WORKSHOP - Accounting PDF

Management control WORKSHOP 1: 11/11-2024 Introduction to accounting How do you get someone to do what you want? - Collier definitions of management control: a system of rules - A “system” is a collection of at least two inter-related parts, together doing what one part cannot do alo...

Management control WORKSHOP 1: 11/11-2024 Introduction to accounting How do you get someone to do what you want? - Collier definitions of management control: a system of rules - A “system” is a collection of at least two inter-related parts, together doing what one part cannot do alone. - Rules are statements about right and wrong - Management control, then, is about controlling a system and its performance. More detailed: “The process (of parts interacting) by which managers assure that resources are obtained and used effectively ….. How does “management control” relate to “finanical accounting and “management accounting” Financincial accounting: Focus on money Management accounting: focus on action Management accounting concerts 1. Preparing relevant information (along threedimensions: (i) past, present and future; (ii)internal and external; and (iii) financial and non financial information) 2. Modelling value creation (to understand the cause-effect relationships between inputs and outcomes 3. Comunicating with impact to drive better decisions about strategy execution. Value creation - the value the company gives to the costumers, customer satisfactionf - Goals and objective in focus - intentions matters - Division of labor and responsibilities necessary - skills matter - The roganistion is a system of interacting parts - coordination matters - Plans for the future are required - foresight matters - Checks of performance in relation to intentions imperative - feedback matters - Financial measurements determine success - money matters A general roadmap for management control ⬇️ Assessing opportunities and abilities Needs (demand for a certain utility) Offerings (supply of goods and services) Methods (resources and capabilities) SWOT – internal adaptation to external realities Wednesday- Constructing financial statements - Annual report - Income statement concerning the performance during a particular year - Balance sheet concerning the financial strength at the start and at the end of a particular year (two financial snapshots one year apart) Friday - Operating decisions - Production costs may be variable or fixed - What costs should be counted for is determined by the decision situation - choice between alternatives requires Monday - strategic investment decisions - The payback method concerts the time it takes to recoup the money spent on an investment Shadowing MANGERS - hon från Fem festival Recommendations for the restaruant: - Profit - how do we go further → SWOT - What makes us profitable and sustainable cost WORKSHOP 2: 13/11 -2024 Management control - - Annual report - Income statement concerning the performance a particular year - An income statement is a financial statement that lays out a company's revenue, expenses, gains, and losses during a set accounting period. It provides valuable insights into various aspects of a business, including its overall profitability and earnings per share. - Balance sheet concerning the financial strength at the end of a particular year (and the change from last year) - A balance sheet, an important financial tool, calculates a company's assets with its liabilities and equity. Total assets are calculated as the sum of all short-term, long-term, and other assets. Total liabilities are calculated as the sum of all short-term, long-term, and other liabilities. Income (also profit and loss) statement and balance sheet ○ What has come into the company and what has left  ○ Income & expense & profit (loss) ○ Not necessarily direct cash - Klarna (30 days) Cost ○ Not necessarily cash The transfer could be later (Klarna) Depreciation is something to put the income statement ○ Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. ○ Write of value: avskrivning ○ Economic lifetime of the product, spread out cost and save move ○ Buy a machine, economic lifetime of 10 years, → 1 million a year Difference: technical lifetime and economic lifetime Assets - what we owe ○ Current and non-current; inventory, receivables, cash ○ Current: they are gonna generate money within a year ○ Non current: assets that generate money but longer than a year, machine etc ○ Liabilities skulder (current and non-current; bank overdraft, payables, long-term bank loans) ○ Current: something you need to pay of, short-term loan within a year If higher current liabilities than current assets = WORRY ○ Non-current: Long-term loan more than a year Equity (shareholder equity, retained earnings, profit, loss) ○ – de pengar som delägarna (=aktieägarna) har satt in i ett företag, plus vinst som inte har delats ut till delägarna. – Eget kapital tillhör företaget och är alltså inte en skuld till investerarna: de har inte rätt att få pengarna tillbaka. ○ Counted as your own money Cashflow (positive or ”inbound” and negative or ”outbound”) The objective of financial statements:...”to provide information about the financial position, performance, and changes in financial position (i.e. cash flow) of an entity that is useful to a wide range of users in making economic decisions (i.e. ’decision usefulness’)”. p.101 Who might be the ”users” of this information? Four qualitative characteristics of financial reporting Understandability Relevance Reliability Comparability ○ Following the standard rules on how the annual looks like - its easy to compare among years, and companies Elements of financial statements Balance sheet for financial position (for the beginning and the end of one specific year) ○ Always a starting and an ending sheet.  ○ What assets you have and what you used to get them Income statement for the financial performance during the same specific year ○ How much cost did you have → profit of the year (Cashflow statement shows how funds have entered and left the organization; payments to or from the organization) ○ Cash flow in - and out. 1. What we start with in January a. EX: journey: What you start the travel with b. Everything in the packing is assets 2. Income statement a. Buy things, and leave/lose some things 3. What we bring with us Assets Equity + Liabilities -------------------------------------------- Current L Current Non -current Non- current E ------------------------------------- x (Should be) = x  - Summary of how much sale and cost during the year Cost of goods No taxes - If you make a loss - If it is a small company → move it to another year Balance sheet (statements of financial position) Time value of money Cashflow statement (no counting here) Movements of money INTO (positive cash flow) and OUT FROM (negative cash flow) the organization’s bank account Some key items where cash flows impacts the balance sheet: Depreciation: a decrease in asset value, registered as an expense in the income statement which reduces profit; no payment made Changes in accounts receivables and accounts payables Payments to or by the organization Taking new or paying back existing bank loans Paying dividends or issuing new shares Some questions in relation to the financial reporting How would you say the financial development in general for the company looks? What is the company’s income after tax 2020? How did it change from 2019? Why? What is the difference between gross profit and operating profit in the types of cost accounted for - what is ”Cost of goods sold?” What assets are the most apparent in the group’s balance sheet? If the café would report depreciation, what could that be and where would it show in the annual report? Is the company reporting depreciation, yes or no? How can you tell? Soliditeten anger hur stor del av de totala tillgångarna (= balansomslutningen) som har kunnat finansieras med eget kapital. Soliditeten anger företagets stabilitet eller förmåga att motstå förluster och överleva på längre sikt. Soliditet visar justerat eget kapital, dvs eget kapital i procent av balansomslutningen. WORKSHOP 3 15/11-2024 - Operating decisions Operation decisions (& cost-volume profit analysis) - Production costs may be variable or fixed - What costs should be counted for is determined by the decision situation. - Choice between alternatives requires relevant comparisons - Costing techniques determine costs to be relevant or irrelevant for decision at hand, - Cost- volume- profit is concerned with the impact of volume on profits. Operating decisions- gfo into more details, what do we need to do to become more profitable, trying to understand, how many units do we need to sell to make it profitable Cost-volume-profit decisions Fixed costs ○ salary,fasta kostnade Variable costs- selling of more coffee→ more beans ○ Increases with the amount of the selling ○ Decreases if selling less Production volume - How many servings did you manage to do Contribution (price- variable cost) and gross profit ○ As high as possible per unit Break-even point, ○ Tells us how much servings per day/per month is needed to be sold to covering the costs (including the fixed cost) ○ break-even point - ex 200 servings per day atleast Safety margin ○ if 250 is sold - safety margin is 50 ○ how many servings can you lose per day, how much can I afford to screw up before the break even point Operating leverage ○ Which of the costs are the dominating cost ○ Hgh opening leverage → mostly high fixed costs, low variable costs ○ We want it to be high → profit faster if its high ope ○ Economic decisions The “opportunity cost”  ○ Opportunity cost is the potential forgone profit from a missed opportunity—the result of choosing one alternative over another. The sunk cost ○ We should not consider things that is not profitable anymore ○ Dare to kill your darlings ○ Put the feelings on the side, if it doesn't make sense - leave it Bottlenecks and the theory of constraints ○ A constraint that we have, only one worker, bottleneck = the time of the worker Let’s look at a Wayne’s coffee franchise Estimate (a ”qualified guess”) the average sales per day Estimate the gross profit and gross margin for 190701-200630 How many cups of coffee do you think they sell per day? How many cups of coffee do you think they (two employees) COULD sell per day? What costs in the cafe would be unaffected by a change in sales volume (i.e. number of servings)? Managing profits through cost & volume (cost-volume-profit analysis) CVP Question: how is the profit affected by changes in sales? Statement 1: if you sell one more unit, that unit ”contributes” to ○ a) covering fixed costs and, once all fixed costs are covered, ○ b) rendering the organization a profit. Statement 2: net profit = sales - fixed costs - variable costs ○ Sales = units sold x selling price ○ Variable costs = units sold x unit variable cost (coffee beans, cheese) Statement 3: contribution (price - variable cost) = operating leverage ○ We want it high, profit per unit (gap between price and variable cost) Fixed and variable costs Total fixed costs are NOT affected by changes in sales volume* Total variable costs ARE affected by changes in sales volume The fixed cost per sold unit DECREASES with increased sales volume The variable cost per sold unit is unaffected by sales volume *within a so called ”relevant range” (defined by the production capacity in the fixed costs) Three things to keep in mind when making economic decisions 1.. What alternatives do you have to choose from and what are they worth? >>> The ”opportunity cost” of a decision 2. What costs should be considered in a decision? >>> The ”sunk cost” being unaffected by a decision 3. The prioritization of alternatives to make the most of what you got >>> The theory of constraints What is an ”opportunity cost" Having an opportunity means that you have something to consider engaging in. If you engage in something, saying Yes to it, that means that you essentially limit your opportunities of saying Yes to other things. Yes to A means No to B.  Opportunity cost = ”The lost opportunity of not doing something, which may be financial or non-financial, e.g. time.” (Collier, p 376 in 2003 ed). Opportunity cost in different terms = The value of the alternative not chosen. What is a ”sunk cost" A ”sunk cost” is something forever lost. It is basically money that you have spent on something you (may) regret, but you can’t sell in order to get your money back. 32 years ago – the Halland Ridge (passed through when going from Lund to Gothenburg on the Swedish west coast) The theory of constraints In operations, there may be constraining factors. It could be an insufficient amount of time, space, hands etc. The theory of constraints is a technique for finding a solution to the problem of maximizing ”throughput contribution”. Maximize throughput contribution: if time is the bottleneck, prioritize products with the highest contribution per minute. How much total contribution can we get from the constrained (”bottleneck”) resource Reduce BLT if anything# WORKSHOP 4 18/11-2024 Strategic investment decisions - Captital expenditure evaluation concerns the spending of resources today in order to getting increased value back later - Discounted cashflows are used to calculate the net present value or the internal rate of return of an investment  - The payback method concerts the time it takes to recoup the money spent on an investment. KOLLA VIDEOS PÅ PAYBACK METHOD AND DISCOUNTED CASHFLOW Chapter 14 Strategic investment decisions Strategy: ”offensive or defensive actions to create a defensible position in an industry [to] yield a superior return on investment for the organization.” (in Collier, p.297) Capital expenditure concerns the spending of resources today in order to get increased value back later. → calculating the residual income in a business unit → the determination of net present of an investment The payback method concerns the time it takes to recoup the money spent on an investment Discounted cashflows and the NPV method are used to calculate the ”net present value” of an investment ○ Dominating ○ is a valuation method that estimates the value of an investment using its expected future cash flows. ”Capital expenditure” (investment) Three reasons for investing (new, expand, replace; voluntary / required) Initial investment and annual net cashflow Time value of money and cost of capital ○ Invest your money so it grows - Interest, discount factor, opportunity cost ○ Discount factor: PAYBACK METHOD: non sophisticated method Timeline: 0 = today, 1 , 2, 3, etc. Initial investment: 5 million today Estimated cashflow that's left year 1: 0,5 million Estimated cashflow year 2: 0,5 million Estimated cashflow year 3: 2 million Pays back year 4. How many years does it take to cover it up? → payback method - In 4 year it has paid back its initial cost Method 1: payback measured in time We choose the option that paybacks the fastest ISSUES: - Ignore year 5, the year after the payback the fastest - We do not look at the years after the payback. - Interest, time value of money.  - Discounted Cashflow Method 2: net present value (NPV) measured in absolute money value - discounted cashflow method: Sofisticated method ○ Discounted factor: In financial modeling, a discount factor is a decimal number multiplied by a cash flow value to discount it back to its present value. ○ Discount Factor = (1 + Discount Rate) – Period Number. ○ Discount Factor = 1 / (1 x (1 + Discount Rate) Period Number) ○ 1 / (1 + 10%) ^ 1 = 0.91. ○ $1 x 0.91 = 0.91. ○ Year 1: 100 → Year 0 : 100/1,10 → Year 4: 100/(10^ 4) - Consider the opportunity cost NPV measures the difference between the present value of cash inflows and outflows of a project, while payback period measures how long it takes to recover the initial investment What is an ”investment”? ”Spending money now in the hope of getting it [and more] back later” - Why do you need / want to invest? New, expand, or replace? - How much money does the investment require? When? - Where does the money come from and what does the money ”cost” you? - How much money will be paid to the organization AS A RESULT of the investment? - When? Focus on cashflows When calculating the value of investments, it is the use of the money during a certain time that is in focus, not the cars, buildings, machines, factories, computers or other ”assets”. That is accounted for in the income statement and balance sheet. Depicting an investment Pay-back evaluation The time value of money comes from the fact that money can pay for (be invested in) resources creating value investments are risky - lending money comes with an expected remuneration (risk premium) to cover the risk of losing money as a lender or invester the value of money is inflated over time (purchasing power is reduced over time by ’inflation’) This is taken into account in ”interest rates”, ”cost of capital” and ”discount rates” (technically by way of the so called ”discount factor”) Cost of capitale What is the cost of capital? - How do we decide the 10 % rate Where do we get the money from? - Bank → liability - Bank is asking for 7% - Shareholders/investors → equity (eget kaptial) → higher risk - Shareholder asks for 26% Cost of capital: adding 7% + 26% The bank gets the money first if something happens. How much is the Debts /(Equity + Debts) x 7 % + Equity/(Equity + Debts) x 26 % = How much of each of them did I use x 7 % or 26% How much did it cost me, and at least it gives me back to the bank and Highest net present value: how much its left for me after compensation What determines the “net present value” of a future payment? What if the interest rate (r) is 6% and the 1000 SEK is paid out in two years? 0.890 x 1000 = 890 How much could you settle for instead of a payment of 1000 SEK in twenty years if you can earn an average stock market return of 5 %? 0.377 x 1000 = 377 What if the ”donor” says that you would earn at least an average of 10% on the stock market, how much would you be offered? 0.149 x 1000 = 149 An increase in the interest rate reduces the discount factor, hence the present value of future cashflows decreases. Discount factor: (1+r)- n Example of net present value calculation Investment (I) in a taxi car: 600 000 SEK Expected annual positive cashflow (a): 140 000 SEK (=net sum of customer payments, fuel, insurance, service & maintenance, etc) Discount rate (r): 10 % Expected economic lifetime of the investment (T): 6 years Salvage value: 20 000 SEK (sold after six years) Cost of capital becomes the discounted factor NPV vs Payback Method Advantage Agency cost : You gave your money to the company but they did not maximize. Normative field The golden rule of financial decisions making is to accept projects with positive NPV and reject thos with negative. Liquidity issues Workshop 5 - 20/11-2024 Performance evaluation of business units - Structures of business organisation and the allocation of resources, authority and accountability. - Profit - Return on investment Budgeting vs budgetary control - The budget is a plan expressed in monetary terms covering typically one year ahead - profit vudgets and cash forecasting - Budgetary control: feedback and corrective actions Performance evaluation of business units: - Organizing, - budgeting - following- up of financial performance How do we plan financially for the coming year? How are owners in control of financial performance? Profit budget - Projected income and costs Cash budget - Time matters when exactly do the transfers happen Performance evaluation - Organization structure as a control tool - Responsibility centers: cost centers, profit centers, investment centers - Transaction costs - Transfer pricing - Controllability - Absolute profit - Return on investment - Residual income Budgets - Budget as a short-term planning tool - Profit budget - Cash budget (forecasting) - Budgetary control - Comparing actual outcomes to expected outcomes - Controlling human behavior Budgeting vs budgetary control - Budget is a plan expressed in monetary terms covering typically one year ahead - Profit budgets and cash forecasting - Budgetary control: feedback and corrective actions - We try to change something that is not working in the budget, too much costs? Wrong person being responsible for the company Why budgets? When? - Budgeting is ”an important tool for effective short-term planning and control.” (in Collier, p.335) - Strategic planning ”precedes budgeting and provides the framework within which the annual budget is developed. A budget is, in a sense, a one-year slice of the organization’s strategic plan.” (in Collier, p.335) Budgets characteristics maps guiding to destination points (the objectives) express, in quantitative terms, organization’s objectives and possible steps for achieving them generally cover a period of one year match the organization’s responsibility structure once approved, can be changed only under specified conditions Budgetary control and corrective actions - Budgetary control is about ensuring that actual financial results are in line with targets (c.f. definition of management control). - Budgetary control is part of a feedback process, in which variations between actual and budgeted numbers are investigated. - Deviations may lead to ”corrective actions”, either by - revising the budget (!), or - having people do different things or things differently (change behavior). Try to divide it into months, what is our estimated sales for each months cost of sales and cost of goods, and everything else we think matters - CASH BUDGET includes 4 sections 1) Receipt section, cash inflows (no financing inflows): mainly, collections from customers 2) Disbursement section, cash outflows: - RM, DL, MOH, SAE, equipment purchases, dividends,... - NO depreciation (it is a non-cash cost!) 3) Cash excess or deficiency section - Deficiency: need for additional funds further borrowing - Excess: repay of previous borrowing or short-term investments 4) Financing section, borrowings, borrowings’ repayments and interests payments taking place in the budget period 11 - What goes in and what goes in EACH Month - What kind of cash outflows do I have each month Look at the profit budget, and just add just WHEN in time it. The closing You own a pizza food truck, and you’re budgeting for the next year. The goal is to create a yearly profit budget and a cash flow budget, highlighting how sales, costs, and loan repayment affect the business. You sell 400/pizzas/month at $10 per pizza (previously 300 pizzas, due to new oven) Total monthly sales =$4000 70% of customers pay immediately, and 30% are on credit (collected the following month). Costs: Raw materials (dough, toppings, packaging): $4 per pizza Monthly fixed costs (rent, truck maintenance, insurance): $1200 Monthly wages: $800 A $3000 loan is taken in january for purchasing a larger oven, its repaid in December with $300 interest Initial cash: $1000 in the bank at the start of january. In a profit budget: The income and the costs: same as estimated next years income statements Inflow: - Jan 4000 Outflow: - depreciation + interest rate In a cash budget: Determines, shows the details the inflo and outflows for the future Inflow: → Jan: 4000 x 0,7 (due to credits) → Feb: 4000 x 0,3 (from jan) + 4000 x 0,7 (feb) → Mars: 4000 x 0,3 (feb) + 4000 x 0,7 (mars) Outflow: - 3300 for machines Three evaluation measures of financial performance Absolute profit Actual ”absolute” profit often compared to expected (budgeted) profit Pros and cons + easy to use + standard reporting - does not consider capital investment - short-term incentives override the long- term prosperity (cutting R&D, maintenance, etc) Relative profit: Return on Investments (ROI) The ROI measures the rate at which you have created additional money (operating profit) to the capital you have used in your operation. Operating profit / Total Assets = ROI Residual income The ”residual income” shows what is left in a business unit in a corporation after having paid an internal ”interest rate”, the cost of capital, to the corporate level of the organization. The metric helps showing if the business unit creates additional shareholder value from its operation. Operating profit - (capital invested x cost of capital) = residual income If the residual income is positive, the business unit has paid its internal ”interest rate” and added an extra profit on top of that. Residual income- pros and cons Accountability organized Organization structure is about ”the formal allocation of work roles and the administrative mechanisms to control and integrate work activities” The organization structure is ”a potent form of control because, by arranging people in a hierarchy with defined patterns of authority and responsibility, a great deal of their behavior can be influenced or even pre-determined.” Both quotes from Collier, p.317. Strategy determines structure The functional organization is well suited for limited market and/or product scope As organizations grow, tasks and responsibilities need to be divided Divisional organizations (an organization with two or more ”business units”): each division is itself a functional organization Divisions in a company are coordinated by a corporate level management Operational responsibility and decision-making (authority) are decentralized Interative: decentralized and centralized Decentralized: delegate the responsibility to the people that should know, Centralized : Works in smaller firm Controllability Making sure it is contralability, ”Individuals should be held accountable only for results they can control.” (Merchant, in Collier p.323) Three types of responsibilities - General conditions for performance evaluation in the allocation of responsibility to ”responsibility centers” - Cost centers: budgeted costs in focus - Profit centers: evaluated on sales minus expenses (cost); in larger integrated corporations, unit cost often a given through ”transfer pricing” - Investment centers: responsible for both income statement and balance sheet, i.e. profits and the utilization of capital (investments) The ”make-or-buy” decision and the transaction cost explanation A large company can choose between buying inputs to its production (the ”buy” option) or to produce the inputs by themselves (”make”). In the early 20th century, the Ford Motor Company owned rubber producers, iron mines, leather factories and everything that was needed for making a car. Ford followed the ”make” strategy. Today, car manufacturers ”subcontract” most of these parts. They follow the ”buy” strategy. Transaction costs When ”buying”, every contract requires negotiation and agreement, and eventually to be renegotiated or replaced with some other supplier or customer. When ”making”, every producing part of the company needs to coordinate production, delivery, quality and development from within. transaction costs Transfer pricing - ”Transfer pricing” is concerned with the situation where two departments or divisions sell and buy with each other, within the same corporation. → Budget within the company, between the units → So not just one of the units get the profit. - Full cost - market price - variable costs only Cash flow shows how much money moves in and out of your business, while profit illustrates how much money is left over after you've paid all your expenses.