Basic Business Science (C3542AM) Past Paper Notes PDF

Basic Business Science (C3542AM) Alfred Makosa Room X212 X Block 061-206 3810 [email protected]  Unit 4 Examine how the finance function uses digital technologies to fulfil its roles Unit Learning Outcomes: By the end of this unit, you should:  Explain how a digital mindset can transform fin...

Basic Business Science (C3542AM) Alfred Makosa Room X212 X Block 061-206 3810 [email protected]  Unit 4 Examine how the finance function uses digital technologies to fulfil its roles Unit Learning Outcomes: By the end of this unit, you should:  Explain how a digital mindset can transform finance functions, processes and measurement of performance.  Explain the components of the finance function (financial reporting, management accounting, treasury and internal audit) and how they can be affected by the increased use of automation.  Discuss how the increased use of technology impacts ethical considerations including data protection, privacy and overall corporate digital responsibility.  Digital Mindset What is a digital mindset?  A digital mindset is the concept of seeing the bigger picture of technological change and anticipating how this will affect society and also business.  Finance may see technology as an opportunity i.e. an aid to do routine tasks and free up time for value adding tasks.  Finance might see technology as a threat that will take up their roles. When finance see technology as a threat, they need to turn this threat into a opportunity  How?  By developing a digital mindset. The key aspects to the Forbes digital mindset Provide vision yet empower others  A clear vision of how a business should evolve and transform in this digital age, whilst supporting and empowering the initiatives of employees to translate the high level vision into ground floor action. Give up control yet 'architect' the choices  Empowering employees by giving up control does not mean leaders stop being in the driver's seat.  Instead of sticking to rigid rules, leaders should seek to influence outcomes more through the way they design and present the choices to those best suited to make the decisions and carry out the tasks. The key aspects to the Forbes digital mindset Sustain yet disrupt  Digitally minded leaders need to mitigate conflicts and serve as a bridge between the old and the new.  Existing business practices must be sustained and enhanced to ensure profitability.  New innovations and ideas will disrupt the old practices but they must also be protected and nurtured, as they have potential to benefit the future. The key aspects to the Forbes digital mindset Rely on data yet trust your intuition  Digitally minded leaders must look beyond the numbers and historical data and use their vision and intuition to make decisions. Be sceptical yet open minded  There are many new technologies that may succeed or just disappear, therefore digitally minded leaders should maintain a degree of caution but also consider and try things to learn lessons and see what fits.  Change Adept  This is a term given to organisations that are capable and have the capacity and appetite to deal with change.  To do this, the use lean processes, have flexible structures and are forward thinking.  The staff of such organisations need to have a growth mindset.  A growth mindset is the desire to continuously learn and develop  Such a mindset views feedback in a positive manner and use it as an opportunity and a tool for growth rather than as a threat, criticism or confrontation.  A person with a growth mindset gives feedback easily for the same reason. Key digital skills: basic digital skills Finance professionals need to have the capability to work in a digital environment and be confident to use it. They need to be able to:  Create digital content – be skilled in a range of digital software  Ensure data safety – treat data and information appropriately  Communicate in a range of digital channels  Solve problems created by the digital environment Key digital skills: technology know how Finance professionals must have sufficient technical knowledge where a deeper level of expertise is required. This enables them to create value in an organisation. In particular, they need to:  Understand how digital issues (such as cyber security) impacts the finance function  Understand how digital technologies (such as data analytics) can disrupt and organisation's business model and identify possible future disruptions.  Appreciate the need for and apply data privacy and security procedures. Cloud Computing and Cloud Accounting  Finance uses cloud computing in a similar way as other business functions  Cloud computing is changing the structure and working of the finance function by:  Allowing flexible working as staff can work in different locations at different times  Allowing collaborations as files can be shared and updated by multiple staff in real time  Keeping software continuously up to date and improving compliance with data protection regulations  Improving the integration of software as for example, customer relation management software can be linked to accounting software  Improving data security as cloud providers better understand how to protect data  Examples of cloud based accounting software, QuickBooks, Xero, Sage, Draft Worx  Big Data and Analytics  Data analytics on big data can assist the finance function’s work by looking at internal and external data  Internal data – identification, quantification and management of risk in an organisation. Very beneficial to internal audit function because it can focus on key business risks  External data – can be used by management accounting to support performance management. Variance analysis will often identify areas where an organisation’s performance is better or worse than planned but the root cause may not be always apparent. Data analysis can be used as evidence to support why the organisation performed as it did.  Big Data and Analytics  For financial accounting, big data can improve the quality and relevance of financial information, improve transparency in reporting and enhance stakeholder decision making.  In terms of financial reporting, big data can support the development of more relevant and useful information that can be used to improve future accounting standards.  Process automation  Automation is changing the role of an accountant from recording and verifying low level transactions, to higher level activities such as producing and analyzing reports.  Automation is increasing the effectiveness of accountants because they can spend less time on simple, routing tasks and more time on value adding services, making better use of the professional knowledge and skills that they have.  Advantages and disadvantages of automation Advantages Disadvantages Frees up staff time to focus on Training costs can be significant value adding activities Head count can be reduced as Introducing the system involves work is automated, this helps change which must be managed reduce costs carefully and thoughtfully Removal of human error will System may create uncertainty improve accuracy of over job security and future information prospects in staff Systems are only as effective as Can be used as a catalyst to help the person that creates them. the organisation adapt and Therefore, the programmer must improve in response to change be competent and understand the existing process completely The finance function's Well developed and implemented relationship with IT must be systems will have a positive carefully managed in terms of return on investment time and resources for the  Artificial Intelligence  Artificial intelligence enables transactions to be processed without input from humans and for humans to be assisted in decision making.  Examples of how AI can support the finance function include:  Simple processes can be automated  Improved fraud detection as systems can better understand ‘normal’ and ‘abnormal’ transactions  Predictive models can help forecast costs and revenues  Enables improved analysis of unstructured data in contacts and emails  Optimizing cash at hand by recommending specific supplier discounts  Extracting insights from real time financial and no financial data whilst avoiding data and information overload. Artificial intelligence and the finance function Can you think of how artificial intelligence might support an accountant who is working in an organisation's credit control team? Artificial intelligence and the finance function  AI might support an accountant working in a credit control team by assisting them to make decisions, such as whether to extend credit to customers. This system could search the customer’s credit history and previous transactions with the organisation to help judge how risky a customer they are and the level of credit that should be offered to them.  Data Visualisation  Data visualisation can be used by the finance function to present the information and reports that are required by management  It allows far richer information to be provided and therefore more value can be added by the finance function  For example, mapping analysis allows recipient to drill down into sales data by region to identify areas of the business which are having the biggest impact on sales  It allows the function to present the information in different ways depending on the audience. For example higher level management may want a dashboard overview of the performance of the business areas, whereas the management team of each business area will want a greater depth of information such as management accounts with variance analysis  These reports can quickly be extracted in the system because they are driven by the same data in the system.  Data Visualisation  Some key benefits of data visualisation for the finance function include:  Accessibility in terms of visual appeal and the ability to be understood easily  Real-time processing means the picture is always kept up to date  Performance is optimized as clear information allows improved decision making and efficient use of resources in response  Allows richer insights and understanding of the relationships that drive performance Distributed ledger technology and Blockchain  Distributed ledger technology and block chain can increase the clarify and transparency in the recording of business transactions  Key uses are in regards to measuring the value of assets and verifying asset ownership and accounting transactions, which are of interest to financial reporting and internal audit. It reduces the need to verify transactions by internal audit and financial accountants Distributed ledger technology and Blockchain  Blockchain may have the following impacts on the finance function:  The security and traceability of transactions may impact how businesses record their dealings  Smart contracts can be created which are self executing agreements that utilize cryptography, digital signature and secure completion. If certain obligation are met, they can automatically be executed on a particular date and time.  Bitcoin and other crypto currencies are not covered by accounting standards and decisions need to be made on how to record them. (i.e. are they cash, intangible assets or financial instruments?)  They allow money to cross borders easily and seamlessly by avoiding traditional intermediaries such as banks.  Internet of things  The finance function can make use of IoT to collect data and present information.  For example, in a large organisation, sensors may be used to collect data on the number of customers visiting the shops and monitor peak shopping times. Such data can be used to support business planning, resource allocation, optimize processes, minimize expenditure and provide advance warning of potential issues, as well as driving management accounting reports.  Smartphones and tablets, linked to the organisation’s information systems, can be used to present reports and data visualisation by the finance team as they visit various areas of business.  Mobile Technology  Mobile technology provides infrastructure that supports the other digital technologies by allowing devices to communicate with each other wherever they are located.  It enables the finance function to use digital devices and communicate with digital devices in other areas of the organisation.  It frees the finance team from having to work in fixed locations, allowing members to become embedded within other areas of the business (such as in operations or marketing) or to work remotely if required.  Mobile Technology Mobile technology also contribute to efficiencies due to:  Its scalability (easily expanded at a low cost)  Communication and flexibility (improves the ability of staff to communicate and allows flexible working)  Reduction in paper work (logging and recording information is done via an app)  Instant visibility (as information is available in real time)  3-D printing  3-D printing currently has little use for the finance function because the nature of the finance function’s work does not require the production of a physical product.  The main impact of this technology on the finance function is to understand how it can be used to transform the business and add value by creating efficient, scalable products.  The finance function must also ensure that the technology is properly recorded and accounted for in the organisation's financial statements.  3-D printing The technology will impact on an organisation’s cost base and the finance function need to be aware of:  Increase in direct costs as any set-up costs can be allocated to specific jobs  Cost savings due to waste reduction  No over production as exact numbers are produced  Reduced inventory and very little raw materials need to be held (allows just in time systems to operate)  Minimal tooling and set up costs are required Process Automation and Finance Function Components of the finance function  Financial reporting  Management Accounting  Treasury  Internal audit Financial reporting  The financial reporting function reports the results and financial position of the business.  Its principal function is to satisfy the information needs of external users  The usual steps followed in preparation of financial statements are transactions, day books, ledger accounts, financial statements  The statutory annual accounts of a company, subject to a minimum size requirement, need to be audited by an independent qualified.  The auditors prepare an audit report which is either unqualified or, if there issues arising from the accounts, qualified. Financial statements?  Name the 5 components of financial statements Financial reporting  The published financial statements are an important means of communication with outsiders  Reported profits determine the level of returns that owners/investors can receive. They also affect the company’s cost of capital by affecting the share price.  There are three key financial ratios used by investors – EPS, PE and dividend yield.  EPS (earnings per share) is a measure of the profit per share. It is calculated by dividing the profit after tax by the weighted average number of shares in issue. Financial reporting  PE (price earnings) ratio is calculated by dividing the share price by the EPS. A high PE ratio indicates that investors expect future earning growth and are prepared to pay more now for shares in return for this.  Dividend yield is calculated by dividing the dividend per share by the current share price and multiplying it by 100 to calculate a percentage.  Name the other users of financial statements  Financial statements are prepared in accordance to accounting standards.  Even non commercial organisations such as charities and clubs should prepare financial statements.  Management Accounting  Management Accounting function analyses data to provide information as a basis of managerial action.  Information is provided to aid planning and controlling the organisation, for example, information on costs are set out in standard cost cards which list all the cost involved in making one unit of a product.  Management Accounting Differences between management Management Financial reporting accounting and accounting financial reporting External - banks, Internal - managers User of information creditors, and employees shareholders record financial Planning, control and Purpose of information performance decision making Statutory format for Legal requirements None companies Must follow Format accounting Set by management standards and laws Both financial and non Nature of information Financial most financial Historical and forward Time period Historically mainly looking Management Accounting  A key role of a management accountant is usually the production of monthly management accounts that show the organization's financial performance against its plan (a budget or forecast) Budgets  Budgets are typically very useful for organisations, and their uses can be remembered by recalling the CRUMPET acronym  Budgets  Coordination – budgets help managers to organize their departments by ensuring that the work efforts undertaken are consistent in helping the organisation to achieve its objectives  Responsibility – budgets provide the organisation’s management with the authority needed to undertake expenditure in accordance to wider organizational plans  Utilisation – budgets helps ensure that managers have better visibility over the efficient deployment of resources that they are responsible for.  Motivation – budget if set appropriately, can have a motivating effect on managers as they may be more inclined to work within the budgets that have been set for them.  Budgets  Planning – budgets help to focus the attention of managers as they require them to be forward looking in terms of how best to use the resources that they have been allocated taking into account relevant opportunities and threats.  Evaluation – budgets provide a helpful point of reference during the process of assessing the performance the manager responsible for that budget.  Telling – budget are a useful communication tool as they set out the expectations of the organisation in terms of the level of performance that managers are required to deliver over a period of time  Management Accounting  The difference between actual and budgeted figures is known as a variance and the management accountant will seek to liaise with other departments in order to identify reasons for variances, such as procurement and production teams.  The results are compiled in a variance report. Once the reasons for variances are identified, control measures can be taken to prevent adverse ones happening again in future, to repeat favorable variances and bring actual results back in line with targets. Management Accounting  Management information can also be provided to help managers make other business decisions for example:  Pricing decisions  Key factor analysis  Investment appraisals  Break even analysis  Continue or discontinue decisions  Treasury  The treasurer is responsible for raising finance and controlling financial resources  Key roles of treasury are:  Working capital (liquidity) management - managing the organisation’s cash flow cycle and ensure cash is always available when needed.  Financing (funding management) – sourcing and assessing sources of funds for investment, such as new shares and bank loans.  Foreign currency management – ensuring the organisation has access to foreign currency to buy materials from overseas suppliers and is able to convert foreign currency received from overseas sales into home currency.  Taxation – managing corporate tax affairs to legally avoid as much tax as possible  Cash management – preparing cash budgets and arranging overdrafts  Keys aspects of treasury Role Key aspect Working capital is an organisation's current assets less trade payables. The following need balancing: Inventories - adequate supplies vs tying up inventory in cash. Working capital (liquidity) management Trade receivables - slow and non payment vs competitive credit terms. Cash - opportunity cost vs too much cash. Trade payables - delaying payments vs good credit record Weighing debt vs equity mix. Debt is cheaper. Treasury need to keep gearing in check which is the long term debt/Shareholders equity x 100. It Financing ( funding management) shows the proportion of financing that is sourced from debt. Gearing measures the risk of lending finance to an organisation Deciding whether, and how, to hedge foreign currency and managing the risk of foreign Foreign curreny management currency movements. The idea is to reduce exposure from exchange losses Ensure that the company is complying with the tax law. Striking a balance between tax avoidance, tax Taxation mitigation (legal) and tax evasion (illegal). Find out about what each of these terms mean Cash management Managing the company's day to day cash balance.  Internal Audit  Internal auditors are employees of the company whose duties are fixed by senior management and who report on the effectiveness of internal controls.  CIMA defines internal auditing as an independent appraisal activity established within the organisation as a service to it.  Scope of internal audit  Internal auditing does:  Reviewing of internal controls, risk management systems and financial reports  Managing the data used by management to identify risks  Identifying methods of prioritizing and managing risks  Reporting on the effectiveness of risk management controls  Prevention and detection of fraud and internal misstatements in financial statements  Purpose on internal audit  Advise those charged with governance (usually board of directors) on effectiveness of internal controls  Make recommendations in relation to improving deficiencies identified in internal controls  Adopt risk led approach to identify and assess organisational risks.  Remit of work undertaken is determined by the organisation but is not limited to just financial matters. Can include operational matters.  Fraud and internal audit  Internal audit should detect and prevent fraud.  Fraud is theft by deception  Fraud can impact business in many ways e.g. Loss of assets or financial difficulties, reduced confidence of shareholders, collapse of companies, fines etc.  Three pre-requisites of fraud are  Dishonesty – lack of integrity  Opportunity – weak controls  Motivation – rewards outweigh risk of being caught  Causes of fraud  Low staff morale  Lack of monitoring and control  Lack of segregation of duties  Unnecessary complex structures  Dominant of management by one person or small group  Symptoms of fraud  Strange transactions  Payments being made out of proportion to work done  Lavish lifestyles of employees  Limitations of internal audit  Independence – as internal auditors are employees, they are not very independent  Organisational constraints – ideally, this function should be separate from other functions to maintain independence but in small organisations it can be very difficult to separate  Poorly qualified staff – inability to employ suitably qualified staff  Self interest threat – internal auditors can be exposed to self-interest threat by virtue of being fearful of making recommendations that are unpopular with management. Automation and the finance function  Automation is seen as a means of re-skilling people  Business processes are reimaged to increase performance through human-machine collaboration.  Three types of relationships are envisaged to emerge:  Machine only activities – activities where machines can outperform humans e.g. routine processes  Human only activities – activities where humans will outperform machines e.g. those requiring high level judgement  Human and machine activities – where technology can augment human intelligence to make finace processes faster.  Three key impacts of automation on finance  Ensuring that they understand what machines can do and what their limitations are  Ensuring that they possess human skills ( such as leadership, empathy, creativity and judgement) which machines lack  Ensure that they are highly skilled in areas where machines and humans can work together.  Automation paradox  Occurs as technology takes tasks out of human control, resulting in loss of skills in these areas.  It may happen that a situation may arise that technology is not able to deal with.  Due to deskilling of humans (because machines have taken over), the tasks may not get completed in time or easily get completed.  To overcome this, humans needs to understands how the system works to be able to assist it or perform the task manually when there is need to. Impact of automation on the components of the finance function Impact of automation on the components of the finance function Skills required by future finance professionals  These skills are expected to be fundamental to future accountants: Analytical skills  Most data produced will come from automated processes, therefore accountants will add value through analysing this data in the business context for meaning and insight. Skills required by future finance professionals Business acumen  Understanding how businesses work, change and can be disrupted. Skills required by future finance professionals Judgement  Making decisions, evaluating data sources and applying knowledge to make sound judgements. Skills required by future finance professionals People skills  Interpersonal skills will be essential as accountants will occupy a more central business partnering role as opposed to just producing accounts and reports for others. Skills required by future finance professionals Leadership  Accountants will have a unique central position in organisations  L – ead  E – ducate  A – dvise  D – elegate  E- ncourage  R-eassure  SHIP – the team  Technology and an organisation's ethical responsibilities  Technology raises ethical questions for both individuals and societies because it creates opportunities for significant social change and threatens existing distributions of power, money, rights and obligations. Ethical considerations/ 5 moral dimensions of the information age Ethical considerations/ 5 moral dimensions of the information age Ethical considerations for data Corporate Digital Responsibility What is CDR?  CDR is an extension of CSR to the world of data and tech. It is about going beyond laws and ensuring that new technology and data are used in a productive manner in ways that are acceptable by society. 5 key areas to the CDR strategy Digital stewardship  This is using data in a responsible and secure way that is line with customer and employee expectations about what is reasonable. Customer expectations  Customer expectations around data use and transparency are increasing.  Customers should be given the choice to opt in and be rewarded for sharing data, this will empower the customer. 5 key areas to the CDR strategy Giving back  An example of this could be a bank with knowledge of financial information could help to inform a customer about choices that could improve their financial management, even if it meant that it was a loss to bank in terms of fees earned. Data value  This is becoming increasingly apparent to customers and businesses, therefore the need to provide incentives to customers to provide more data will become the norm. 5 key areas to the CDR strategy Digital Inclusion  This sees that businesses share data in a kind way to other causes that may benefit from the data. For example, if a pharmaceutical company donated clinical trials data to a university for the betterment of society. Technology and an organisation’s legal and social responsibilities The General Data Protection Regulation (GDPR) Organisations hold a huge amount of data, therefore the privacy, sensitivity and security of the data is a major concern in modern business. The GDPR legalisation principles The following principles are to guide the use and hold of personal data: The GDPR legalisation principles The GDPR legalisation principles – rights for individuals The GDPR legalisation principles – rights for individuals Developing a corporate digital responsibility strategy Developing a corporate digital responsibility strategy Microsoft AI Principles What are the Microsoft AI Principles?  There is a growing move for organisations to commit to doing the right thing and acting in a way that would be deemed acceptable by the public when it comes to how they use technology and data.  Microsoft has laid down ethical principles surrounding its use of AI. Microsoft AI Ethical Principles  Fairness - AI systems should treat all people fairly.  Reliability and safety - AI systems should perform reliably and safely.  Privacy and security - AI systems should be secure and respect privacy.  Inclusiveness - AI systems should empower everyone and engage people.  Transparency - AI systems should be understandable.  Accountability - AI systems should have algorithmic accountability. Homework/Further reading  https://www.weforum.org/agenda/2016/10/top-10- ethical-issues-in-artificial-intelligence/  https://www.fm-magazine.com/news/2020/mar/ rapid-change-management-finance-accounting- 22580.html