Integrating Finance with Operations Management

Heizer & Render (2009, p.33) explains an organisations strategy as its “action plan to achieve the mission”. The mission can be defined as “the purpose or rationale for an organisation’s existence” (Heizer & Render, 2009, p.32).  The mission of the operations management department of an organisation would be to make production consistent with keeping to the organisations overall mission statement, it is focused on the internal processes to do this so maintaining profits and cutting costs is of utmost importance to continue operations.

Production needs to therefore deliver their goods or service cheaper, better (or different) and more responsive (Heizer & Render, 2009, p.33).

Operations strategies are likely to be more successful when they are integrated with other areas of the organisation’s function, not only limited to accounting and finance but also HR, IT, marketing etc. (Heizer & Render, 2009, p.45)

Integration with accounting / finance is something that should be done to achieve the answers to almost all of the “Ten strategic OM Decisions” (Heizer & Render, 2009, p.37), the decisions I would say would require this are

1)     Goods/Service design: As described by Heizer & Render (2009), “design usually determine the lower limits of cost and the upper limits of quality”. Operations must know the financial capabilities of the organisation and the affordability ranges for the level of product they are able to produce. The design must be feasible.

2)     Process/Capacity design: Specific levels of production requires specific levels of labour, management, technology, human resources (qualified and/or unqualified) as well as maintenance; these all come at a cost and make up most of the organisations cost structures (Heizer & Render, 2009).

3)     Location selection: The size and the area of the desired location for the operations strategy to succeed can vary greatly in cost and affordability must be ascertained. If operations required a large plant in a high cost area this may not be feasible and should be consulted against the financial department. Coming to a decision to change areas or have a smaller plant may be required in this situation.

4)     Human resources: People are an integral part of an organisation and, as stated by Heizer & Render (2009), people are expensive. The amount of qualified and unqualified personnel will make up high costs for an organisation and integration with finance/accounting to decide on the affordability of the required personnel as well as salary levels would be required.

5)     Supply chain management: To get good terms and maintain trust with suppliers, keeping a good payment schedule and credit terms is highly important.

6)     Intentory: This ties in to all of the above, the inventory levels must be monitored and considered based on their costs, accounting can provide good reports on the costs behind the levels of inventories that are kept on hand (storage etc.).

7)     Scheduling: With an increase or decrease in schedule time will come additional/decreased costs.

8)     Maintenance: Maintenance can be an expensive or lucrative part of a business depending on which side of the table you are sitting on. Product reliability and  quality are to be considered with maintenance and both of these factors can and mostly are influenced by costs.

Without integration with accounting/finance I would go far as to say that operations would not be able to function effectively.  Finance is what keeps the organisation going and poor operational strategies and decisions without considering finance will cause problems and may even end up in bankruptcy.

References
Heizer, J. & Render, B. (2009) Operations Management. Ninth Edition. Prentice Hall: New Jersey.

Marking, Finance and Operations

The three basic functions of a firm, as Heizer and Render (2009, p.4) have outlined, are applicable to all firms and organisations; whether private, government, non-profit or any other type of organisation. These basic functions can be outlined as follows

1)     MARKETING

Marketing is the part of the firm that is concentrating on generating client demand for the product or service that the firm is producing or providing.

Heizer & Render (2009, p.5) provide some good examples of marketing departments in different businesses, some examples can be:

  1. Commercial Bank – Marketing of loans (mortgage, personal, commercial etc.) which brings in the demand for which the latter two points of this discussion are involved in (mainly 3 – Productions/Ops.).
  2. Internet Service Provider – Marketing of Internet connectivity, shared website hosting, dedicated website hosting, backup services.
  3. Food Store Chain – Marketing opening of new branches, weekly/monthly specials on food products etc.

2)     FINANCE / ACCOUNTING

As I have covered in previous posts, accounting is a vitally important function of a business. Accounting measures the performance of the organisation as well as makes sure the income is collected and the debts are paid (Heizer & Render, 2009, p.4).

Thomas (n.d.) sums the importance of accounting as a function in business as

  1. Allowing business owners to see where profit and losses are being made (Profit and Loss)
  2. Allows business owners to see where and how cash is being spent (Cash Flow)
  3. Shows whether profits are large enough to cover expenses (Balance Sheet)
  4. Helps aid financial decisions.
  5. Required to adhere to tax legislations

All of these areas of accounting apply to all types of businesses.

3)     PRODUCTION / OPERATIONS

This is where operations management comes in to play. Whether the organisation provides manufactured goods or intangible services, or a combination of both the processes are part of the production/operation function.  As Heizer & Render put it (2009, p.4), this function “creates the product”.

There are some notable differences between services and goods but as Heizer & Render show (2009, p.11); even organisations which seem very much “goods” (eg: automobiles), they still require a level of service (vehicle finance, vehicle delivery). The same goes with service heavy organisations (eg: consulting), which mostly have an element of goods as well (eg: printed reports). Heizer & Render  (2009, p.11) point out that one of the only “pure service” providers are those that provide counselling.

Some examples of operations in different organisations are:

  1. Commercial Bank – Tellers, transaction processing, cheque clearing, facility design and layout, vault operation, maintenance and security (Heizer & Render, 2009).
  2. Software Development – facility design and layout (placement of personnel), communications, training, client liaison, quality assurance and control, product development, product design and maintenance.

All of the above 3 functions are imperative to the operation and success of an organisation.

References

Heizer, J. & Render, B. (2009) Operations Management. Ninth Edition. Prentice Hall: New Jersey.

Thomas, C. (n.d.) Why is accounting important in business? [Online] eHow. Available from: http://www.ehow.com/facts_5003375_why-accounting-important-business.html (Accessed: 7 May 2011).

Representing Working Capital

Working capital (WC) can be represented as follows:

Working Capital = Current Assets – Current Liabilities

It can be said that WC measures a company’s efficiency as well as their short-term financial health (Investopedia, n.d.).

A company should always have a positive WC value. If there are less assets than there are liabilities then this means that the company is unable to repay all of their liabilities, this should be considered a “red flag” when assessing the financials of a business (Investopedia, n.d.). It should also be compared with previous WC amounts to assess a decline in profits/sales and should also be cause for concern (Investopedia, n.d.).

Management of Stock-in-trade:

It is important to consider the costs behind holding and not holding your inventories (stock-in-trade). Holding stock incurs costs such as storage space, insurance, loss of interest on the cash used to purchase stock as well as the potential losses in the case that stock becomes obsolete (Atrill & McLaney, 2011).  On the contrary, not holding stock on hand poses risks of losing sales, reordering costs, production being slowed down, and potential time critical opportunities for large quantities of stock being missed (Atrill & McLaney, 2011).

Companies should therefore manage their inventories wisely. When managing inventories a company should identify the most efficient amount of stock to be ordered by using assessment models and methods to find out the best frequency and quantity to order stock, it is important to keep accurate inventory logs so that historical data can be used in this (Atrill & McLaney, 2011), taking into consideration future forecasts of required stock.

“Just in Time” (JIT) inventory management can also be considered (Atrill & McLaney, 2011). JIT is used by most online stores today and, as the name implies, stock is ordered or re-ordered only when it is needed (often after the purchase has been made in the scenario of online stores).

Management of Trade Debtors:

This can also be referred to as “trade receivables”. Careful consideration should be made when deciding which customers should receive credit. Atrill & McLaney (2011) outline the 5 C’s of credit, as explained by Investopedia (2011):

1)     Character – The reputation of the borrower (eg: via credit check)

2)     Capacity – Compare the borrowers income to their recurring debts to work out their capacity to repay more debt

3)     Capital – Consider the amount of capital (deposit) the borrower is going to put down on the purchase, the higher the deposit the less chance of default.

4)     Collateral – Does the borrower have collateral (eg: property) that can be used to recover bad debt.

5)     Conditions – Interest rates and the term of repayment should also be considered.

The costs behind giving credit are also a factor. These are costs such as losing interest from having cash on hand in investments, as well as the lost purchasing power due to the lack of cash on hand, administration costs for maintaining customer accounts and the additional costs involved in vetting potential trade debtors must also be considered; perhaps the biggest concern would be the risk of bad debts (Atrill & McLaney, 2011). If potential clients are refused credit then the potential of a poor reputation, or losing clients is also there.

All of these above issues should be carefully evaluated and policies on all possible risks and situations as well as contingency plans should be drawn up to maintain trade debtors.

Cash

When managing cash it is important to evaluate the benefits behind keeping cash on hand as well as the best amount of cash to keep on hand. If cash is on hand, the company is losing out on interest that could be gained from the cash being in investments, also, purchasing power due to bank statements reflecting a lower balance (Atrill & McLaney, 2011).

The potential losses from not having enough cash on hand can be that of losing “supplier goodwill” (Atrill & McLaney, 2011) if there are not enough funds to keep up to date on payments. As well as missed opportunities for purchasing in cash and receiving cash discounts. Another major issue to consider is the cost of borrowing money needed (interest charged) if there is not enough cash on hand.

As with trade debtors, it is important to plan, using historic records to base your plans on. Make contingency plans and policies and find the lowest source of funding if needed (overdrafts etc.).

Trade Creditors

Also referred to as “trade payables”, is the amount of credit the company itself has (for purchasing inventories etc.) Costs to consider when managing trade credits are that of purchases on credit generally being of a higher cost than purchasing in cash (due to interest, or just simply a higher price); additional administration costs are also required to manage trade creditors for the company (Atrill & McLaney, 2011).

Trade credit can also favour the company as some suppliers may allow for borrowing without charging any interest, some suppliers may also require the company to have credit (or at least, be “credit worthy”) to be able to get discounts or be able to make large orders (helps build goodwill) (Atrill & McLaney, 2011).

As with the previous areas it is important to develop policies and plans around trade creditors. If the company is able to get interest free credit then they should take advantage of this to increase cash flow in the business (Atrill & McLaney, 2011).

Conclusion

Accounting ratios should be used where ever possible to help evaluate and assess the best possible option in managing working capital.  The working capital ratio can be used to calculate the efficiency of a company when it comes to managing stock in trade, trade debtors and creditors (MoneyTerms.co.uk, n.d.) – the calculation is as follows:

Working Capital Ratio = (stock-in-trade + trade debtors – trade creditors) / sales

MoneyTerms.co.uk (n.d.) give an example that if the ratio is 0.20 then that means that the company requires 20p (cents) of working capital for every 1GBP of annual sales, which can be put as : “If annual sales increase by £100,000 of then the company will have to invest £20,000 in working capital to be able to meet this.”.

References

Atrill, P. & McLaney, E. (2011) Accounting and Finance for Non-Specialists. 7th Edition. Prentice Hall.

Investopedia (n.d.) 5 Cs of Credit [Online]. Available from: http://www.investopedia.com/terms/f/five-c-credit.asp (Accessed: 30 April 2011).

Investopedia (n.d.) Working Capital [Online]. Available from: http://www.investopedia.com/terms/w/workingcapital.asp (Accessed: 30 April 2011).

MoneyTerms.co.uk (n.d.) Working capital [Online]. Available from: http://moneyterms.co.uk/working_capital/ (Accessed: 30 April 2011).

Methods for investment appraisal

Atrill & McLaney (2011, p.358) describe the four main methods of investment appraisal to be:

1)     Accounting Rate of Return (ARR)

2)     Payback Period (PP)

3)     Net Present Value (NPV)

4)     Internal Rate of Return (IRR)

It is noted that companies do have variations on the above but these are the main methods used. Details of the four methods are as follows:

1)     Accounting Rate of Return
Atrill & McLaney (2011, p.359) explain the ARR method to use the two main pieces of information.

  1. Annual average operating profit
  2. Average investment

The equation to calculate the ARR is as follows:
ARR = Annual average operating profit / Average investment (to achieve profit) x 100%

The company should decide a minimum target ARR and base their decisions upon projects achieving an ARR of that minimum percentage or higher. If there are numerous projects that meet the required minimum, the one with the highest ARR should be selected (Atrill & McLaney, 2011, p.360).

The main risk with using ARR is that it does not take into consideration the time factor for return on investment (Atrill & McLaney, 2011, p.362). If three projects have an equal investment and projected return a fixed period of time, they will all have the same ARR; but if one of those projects covers its investment costs within 1 year and the other only after 4 years, project 1 should be the clear winner.

The second major flaw in the ARR method is that ARR is based on Accounting profits rather than cash profits. As explained in an example by Atrill & McLaney (2011, p.362); if an asset has a residual value at the end of life of the project, giving it away rather than selling it allows for a higher ARR (Average Investment = Cost of Asset + Residual Value).

2)     Payback Period

This calculates the amount of time that is required for a project to repay the initial investment amount out of its resulting cash inflow (Atrill & McLaney, 2011, p.364).

Companies should base their decisions when using PP on a predefined maximum time limit for projects to repay their investments, the project with the shortest projected time to repay initial investment should be chosen (Atrill & McLaney, 2011).

The flaw with this method is that it doesn’t consider the amount of cash flow in the period it takes to repay the investment. As per Atrill & McLaney’s example (2011, p.366) if project A B and C repay an investment in the exact same amount of time (3.5 years), but project C repays almost all of the investment in the first year while project B and A in the late 2nd and 3rd respectively, project C should be the clear winner. Also, it does not consider the cash flows after the initial investment has been reach, it concentrates on high initial returns which lends itself to a more negative idea that the project is going to fail so the money must be recouped as soon as possible. If project A gives twice as much return as project C after the third year then that should be strongly considered as a better option.

3)     Net Present Value

The NPV method allows us to make a decision based on all of the costs and benefits as well as the exact timings in which they occur (Atrill & McLaney, 2011, p.368).

To put it simply, NPV compares the value of the invested currency today and compares it with the value of that invested currency in the future, also taking into consideration inflation and returns (Investopedia, 2011).

Value Based Management (n.d.) describes the steps to calculating NPV as follows:

1)     Calculate expected free cash flows per year as a result of the investment

2)     “Subtract/discount for the cost of capital (an interest rate to adjust for time and risk)”
This intermediate result is called the Present Value

3)     Subtract initial investment amounts

This end result is the Net Present Value

Companies should consider projects with a positive NPV,  negative NPV’s should be rejected and the project with the highest positive NPV should be chosen when faced with multiple projects.

The problem with NPV as explained by Value Based Management (n.d.) is that it does not account for flexibility or changes / uncertainty after the decision has been made to proceed with the project.

4)     Internal Rate of Return

This method is closely tied with NPV. IRR uses the method of discounting future cash flows from an investment but it produces the discount rate at which an NPV value of zero is achieved (Atrill & McLaney, 2011, p.379). It is noted that IRR is difficult to calculate as it involves trial and error to get the value down to 0.

IRR can be thought of as “the rate of growth a project is expected to generate” (Investopedia, n.d.).

Investopedia (n.d.) explains that generally a project with a higher percentage IRR is more desirable than one with a lower percentage IRR. The project that yields the highest percentage IRR is the project that should be considered first.

The flaw with IRR is that it does not take into consideration the scale of development (Atrill & McLaney, 2011, p.383), basically an increase in investment can increase returns yet give us the same percentage. Another issue is that it does not cater for fluctuations in cash flows. With a fluctuating cash flow, multiple IRR’s or none at all may be the result (Atrill & McLaney, 2011).

Atrill & McLaney (2011, p.383) mention that NPV overcomes the flaws of IRR and out of the 4 options outlined above I would also tend to lean towards NPV as being the best method of assessing a risky investment because it gives us closer to real world values of our returns on a project. I believe it is very important to consider that even if we are getting a positive return when projecting, what would that amount really equate to in the time frame that it is being returned, with inflation and rising labour costs it wouldn’t be wise to exclude them from your assessments.

That being said, as Atrill & McLaney (2011, p.388) point out, companies use combinations of the above 4 methods to evaluate investments and I would consider using NPV and IRR and PP when considering an investment.

References

Atrill, P. & McLaney, E. (2011) Accounting and Finance for Non-Specialists. 7th Edition. Prentice Hall.

Investopedia (n.d.) Internal Rate of Return – IRR [Online]. Available from: http://www.investopedia.com/terms/i/irr.asp (Accessed:

Investopedia (n.d.) Net Present Value – NPV [Online]. Available from: http://www.investopedia.com/terms/n/npv.asp (Accessed: 30 April 2011).

Value Based Management (n.d.) Net Present Value Method [Online]. Available from: http://www.valuebasedmanagement.net/methods_npv.html (Accessed: 30 April 2011).

Cash Flow Statements

A cash flow statement (or statement of cash flows) shows a fairly detailed description of the movement (or flow) of cash over a period of time. The cash flow statement includes with the cash flows from operating activities, investing activities, financing activities and provides the cash and equivalents total for the end of the reported period.

There are two methods of measuring the cash flows from operating activities

Direct Method

This is the simplest, yet the least used method. The requirements are simply to add up all the payments and receipts over the reported period to give a total that reflects on the cash flow statement.

Indirect Method

This method is the more popular method and is based on the principal that the sales revenue increases cash inflow while expenses increases cash outflows. “The indirect method adjusts net income for items that affected reported net income but didn’t affect cash” (Anon, n.d.)

Examples

ABC Limited reported a revenue of $ 1 000 000 at the year ending 31 December 2010. The income statement reflected a $ 140 000 tax payment and a Net Income of $ 34 000. Accounts receivable increased by $ 200 000; therefore cash collected on the revenue is $ 800 000 ($ 1 000 000 – $ 200 000). ABC Limited reported operating expenses of $ 825 000. Accounts payable (operating expenses) was reported as being $ 45 000; therefore cash operating expenses were $ 780 000 ($ 825 000 – $ 45 000). Tax payable at the end of the year was reflected as $ 0.00 which means the income tax payment was made during the year in cash.

Direct Method

Cash collected from revenues                                                   800 000
Cash payments for expenses                                                     780 000
Income before income taxes                                                            20 000
Cash payments for income taxes                                            140 000
Net cash flow from operating activities                                     (120 000)

Indirect Method

Net income                                                                                           35 000
Increase in accounts receivable                                         (200 000)
Increase in accounts payable                                              45 000         (155 000)
Net cash flow from operating activities                                    (120 000)

We can see that both methods result in the same net cash from operating activities. While direct looks directly at the cash in hand the indirect looks more at the income statement and uses trade payables and receivables to work out the cash flow from operating activities.

References

Anon (n.d.) Cash Flow Statement Example-Direct and Indirect Method [Online] Accounting for Management. Available from: http://www.accountingformanagement.com/preparation_of_statement_of_cash_flows.htm (Accessed: 16 April 2010).

Atrill, P. & McLaney, E. (2008) Accounting and Finance for Non-Specialists. 6th Edition. Financial Times Press.

Liability, Tax and Financial Reporting Requirements in South Africa

Legal Entity

Limited companies are, by law, legal entities that have a (perpetual) life of their own, irrespective of the owners/shareholders of the company. As stated by Atrill & McLaney (2011), this means that the company itself can be sued, or can sue another person/entity in its own capacity, irrespective of the owners. This is in direct contrast with sole proprietorships where, unlike the accounting (where the owner and the business is separate), the owner and the company are legally treated as the same entity, therefore the owner is the one who is liable if any legal issues arise.

Limited Liability

Perhaps one of the most important features of a company is that the shareholders of the company have a liability that is limited only to the equity (shares) they have in the business. If the company has a large outstanding debt which it is unable to repay, by law only the assets/equity the business itself owns can be liquidated to repay the outstanding amount, and the shareholders are not liable for any repayment in their personal capacities. Again this is in direct contrast, as mentioned above, with sole proprietorship where the sole proprietor themselves would be liable for any bad debts in their personal capacity and therefore even their “non-business” assets may be liquidated to fulfil debt payments.

Tax

Due to the two points mentioned above, a limited company therefore must be taxed as an entity. Most countries have separate taxation percentages for legal entities. These taxes are charged to the company and this does not exempt shareholders from their personal tax requirements, for example; receiving a dividend pay-out from the already taxed profits does not mean the shareholder doesn’t have to pay tax on the dividend pay-out as the dividend pay-out is a taxable income to them personally, the tax the company has paid is for the company.

South Africa – Accounting and Financial Reporting

South Africa currently has limited companies as well as another form of entity called a close corporation. Closed corporations are much easier to incorporate than regular companies and do not require full accounting audits, but have a number of other limitations compared with regular limited companies which are represented by (Pty) Ltd (eCompanies, n.d.). Close corporations in South Africa have, however, been phased out as of this year.  Regulations for limited companies in South Africa, as mentioned, require the financials to be audited by a firm of Chartered Accountants.  With effect from July 1, 2010, a new legislation amendment has been made to the companies act that states financial reporting standards “must be consistent with the International Financial Reporting Standards of the International Accounting Standards Board” (eStandardsForum, 2009).

References

Atrill, P. & McLaney, E. (2011) Accounting and Finance for Non-specialists. 7th Edition. England: Pearson Education Limited.

eCompanies (n.d.) What is a close corporation? [Online]. Available from: http://www.ecompanies.co.za/cc.htm (Accessed: 16 April 2011).

eStandardsForum (2009) South Africa – International Financial Reporting Standards [Online]. Available from: http://www.estandardsforum.org/south-africa/standards/international-financial-reporting-standards (Accessed: 16 April 2011).

Accounting conventions and their effects on financial position

Balance Sheets

This report can also be referred to as “The Statement of Financial Position” (Atrill & McLaney, 2008). It shows a “snapshot” of the businesses financial position, it is important to remember that the balance sheet only reflects for the date on which it was prepared; it is not highly unlikely that dates before and after may be significantly different. The details on the Balance sheet include a value listing of the current assets (items equitable to a monetary value with an expected conversion to the proposed value within 12 months), the non-current assets (the same as current but with an expected conversion to monetary value that is over 12 months), versus the liabilities (items that the business owes money on, such as loans and stock purchased on credit; both current and non-current) and equities (amounts paid in to the business by the owners as well as the profits generated by the business).

As the name states, the balance sheet should always balance so that the Total Assets = Total Equity + Total Liabilities.

Accounting Conventions – Effects on Measuring & Reporting Financial Position

There are a number of different accounting conventions that can change the appearance of a company’s financial position which are outlined by Atrill & McLaney (2008) and can be summarised as follows:

  • Business Entity Convention:
    Whether a business is a sole proprietorship or a partnership, or any other kind of business, the business always exists as its own entity with its own finances. If the business owner invested $ 50 000 in to the business then that is considered as an amount the business “owes” the owner.
  • Historic Cost Convention:
    This convention specifies that the costs of assets are to be recorded and maintain the original cost value throughout their lifetime. The purchase of a vehicle which depreciates fairly rapidly and the cost of property which appreciates will be recorded at the original purchase price. In these two situations the financial representation can be biased either positively or negatively respectively.
  • Prudence Convention:
    This convention is used to avoid over-optimistic projections by managers and directors. All possible losses are recorded once and in full while the profits are only recorded once they actually happen. This is a somewhat bleak outlook on financial position and may end with investors placing a lower value on their investments into the business than the true value.
  • Going Concern Convention:
    This convention has a more positive view than the prior convention. The assumption is made that the business will not be closing in the foreseeable future. Values are taken as current. The issue that arises with this convention that is if the company is to close, assets being sold off will more than likely be sold for less than their reflected value.
  • Dual Aspect Convention:
    This convention keeps with the concept of the balance sheet. Each transaction has a positive and negative effect on the balance sheet and should be recorded as so in the relevant categories. This assures the balance sheet will always balance.

Asset Valuation – Effects on Measuring & Reporting Financial Position

Asset valuation can be measured in different ways. One of the ways as mentioned above is the historic cost method where an asset is valued at its original cost to the business. As with the example above, it is important to keep an accurate record of the depreciation (decrease in value, such as with motor vehicles) and/or appreciation (increase in value, such as with property) recorded to maintain a more accurate measurement of the true values.

“Fair values” may also be used to measure an assets worth. This can be the assessed value of replacing or selling the asset as opposed to the depreciated or appreciated value of the asset. Fair value is often open to much debate and is more difficult to pin-point than appreciated or depreciated values.

References

Atrill, P. & McLaney, E. (2008) Accounting and Finance for Non-Specialists. 6th Edition. Financial Times Press.

Finance, Financial Accounting and Management Accounting

Finance

Atrill & McLaney (2008) describe Finance (also referred to as financial management) as being something likened to accounting rather than accounting itself. Atrill & McLaney (2008) go on to describe finance as existing to aid decision makers on how to plan a business, by assessing the needs of the business and organising the finances to suit these needs (being simply to make investments for good returns, or additionally numerous other arenas where financial needs must be assessed).

Financial Accounting

Atrill and McLaney (2008) outline Financial Accounting quite thoroughly and it can be summarised as the following: Financial Accounting is predominantly produced to summarise the overall financial standing of a business in a formal, regulatory defined format for public view (eg: investors/potential investors, governments, general employees, suppliers, competitors etc.). Financial accounts are usually prepared out of necessity once (in some cases twice) per year and are often a requirement by many countries tax laws.

Management Accounting

Atrill and McLaney (2008) describe how, as the name suggests, this form of accounting is used by management in a company and are often used to aid in specific decision making requirements (such as new purchases, new investments, etc.). Management accounts are mostly tailor-made both in format and in financial area to best suit the requirements of the specific manager and specific task at hand.

Similarities and Differences

Finance itself is a broader outline of the processes involving finance in a business, which is arguably the most important aspect of a business. Finance itself would encapsulate the latter two of the above definitions.

As described above, Financial Accounting provides predefined forecast on how a business has been running, financially, in the past period; which, as Atrill & McLaney (2008) point out, can also be used to forecast future performance. Management Accounting is predominantly used for projections or forecasts on new ventures or current ventures that a business is partaking in and are generated if and when they are required by management, rather than at predefined times as required by regulatory bodies.

To conclude, “management accounting seeks to meet the needs of the business managers and financial accounting seeks to meet the needs of the other user groups” (Atrill & McLaney, 2008).

References

Atrill, P. & McLaney, E. (2008) Accounting and Finance for Non-Specialists. 6th Edition. Financial Times Press.

Should an Organisational Strategy intertwine itself with the Human Resources Policy?

With regards to the argument of whether organisational strategy should or should not be intertwined with the human resources policy, I believe that it should be.

As written in by Buchanan and Huczynski (2010), people form an organisation, even down to the organisations “personality” – while the organisational strategy may seem on the surface to be more along the lines of the organisations ideal vision and mission, this is the weight the employees must take on their shoulders and human resource policies should be structured to align the real world, daily function of the organisation to achieve the ideals specified in the strategy.

HRM Guide (n.d.) states “organisations can be regarded as people management systems” as well as “Human resource managers can encourage organisations to adopt strategies (for their structures) which foster both cost-effectiveness and employee commitment”. Particularly important, is the employee commitment that HRM Guide has pointed out, without the full commitment and belief of the employees in the organisation and its strategy, the organisation is going to find it difficult to implement the strategy and the values.

HR-Info (n.d.) explains how “people management professionals” have the role of becoming knowledgeable about an organisation but are often discouraged by jargon and complexity, following this comment we can assume that if the management professionals are discouraged by the complexity of the strategy then most of the employees will be too. It is the job of the management professionals (specifically HR), to, as HR-Info puts it, “demystify” the organisational strategy for the employees and it should be an important part of the HR policy to explain the details behind the organisational strategy.

I also feel that, from my experience, if an employee has full understanding of the goals and vision of an organization – they will perform better and also feel more part of the organisation. Many employees are unaware of the strategy behind an organisation or feel detached from it due to the “higher level” overview carried across in vision and mission statements. If organisational structures are evaluated against internal staff policies this will aide in a more unified vision and understanding in an organisation.

To conclude, it is my view that the vision and mission of an organisation, therefore, should be simplified with regards to the use of jargon and structured in a clear manner which considers the employees of the organisation. Upper management and/or directors of an organization should consult with the HR department when developing, or redeveloping their organisational structure, perhaps to the point where the HR department drafts the organisational structure based on initial instruction of the upper management/directors. Without consultation, organizations run the risk of losing the link between upper management goals and employee participation which make up the day-to-day life of the organisation. Without the alignment of these two, it is difficult to imagine the fruition of the strategy behind the organisation.

References

Buchanan, A. & Huczynski, A. (2010) Organizational Behavior. 7th Edition. Upper Saddle River: Prentice Hall.

HR-Info (n.d.) Demystifying Organizational Strategy [Online]. Available from: http://www.hr-info.com/2011/03/demystifying-organizational-strategy/ (Accessed: 20 March 2011).

HRM Guide (n.d.) Organizational Structure [Online]. Available from: http://www.hrmguide.net/hrm/chap4/ch4-links3.htm (Accessed: 20 March 2011).

IT Positions in South Africa, do they require tertiary education?

In South Africa, there is a strong emphasis on experience when it comes to technical or IT positions. IT job ads in South Africa are generally opened up with a requirement of “IT related Degree or Diploma” but, in my experiences of being an applicant without a degree (only a 1-year Comp Sci. diploma) as well as being in the position of hiring applicants, this is often just a small benefit when it comes to the final choice. In the interviews I have taken part in I have never had an in depth discussion about the qualifications either I myself have or an applicant that I am interviewing has.

In this (IT) industry in South Africa, it’s a known fact that for technical positions (programmers, technicians etc.), salary is almost solely based on the amount of experience an applicant has.

Another point I found when being an applicant with a diploma is that the difference between a 1 diploma and a 3 year degree is quite vast. Not exactly 2 years ahead due to degrees generally being spread out with a lot of holidays and the 1 year diplomas being 48 out of the 52 weeks in the year, but still a very significant amount more learning is gained in the degree program. Yet, job ads were looking for “either a degree or diploma”.

I do keep up to date with job postings for IT related positions in my country and I have found that recently, a number of jobs are asking for a “3 year degree” rather than simply a degree or diploma.

For positions in management, which mainly consist of project manager positions, project management training has always been a requirement in my experience of reading through positions, but along with that comes a requirement of, generally, a minimum of 3 years of experience in project management.

This brings me to the catch-22 of the job market in South Africa that I found in my first 2 years of being in the industry. Practically nobody will even interview you without relevant experience, let alone hire you. Without experience you cannot get a job, and without a job you most certainly can’t get (valuable) experience.

I feel the main area where specific training is not a major requirement is in the field of IT support. Many positions are available in support and most of them involve being trained in the specific scenarios of the organisation on the job. Even with regards to hardware support, I find the most talented hardware support people have learned themselves. The courses such as the A+ and other technical courses, which I have done personally, are almost trivial to someone who has “played around” with computers for a few years. In my opinion, it is difficult to teach such an area as the reasons behind hardware/software failing are not standard, they require trial and error even for the experienced hardware technician.

For technical positions, I have always, and my colleagues in the industry, been given mini-projects to complete and/or written general tests. Personally I give applicants a mini-project as I do not believe that written tests are a good when it comes to programming, specifically. Knowing functions off by heart doesn’t mean much, as generally we all have access to the internet to solve these issues, rather the ability to solve a problem and produce a project with good quality code.

To conclude, the situation in South Africa has become more focused on pre-trained individuals over the years – but this is generally just an initial prerequisite to avoid interviewing potentially mis-fit applicants. The strongest focus does still lie on experience in the specific field that is being applied for.