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FMA
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Mike Powers
MBA INTENSIVE SEMINARS 2004 Page 4
Creative Accounting?
“Things may exist independently of our accounts, but they
have no human existence until they become accountable.
They may not exist, but they take on human significance by
becoming accountable..”
“Accounts define reality and at the same time they are that
reality….”
“Accounts do not more or less accurately describe things.
Instead they establish what is accountable in the setting in
which they occur”
Financial statements
Organisational impact
Understandability
Decision-Usefulness
Relevance Reliability
Receive cash
MBA INTENSIVE SEMINARS 2004 Page 12
When is profit reported?
Current assets
Less
Current liabilities
Equals
Shareholders’ funds
Equals Profit
plus
Investing cash flows
plus
Financing cash flows
Equals change in cash and bank loans
MBA INTENSIVE SEMINARS 2004 Page 23
Creative accounting
•Sufficiently liquid?
•Financed properly?
•Able to meet its financial obligations?
•Viewed favourably by financial markets?
MBA INTENSIVE SEMINARS 2004 Page 33
Financial ratios
• Quick and simple check on financial health
• Small number of ratios gives a picture of the
business. Easy to calculate, harder to interpret.
• Provide a starting point for further investigation.
Formulating strategy
MBA INTENSIVE SEMINARS 2004 Page 72
Importance of costing
• Many organisational decisions rely on costings
• Costing is complex but essential
• “An accountant knows the cost of everything but
the value of nothing” Oscar Wilde
Resources
consume
Non-financial
Collect
Data
Activities Performance
Analysis
produce
Outputs
creates Value
MBA INTENSIVE SEMINARS 2004 Page 96
Benefits of ABC
• Makes visible the activities that drive the costs
• Prevents misallocation of costs
• Links costs more closely to responsibility for
causing costs
BUT does not save money or generate profit. It
only gives more accurate information
Budgets and
Budgetary Control
Financial plans
Corporate objectives
Assumptions
Assessed market Long term on critical
opportunities/ strategy factors
organisational
capability
Long term plans
MBA INTENSIVE SEMINARS 2004 Page 101
Long term strategy
Zero-based budgeting
• Start with a clean sheet
• Justify every item
• Focus on goals and objectives
Kaizen budgeting
• continuous improvement
• budget is achieved if improvements are met
MBA INTENSIVE SEMINARS 2004 Page 112
Not-for-profit organisations
• Goals and objectives measured differently
• Need to be cost effective
WHY ?
MBA INTENSIVE SEMINARS 2004 Page 134
Financial measures (contd)
Top line answer
• Division’s market share dropped
• Costs were reduced by reducing maintenance of cutting
machine, reducing staff training
•build up of stocks (inventory) of unsold goods
Bottom line answer
• Reduced investment in new technology
Financial System did not pick up the BAD Events
Financial
Perspective
Internal Business
Customer Vision and Perspective
Perspective Strategy