 Customers sometimes buy products for enhancing beauty or status.

6 Customers sometimes buy goods for investment rather for utility purposes.

7 Have you asked customers what they value most about your products?

Attractive physical surroundings, committed staff, well thought out procedures are all important in conveying a caring and friendly image which gives your organisation a competitive edge.

Getting to Know Your Customers

Good customer information is key to boosting profit, so build a up a clear picture of your customers, watch them, talk to them, ask them questions, and find out all that you can in order to give them what they need and keep them happy.