Management accounting control

θωερτψυιοπασδφγηϕκλζξχϖβνμθωερτψ
υιοπασδφγηϕκλζξχϖβνμθωερτψυιοπασδ
φγηϕκλζξχϖβνμθωερτψυιοπασδφγηϕκλζ
ξχϖβνμθωερτψυιοπασδφγηϕκλζξχϖβνμ
Management
Accounting
Control
θωερτψυιοπασδφγηϕκλζξχϖβνμθωερτψ
Philippe
Smans
υιοπασδφγηϕκτψυιοπασδφγηϕκλζξχϖβν
Manon
Cuylits
μθωερτψυιοπασδφγηϕκλζξχϖβνμθωερτ
ψυιοπασδφγηϕκλζξχϖβνμθωερτψυιοπα
σδφγηϕκλζξχϖβνμθωερτψυιοπασδφγηϕκ
λζξχϖβνμθωερτψυιοπασδφγηϕκλζξχϖβ
νμθωερτψυιοπασδφγηϕκλζξχϖβνμθωερτ
ψυιοπασδφγηϕκλζξχϖβνμθωερτψυιοπα
σδφγηϕκλζξχϖβνμθωερτψυιοπασδφγηϕκ
λζξχϖβνμρτψυιοπασδφγηϕκλζξχϖβνμθ
ωερτψυιοπασδφγηϕκλζξχϖβνμθωερτψυι
οπασδφγηϕκλζξχϖβνμθωερτψυιοπασδφγ
ηϕκλζξχϖβνμθωερτψυιοπασδφγηϕκλζξ
χϖβνμθωερτψυιοπασδφγηϕκλζξχϖβνμθ
ωερτψυιοπασδφγηϕκλζξχϖβνμθωερτψυι
οπασδφγηϕκλζξχϖβνμθωερτψυιοπασδφγ

Management
Accounting
Control
2012-‐2013
Manon
Cuylits
2
TABLE
OF
CONTENTS
Exam
.......................................................................................................................................
3
Chapter
1:
Introduction
...................................................................................................
4
Some
history
.................................................................................................................................
4
1.
Classical
approach
...........................................................................................................................
4
2.
Cybernetic
approach
......................................................................................................................
5
3.
Systemic
approach
..........................................................................................................................
6
SUMMARY
....................................................................................................................................................
8
the
management
controller
....................................................................................................
8
The
role
of
Finance
is
changing
.......................................................................................................
11
The
role
of
the
Management
Controller
is
changing
..............................................................
12
Operational
and
strategic
feedback
...............................................................................................
14
What
might
be
part
of
the
Management
Control
Function
.................................................
16
Required
skills
........................................................................................................................................
19
Chapter
2:
Management
accounting
control
.........................................................
22
LINK
WITH
FINANCIAL
MANAGEMENT
............................................................................
22
LINK
WITH
MARKETING
MANAGEMENT
.........................................................................
25
Controlling
the
sales
force
....................................................................................................
25
Forecasting
sales
...................................................................................................................................
26
Establishing
sales
territories
and
quotas
....................................................................................
28
Analysing
expenses
..............................................................................................................................
29
THE
LINK
WITH
HR
MANAGEMENT
...................................................................................
31
Chapter
3:
budgetting
...................................................................................................
32
Successive
steps
for
a
budgeting
process:
..................................................................................
35
Operational
budgets
...............................................................................................................
37
Financial
budgets
..................................................................................................................................
38
Budget
Process
.........................................................................................................................
42
Incremental
method
.............................................................................................................................
42
Percentage
method
...............................................................................................................................
43
«
Zero
based
»
budget
..........................................................................................................................
43
Chapter
4:
Capital
budgeting
......................................................................................
45
Key
motives
for
making
capital
expenditures
..........................................................................
45
Steps
in
the
capital
budgeting
process
.............................................................................
46
Basic
Terminology
...................................................................................................................
47
Chapter
5:
cash
flow
.......................................................................................................
49
The
relevant
Cash
Flows
........................................................................................................
49
Main
components
..................................................................................................................................
50
Terminology
............................................................................................................................................
51
What
are
the
key
elements
of
the
recent
business
evolution?
..........................................
65
Parallel
Business
tools
evolution:
..................................................................................................
66
But…
............................................................................................................................................................
67
“Balances”
.................................................................................................................................................
69
Linkage
between
causes
and
strategic
activities
.....................................................................
75
Perspective
measurement
....................................................................................................
79
Financial
perspective
...........................................................................................................................
80
Customer
perspective
..........................................................................................................................
82

Management
Accounting
Control
2012-‐2013
Manon
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Internal
process
perspective
............................................................................................................
86
Learning
and
Growth
perspective
..................................................................................................
87
Chapter
7:
Technique
of
cost
accounting
................................................................
97
Allocation
of
costs
..........................................................................................................
97
producing
department
overhead
.................................................................................................
100
Allocation
of
service
department
costs
to
producing
department
.......................
103
partial
overhead
absorption
...........................................................................................................
120
Activity-‐based
costing
(ABC)
..........................................................................................................
124
Activity-‐based
Costing
system
.......................................................................................................
134
CONCLUSION
...................................................................................................................
138
3
EXAM
Case
study:
19
pages
to
read,
there
will
be
questions
about
it.
We
can
bring
it
to
the
exam,
and
he
will
test
our
understanding.
We
can
bring
the
case
study
with
some
notes
on
it.
Other
questions:
Mix
of
several
types
of
questions:
QCM
–
basic
calculations
(CF,
Cost
allocation,
etc.)
–
questions
aiming
an
understanding
of
the
basic
subjects
(ex:
explain
the
job
of
a
MC)
–
close
questions,
etc.
We
don’t
have
to
know
the
presentations
but
we
have
to
know
one
or
two
messages
per
presentation.

Management
Accounting
Control
2012-‐2013
Manon
Cuylits
4
CHAPTER
1:
INTRODUCTION
This
course
is
designed
for
students
with
a
Bachelor
Degree
in
Management
or
Business
Administration
who
want
to
develop
their
abilities
to
work
more
effectively
within
large
and/or
well-‐structured
companies
and
to
deal
with
questions
of
management
control
in
any
type
of
company.
Therefore,
the
course
is
developed
from
a
company
/
business
point
of
view.
Theoretical
concepts
on
Management
Control
will
be
reviewed,
and
will
constantly
be
illustrated
through
real-‐life
examples
and
case
studies,
in
order
to
have
the
students
familiarized
with
the
main
aspects
of
Management
Control
and
especially
to
apply
the
methods
of
Management
Accounting
Control.
Basic
concepts:
ð What
is
Management
control?
ð Why
is
it
necessary?
ð What
are
the
basic
tools?
SOME
HISTORY
If
we
look
back
we
can
see
that
over
time
3
types
of
management
control:
-‐ Classical
approach
-‐ Cybernetic
approach
-‐ Systemic
approach
1. CLASSICAL
APPROACH
Fayol
(theoretician):
“management
means
a
couple
of
things:
-‐ Planning,
-‐ Organizing,
-‐ Commanding,
-‐ Coordinating
activities,
-‐ Controlling
performances
(NB:
first
time
we
see
the
word
control)
Most
of
these
activities
are
task
management
oriented
rather
than
people
management
oriented.
This
was
typical
of
Taylor
and
the
Scientific
Management.

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Contrôler
(French)
=
to
check
something.
(E.g.:
to
check
the
speed
of
a
car)
To
control
something
(English)
=
Make
sure
that
things
“happens”
correctly
≠
to
check.
The
“control”
was
perceived
narrowly
(“surveillance”)
and
not
very
explicit.
ð Management
controller:
not
somebody
who’s
just
checking
the
management,
it’s
5
something
broader.
This
looks
like
something
mechanic,
really
systematic,
but
the
experience
shows
that
you
might
not
be
efficient;
you
could
fail
even
If
you
make
many
efforts
to
plan,
organize,
…
Nowadays,
things
are
moving
really
quickly.
You
have
to
be
able
to
adapt
to
those
changes.
A
better
ability
to
adapt
to
a
changing
environment
is
needed.
That
leads
to
the
cybernetic
approach.
After
a
while,
if
the
output
is
not
right
in
the
case
of
the
classical
approach,
you
will
change
your
approach
to
the
cybernetic
approach.
2. CYBERNETIC
APPROACH
Without
the
right
input
it’s
really
difficult
to
have
a
good
output.
If
my
outputs
seem
not
to
be
all
right,
it
might
be
because
of
the
inputs,
or
because
of
the
system
itself.
Output
=
It’s
something
you
want
to
reach,
an
objective.
Every
company
has
objectives.
They
will
put
a
system
in
place
and
chose
inputs.
Examples:

Management
Accounting
Control
2012-‐2013
Manon
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Profit
is
a
typical
output
of
the
company,
but
not
the
only
one.
Another
example
of
output
could
be
customers,
market
shares,
customer
satisfaction,
and
so
on.
But
it’s
never
limited
to
profit.
Most
of
the
time
they
will
first
discover
that
the
output
is
not
good
and
they
will
make
changes.
It’s
better
than
the
previous
approach
but
still
no
question
about
the
relevance
of
6
the
goals
and
objectives.
“Is
this
the
right
output
that
I
want
to
achieve?”
or
“Is
there
another
output
which
would
be
better?”
If
you
start
to
question
the
relevance
of
your
objectives,
you
arrive
in
the
systemic
approach.
3. SYSTEMIC
APPROACH
You
will
consider
any
company
as
a
system.
That’s
much
more
sophisticated,
and
closer
to
the
reality,
because
nowadays,
running
a
business
is
becoming
more
and
more
complex:
(The
following
reasons
bring
problems
but
also
opportunities)
-‐ More
competitors
on
the
market,
globalization
in
the
last
decade,
etc.
-‐ Regulation
is
increasing;
environment
of
regulation
is
becoming
tougher
and
tougher.
The
speed
of
change
is
increasing.
-‐ The
economic
situation
(crisis),
it’s
currently
not
easy.
But
it
also
creates
opportunities.
-‐ Technologies.
Some
companies
are
very
successful
thanks
to
their
ability
to
adapt
themselves
really
quickly
to
new
technologies.
In
this
model,
a
company
is
defined
as
a
system
with
goals
and
able
to
adapt
itself
(continuously)
The
management
control
is
no
longer
a
process
of
“a
posteriori”
verification.
“Control”
means
actually
“keep
control
in
order
to
adapt
to
the
environment
evolution”.
Therefore
the
role
of
the
control
is:
-‐ To
ensure
the
relevance
of
the
system’s
goal
and
objectives
-‐ To
ensure
that
the
relationships
between
subsystems
allow
to
move
towards
the
objectives
Systemic
control
covers
the
2
points
of
view:
-‐ External:
the
control
system
must
ensure
the
relevance
of
the
strategic
choices
and
of
the
behaviors
-‐ Internal:
the
choice
of
control
system
is
clearly
linked
to
the
organizational
system

Management
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2012-‐2013
Manon
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7
Analytic
approach
Systemic
approach
AA
isolates
and
then
concentrates
on
the
elements
SA
unifies
and
concentrates
on
the
interaction
between
elements.
Studies
the
nature
of
interactions
Studies
the
effects
of
interactions
Emphasizes
the
precision
of
details
Emphasize
global
perception
Modifies
one
variable
at
a
time
Modifies
groups
of
variables
simultaneously
Remains
independent
of
duration
of
time,
the
phenomena
considered
irreversible
Integrates
duration
of
time
and
irreversibility
Validates
facts
by
means
of
experimental
proof
within
the
body
of
a
theory
Validates
facts
through
comparison
of
the
behavior
of
the
model
with
reality
Uses
precise
and
detailed
models
that
are
less
useful
in
actual
operation
(example:
econometric
model)
Uses
models
that
are
insufficiently
rigorous
to
be
used
as
bases
of
knowledge
but
are
useful
in
decision
and
action
Has
an
efficient
approach
when
interactions
are
linear
and
weak
Has
an
efficient
approach
when
interaction
are
nonlinear
and
strong
Leads
to
discipline-‐oriented
(juxtadisciplinary)
education
Leads
to
multidisciplinary
education
Leads
to
action
programmed
in
detail
Leads
to
action
through
objectives
Possesses
knowledge
of
details
poorly
defined
goals
Possesses
knowledge
of
goals,
fuzzy
details
1ST
ELEMENT
Analytic
approach
=
“AA
isolates
and
then
concentrates
on
the
elements”
Systemic
approach
=
“SA
unifies
and
concentrates
on
the
interaction
between
elements.”
A
company
is
a
system
(//
human
body:
sum
of
different
elements
interacting
a
lot
with
each
others).
In
this
approach
you
will
define
a
company
by
a
series
of
elements.
è
Different
parts,
and
for
each
part:
one
specialist.
That’s
typical
of
many
companies.
What
may
happen
if
you
concentrate
on
those
elements?
Ex:
You
may
have
a
purchasing
department:
the
job
of
the
purchasing
manager
is
buying.
If
he’s
a
real
specialist,
he
will
be
champion
in
bargaining
for
the
minimum
price.
Sometimes
it
raises
problems.
Ex:
I
buy
a
car
at
the
minimum
purchasing
price
=>
lower
quality,
so
much
more
reparations,
and
the
total
cost
of
the
car
could
be
higher
than
it
was
supposed
to.
Sometimes
it’s
not
a
good
idea
to
buy
a
car
at
the
minimum-‐
purchasing
price.
Systemic
approach:
It’s
much
more
powerful
than
the
analytic
approach.
Here
you
look
at
several
elements
and
at
their
interactions!
You
never
look
just
at
the
purchasing
price
but
also
at
the
quality
etc.
You
concentrate
on
the
interactions
between
the
elements
in
this
approach.
Ex:
as
human
resource
manager,
what
do
you
expect?
You
want
your
people
to
be
productive,
so
you
want
them
to
be
motivated,
and
what
drives
motivation?
Training
possibilities,
coaching,
etc.

Management
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Control
2012-‐2013
Manon
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Good
managers
have
to
look
at
the
interactions
between
human
resources,
finance
department,
purchasing
department,
etc.
It’s
necessary
for
the
company
to
succeed
8
SUMMARY
Classical
approach:
You
focus
on
the
output.è
The
only
things
you
need
to
do
are
check,
surveillance,
look
at
the
output.
Cybernetic
approach:
Focus
on
the
process
that
produces
the
output.
If
my
output
is
wrong,
it’s
probably
because
something
is
wrong
with
the
process.è
Process
audit.
How
does
the
process
work?
Systemic
approach:
Focus
on
the
system1
that
produces
the
output.
è
System
audit.
I’m
going
to
look
at
the
system
(//computer
system).
THE
MANAGEMENT
CONTROLLER
In
front
of
increasing
business
complexity,
there
are
often
too
many
activities
for
a
single
person.
More
and
more
activities
are
delegated
to
a
management
controller,
who
must
keep
the
CEO
informed
about
things
like:
-‐ The
various
department’s
performances
-‐ Sales
-‐ Costs,
benefits
-‐ Control
issues
related
to
systems
that
operates
transactions
-‐ The
impact
of
new
taxes
and
other
national
or
international
trade
regulations
-‐ Etc.
As
a
CEO
you
don’t
have
time
to
do
that,
so
you
ask
someone
to
do
it
for
you
and
to
keep
you
informed,
and
then
you
take
decisions,
because
it’s
your
job.
That
someone
is
the
management
controller.
1
System
=
a
collection
of
processes.
Of
course
it’s
much
more
complicated
than
a
process
because

Management
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2012-‐2013
Manon
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A
management
controller
may
be
compared
to
a
ship
navigator,
who
keeps
the
captain
aware
of
current
or
potential
problems
(icebergs,
etc.)
9
The
job
of
the
management
controller
is
to
get
the
relevant
data,
to
work
them
out,
to
translate
them
into
useful
information
in
order
to
give
it
to
the
CEO.
He
collects
the
information
and
summarizes
it
to
give
it
to
the
CEO.
The
CEO
will
interpret
those
data
and
then
use
it
to
make
decisions.
Therefore,
the
Management
Controller
needs
to
be
aware
of
the
company’s
strategy.
His
job
is
to
get
the
relevant
figures;
therefore
he
needs
to
know
the
objectives,
strategy,
etc.
of
the
company.
Example:
If
the
strategy
of
the
company
is
to
grow,
the
Management
Controller
knows
some
figures
that
are
more
important
for
the
company
to
know.
He
can
then
select
the
relevant
data
depending
on
the
direction
that
the
company
wants
to
take
(its
final
destination,
its
strategy).
Traditionally,
in
most
companies,
the
Management
controller
reports
to
the
financial
manager
and
in
many
cases
his
job
is
not
named
management
controller
but
financial
controller.
Summary:
Get
information
è
Analyze
information
è
Provide,
based
on
that
information,
a
message
to
the
CEO
It
might
be
financial
data,
but
it
could
also
be
other
types
of
data.
It’s
absolutely
not
only
related
to
financial
data,
that’s
why
the
name
“financial
controller”
isn’t
that
good
for
this
function.
Life
of
a
company
is
not
limited
to
financial
data.
They
also
need
customer
satisfaction,
company
reputation,
etc.
you
don’t
get
that
sort
of
data
as
easily
accessible
as
financial
data.
Financial
data
are
the
most
easily
accessible
data
for
a
company.
SUMMARY
OF
EVERYTHING

Management
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2012-‐2013
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10
OPERATIONS
MANAGEMENT
Operations
management
=
Day-‐to-‐day
management
In
a
company
there
is
a
difference
between
the
people
defining
the
strategies
and
the
one
applying
them.
Operations
management
is
one
type
of
management.
Those
managers
are
going
to
be
concerned
by
what’s
going
to
happen
in
the
next
days.
E.g.:
A
project
manager
is
an
operational
manager.
A
production
manager
too
(you
have
to
produce,
not
only
to
sell),
same
for
logistic
managers,
etc.
è
Those
are
operational
activities.
You
realize
the
day-‐to-‐day
life
of
a
company.
STRATEGIC
MANAGEMENT
Strategic
management
=
To
ensure
relevance
of
the
long-‐term
objectives.
Time
horizon
is
longer
for
this
type
of
management.
What
do
I
want
to
achieve
within
3
years/
5
years.
Etc.
è
But
it’s
not
only
related
to
the
time
horizon:
The
aim
is
to
define
a
strategy
and
to
make
sure
that
the
strategy
is
going
to
happen,
to
manage
the
strategy
in
other
words.
Strategy:
I
want
to
achieve
one
goal,
and
this
goal
isn’t
specific
to
one
part
of
the
company
(e.g.
not
specific
to
sales).

Management
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2012-‐2013
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There
are
2
ways
of
communications
between
the
strategy
management
and
the
operations
management
even
if
their
job
has
a
completely
different
nature.
11
MANAGEMENT
CONTROL
Management
control
è
allows
the
definition
of
short-‐term
objectives,
relevant
feedback,
and
a
(usually)
one-‐year
time
horizon
management.
Feedback
is
really
important.
Once
you’ve
defined
the
strategy,
you’ll
need
regular
feedbacks.
There
is
another
part
in
the
job
that
we
haven’t
seen
so
far.
Basic
tool
used
by
the
management
controller
to
translate
the
strategy
into
shorter
objectives:
a
budget!
The
budgeting
process
that
is
one
of
the
most
painful
processes
in
companies;
it’s
the
responsibility
of
the
management
controller.
And
if
he
isn’t
the
main
responsible,
he
will
be
strongly
involved
in
the
budgeting
process.
Budget
is
a
tool,
which
is
used
to
go
from
red
to
green.
The
dashboard
also
is
a
basic
tool.
The
purpose
of
a
management
controller
is
to
help
the
good
communication
between
operational
and
strategic
management.
THE
ROLE
OF
FINANCE
IS
CHANGING
PAST

Management
Accounting
Control
2012-‐2013
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Cuylits
The
first
triangle
was
in
the
past.
Most
of
the
time
spent
by
the
people
was
in
transaction
processing,
a
little
bit
on
reporting
and
control
and
a
very
little
amount
in
decision
support.
12
CURRENT
Transaction
processing
takes
less
time
(almost
zero).
It
gives
much
more
time
to
Decision
Support.
It’s
the
role
of
management
accounting
controller.
è
The
management
controller
doesn’t
take
the
decisions
but
collects
data,
etc.
and
it
helps
the
CEO
to
take
decisions.
ERP
Systems:
Huge
software
(SAP
for
ex),
basically
they
automate
all
that’s
transaction
processing.
We
enter
one
data
in
the
system
and
it
is
going
to
check
if
there
is
enough
raw
materials
for
example,
and
if
not,
it
will
book
some
raw
materials
automatically,
etc.
Series
of
transactions
are
automatically
performed.
That’s
why
that
part
is
really
going
down;
which
is
a
good
new
because
it
leaves
more
time
for
the
other
activities.
Moreover,
it’s
a
boring
task.
The
finance
people
are
no
longer
doing
an
accountancy
job,
but
more
and
more
decision
support.
THE
ROLE
OF
THE
MANAGEMENT
CONTROLLER
IS
CHANGING
ð Originally
nothing
more
than
a
bookkeeper
ð The
function
changed
with
the
advent
of
computers
ð In
the
1970s
and
1980s,
CEOs
became
more
concerned
with
the
efficiency
of
all
company
departments,
including
the
accounting
function
ð Used
a
great
deal
of
process
and
financial
analysis
skill
to
assist
all
parts
of
the
corporation
in
many
ways.
This
is
probably
the
most
important
skill
for
a
management
controller.
Analysis:
that’s
what
it
is
about.
ð Over
the
course
of
one
century,
the
controller’s
function
has
risen
from
one
of
senior
clerk
to
one
of
the
most
advanced,
highly
educated,
and
useful
positions
in
the
entire
corporate
structure.

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2012-‐2013
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13
FROM
CHECKING
TO
CONTROLLING
Checking
Controlling
è
Bureaucratic
&
Standard-‐based
It’s
based
on
standards:
e.g.:
if
I
check
the
speed
of
a
car
that’s
because
there’s
a
speed
limit.
è
Reactive
&
flexible
Exactly
like
when
you
drive
a
car.
The
worst
thing
to
do
would
be
to
be
bureaucratic
and
standard-‐obsessed,
that
wouldn’t
be
very
effective.
e.g.
There
are
always
going
to
be
idiots
that
are
not
going
to
stop
at
a
STOP
panel,
that
are
going
to
cross
the
streets
when
they
are
not
supposed
to.
You
have
to
be
reactive
and
flexible.
è
“Surveillance”
è
“Cause-‐and-‐effects”
relationships
è
No
focus
on
relevance
The
policeman
doesn’t
address
the
relevance.
è
Focus
on
relevance
The
Management
Controller
focuses
on
relevance.
It’s
good
for
him
to
ask
himself
“does
it
make
sense?
Does
that
objective
make
sense?”
è
Resources
management
&
allocation
è
Processes
and
competencies
management
è
“Single-‐loop”
è
“Double-‐loop”
è
Reactive
React
to
what’s
happening.
That’s
not
a
good
way
to
manage
a
company.
è
Proactive
Think
to
WHAT
COULD
HAPPEN,
that’s
the
good
way
to
manage
a
company
è
Optimization
è
Adaptation
They
successfully
adapt,
and
they
do
it
quickly!!!
è
Use
of
theoretical
models
è
Use
of
adequate
behaviors
è
Failure
trigger
sanctions
è
Failure
allow
learning
and
development
Failures
are
accepted,
and
they
are
necessary.
It
doesn’t
mean
that
we
like
failure,
but
it
is
important
because
it
allows
learning.
E.g.:
it’s
impossible
to
learn
riding
a
bicycle
without
falling.
There
is
nothing
wrong
at
making
mistakes,
but
you
have
to
learn
thanks
to
your
mistakes.
In
most
of
the
American
Companies,
failures
are
accepted,
but
you’re
not
allowed
to
make
4
times
the
same
mistake.
Anyway
it’s
obvious
that
nobody
like
failure.

Management
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Control
2012-‐2013
Manon
Cuylits
14
OPERATIONAL
AND
STRATEGIC
FEEDBACK
REALLY
IMPORTANT
SLIDE
What
it
means
to
be
between
strategic
management
and
operation
management.
OPERATIONAL
FEEDBACK
When
you’re
in
the
operational
world,
you’ll
often:
è
Start
with
an
operational
plan
(what
are
you
going
to
produce,
how
much
do
I
have
to
sell,
etc.)
èTranslate
that
into
an
operational
budget
è
Translate/use
the
budget
into
operational
activities
(sell,
buy,
etc.).
è
At
the
end
I
have
some
outputs
(number
of
units
produced,
bought,
number
of
projects
completed,
new
products
developed,
etc.).
è
I’m
going
to
measure
that
(metrics)
to
close
the
loop,
and
è
Compare
that
to
my
initial
operational
plan.
E.g.:
At
the
end
of
the
first
week
you
only
have
90
cars
(you
were
supposed
to
have
100).
If
metrics
show
that
your
outputs
are
not
as
they
were
supposed
to
be
in
the
initial
plans,
there
are
2
options:
Both
are
good,
it
depends
of
the
circumstances,
etc.
-‐ Change
your
plan
(maybe
it
wasn’t
appropriate)
-‐ Keep
the
plan
but
change
something
else
(hire
more
people,
etc.)

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2012-‐2013
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15
STRATEGIC
FEEDBACK
Strategic
plan
that
I
translate
in
a
strategic
budget
that’s
going
to
be
used
for
strategic
actions.
The
difference
I
can
do
here
is
strategic
actions
(ex:
mergers
and
acquisition,
to
launch
a
new
product,
…
)
è
they’re
not
routine
decisions.
The
purpose
of
those
strategic
actions
is
to
impact
the
operational
activities.
Example:
Mergers
and
acquisition:
I
buy
a
competitor
and
his
activity
becomes
mine,
and
it’s
going
to
impact
the
day-‐to-‐day
activities.
Same
if
I
decide
to
launch
a
new
product.
I
will
select
the
outputs
that
are
interesting,
in
relation
with
the
plan.
Outcome:
by
nature
it’s
nothing
more
than
an
output
with
a
strategic,
specific
importance.
I
can
measure
those
outcomes
thanks
to
metrics
and
close
the
loop
by
returning
to
the
strategic
plan.
EXAMPLE
I
run
my
business
in
BENELUX,
I
decide
to
take
a
strategic
action,
before
I
already
had
operational
activities
in
place.
I
want
to
get
more
sales.
ð Outputs
could
be
things
like
the
unit
sold
in
Belgium,
Netherlands
or
Luxemburg
ð The
sales
expressed
in
Euro
ð The
market
shares
in
Belgium/Netherlands/Luxemburg
ð Etc.
I
can
compare
those
outputs
to
your
plan
è
what
was
my
plan
in
relation
with
the
market
shares?
è
Strategic
plan:
to
sell
in
Germany
also!
BASIC
DIFFERENCES
BETWEEN
THE
STRATEGIC
LOOP
AND
THE
OPERATIONAL
LOOP
The
timing
is
very
different
between
both
loops.
Ø Operational
loop:
It’s
going
very
fast,
day-‐to-‐day
activities.
Done
on
a
daily
basis.
Ø Strategic
loop:
That’s
not
something
that
you
can
do
quickly
basically!
It
takes
months.
Budget
is
in
Strategic
actions.
Budget
is
expressing
into
operation
figures
some
strategic
decisions
that
I
took.

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16
Operation
è
strategic
(job
of
the
management
controller):
The
management
controller
will
pick
up
some
figures
from
the
operational
world
and
I
will
use
them
to
provide
information
to
the
CEO.
è
He
will
measure
some
of
the
outputs
and
provide
information
that
are
going
to
help
the
dashboard
to
take
decisions.
Therefore,
a
management
controller
needs
to
be
perfectly
aware
of
the
strategic
intent!
We
can
see
that
it
isn’t
an
easy
job.
It’s
not
always
easy
to
translate
something
into
a
figure.
Ex:
customer
loyalty
is
not
really
easy
to
translate
into
a
figure
(I
can
count
the
number
of
customers
lost).
Sometimes
it’s
easy;
sometimes
it’s
less
easy.
“Strategically
I
want
to
have
a
better
reputation”.
Reputation
is
possible
to
measure
but
not
that
easy.
Not
easy
to
translate
into
figures.
WHAT
MIGHT
BE
PART
OF
THE
MANAGEMENT
CONTROL
FUNCTION
Might
=
in
some
companies
it’s
not
part
of
the
job,
in
other
it
is
AUDITING
Ø The
scheduling
and
management
of
periodic
internal
audits,
as
well
as
the
preparation
of
resulting
audit
reports
and
the
communication
of
findings
and
recommendations
to
management
and
the
board
of
directors.
Ø The
preparation
of
work
papers
for
the
external
auditors
and
the
rendering
of
any
additional
assistance
needed
by
them
to
complete
the
annual
audit
NB:
In
some
companies
audit
and
management
control
are
separated
functions
BUDGETING
The
coordination
of
the
annual
budgeting
process,
including
maintenance
of
the
company
budget,
and
the
transfer
of
final
budget
information
into
the
financial
statements.
CONTROL
SYSTEMS
The
establishment
of
a
sufficiently
broad
set
of
controls
to
give
management
assurance
that
transactions
are
processed
properly.
COST
ACCOUNTING
(=
comptabilité
analytique)
It’s
almost
systematically
a
part
of
the
job
!
You
have
to
have
a
good
understanding
of
the
figures.

Management
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Control
2012-‐2013
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Ø The
coordination
of
periodic
physical
inventory
counts
Ø The
periodic
analysis
and
allocation
of
costs
based
on
activity-‐based
costing
pools
17
and
allocation
methods.
Ø The
continual
cost
review
of
products
currently
under
development,
using
the
principles
of
target
costing.
Ø The
periodic
compilation
and
evaluation
of
inventory
costs.
FINANCIAL
ANALYSIS
Ø The
periodic
comparison
of
actual
to
budgeted
results
and
the
communication
of
variances
to
management,
along
with
recommendations
for
improvement.
Ø The
continuing
review
of
revenue
and
expense
trends
and
the
communication
of
adverse
trends
results
to
management,
along
with
recommendations
for
improvement
Ø The
periodic
compilation
of
business
cycle
forecasting
statistics
and
the
communication
of
this
information
to
management,
along
with
predictions
related
to
the
impact
on
company
operations.
Ø The
periodic
calculation
of
a
standard
set
of
ratios
for
corporate
financial
performance
and
the
formulation
of
management
recommendations
based
on
the
results.
FINANCIAL
STATEMENTS
Ø The
preparation
of
all
periodic
financial
statements,
as
well
as
their
accompanying
footnotes.
Ø The
preparation
of
an
interpretive
analysis
of
the
financial
statements.
Ø The
preparation
and
distribution
of
recurring
and
one-‐time
FIXED
ASSETS
Ø The
annual
audit
of
fixed
assets
to
ensure
that
all
recorded
assets
are
present.
Ø The
periodic
recording
of
fixed
assets
in
the
financial
records
and
their
proper
recording
under
the
correct
asset
categories
and
depreciation
methods.
Ø The
proper
analysis
of
all
capital
expenditure
requests.
POLICIES
AND
PROCEDURES
Ø The
creation
and
maintenance
of
all
policies
and
procedures
related
to
the
control
of
company
assets
and
the
proper
completion
of
financial
transactions.
Ø The
training
of
department
personnel
in
the
use
of
accounting
policies
and
procedures
Ø The
modification
of
existing
policies
and
procedures
to
match
the
requirements
of
government
regulations.

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18
PROCESS
ANALYSIS
Ø The
periodic
review
of
all
processes
involving
financial
analysis,
to
see
if
they
can
be
completed
with
better
controls,
lower
costs,
or
greater
speed.
RECORD
KEEPING
Ø The
proper
indexing,
storage,
and
retrieval
of
all
accounting
documents.
Ø The
orderly
planning
for
and
scheduling
of
document
destruction,
in
accordance
with
the
corporate
document
retention
policy.
TAX
PREPARATION
Ø The
timely
preparation
and
filing
of
tax
returns,
as
well
as
the
supervision
of
all
matters
relating
to
corporate
taxation,
such
as
conducting
an
effective
tax
management
program,
and
both
providing
and
enforcing
policies
and
procedures
related
to
the
compliance
of
all
corporate
personnel
with
applicable
government
tax
laws.
TRANSACTION
PROCESSING
Ø The
timely
completion
of
all
accounting
transactions
at
the
intervals
and
in
the
manner
specified
in
the
accounting
policies
and
procedures
manual.
Ø The
proper
completion
of
all
transactions
authorized
by
the
board
of
directors
or
in
accordance
with
the
terms
of
all
authorized
contracts.
Ø The
proper
approval
of
those
transactions
requiring
them,
in
accordance
with
company
policy.
This
list
may
appear
overwhelming,
but
just
because
the
controller
is
responsible
for
all
of
the
listed
areas
does
not
mean
that
this
person
must
actually
do
each
one.
In
other
words,
the
controller
primarily
manages
the
work
of
other
people
and
ensures
that
they
complete
most
of
the
tasks
just
listed.
In
particular,
a
controller
can
rely
on
the
services
of
assistant
controllers
who
are
responsible
for
smaller
portions
of
the
accounting
department.

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19
REQUIRED
SKILLS
ANALYSIS
OF
INFORMATION
The
controller
must
be
sufficiently
comfortable
with
financial
information
to
readily
understand
the
meaning
of
a
variety
of
ratios
and
trends
and
what
they
portend
for
a
company.è
The
figures
and
information:
You
don’t
need
to
be
a
financial
expert
but
a
really
good
ability
to
analyze
is
required.
COMMUNICATION
ABILITY
A
key
component
of
the
controller’s
function
is
compiling
information
and
communicating
it
to
management.
If
the
compiling
part
of
the
job
goes
well,
but
management
does
not
understand
its
implications,
then
the
controller
must
improve
his
or
her
communication
skills
in
order
to
better
impart
financial
information
to
the
management
team
Ø Those
two
are
the
most
important
skills
COMPANY
AND
INDUSTRY
KNOWLEDGE.
No
accounting
system
is
completely
“plain
vanilla”,
because
the
companies
and
industries
in
which
it
operates
have
a
sufficient
number
of
quirks
to
require
some
variation
from
the
typical
accounting
system.
Accordingly,
the
controller
must
have
a
good
knowledge
of
both
company
and
industry
operations
in
order
to
know
how
they
impact
the
operations
of
the
accounting
department
Ø It’s
better
if
you
have
some
knowledge
but
not
absolutely
mandatory.
MANAGEMENT
SKILL.
The
controller
presumably
will
have
a
staff
and,
if
so,
will
have
considerable
control
over
the
productivity
of
that
group.
Accordingly,
the
controller
must
have
an
excellent
knowledge
of
the
planning,
organizational,
directing,
and
measurement
functions
needed
to
manage
the
accounting
department.
PROVISION
OF
TIMELY
AND
COST-‐EFFECTIVE
SERVICES.
The
controller
must
run
the
accounting
department
as
if
it
were
a
profit
center,
so
that
the
most
efficient
methods
are
used
to
complete
each
task
and
the
attention
of
the
department
is
focused
squarely
on
the
most
urgent
tasks
Ø A
typical
Management
controller
will
have
to
create
budget
and
dashboard.
There’s
a
timing
therefore
(ex:
budget
needs
to
be
ready
on
the
first
December).
It’s
important
to
be
able
to
provide
services
on
time.

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20
TECHNICAL
KNOWLEDGE.
Creating
an
accurate
financial
statement,
especially
one
for
a
publicly
held
company,
requires
a
considerable
knowledge
of
accounting
rules
and
regulations.
Accordingly,
a
controller
should
be
thoroughly
versed
in
all
generally
accepted
accounting
principles
(GAAP2,
IAS3,
IFRS4
è
Extremely
technical
standards.)
Ø Not
always
mandatory.
LET’S
LOOK
AT
A
VERY
BASIC
EXAMPLE
OF
IMC
ISSUE
Compared
profitability
of
4
subsidiaries:
NB:
figures
between
brackets
=
negative.
è
Key
message:
I
am
loosing
money
with
one
country
(Country
A).
When
I’m
selling
something,
I
throw
money
through
the
window.
We’ve
a
problem.
è
Main
reason:
I’ve
a
problem
because
of
customer
delivery.
WHY?
Let’s
make
the
ratio
between
customer
delivery
and
sales,
for
the
good
companies
and
for
the
bad
company.
For
nice
looking
company,
customer
delivery
cost
must
be
around
5%
of
the
sales.
In
country
A,
the
cost
is
already
a
percentage
of
the
sales.
It’s
10
times
more
than
for
the
good
companies.
Customer
delivery
costs
are
10
times
higher
than
in
good
working
countries.
2
GAAP:
Generally
Accepted
Accounting
Principles
3
IAS:
International
Accounting
Standards
4
IFRS:
International
Financial
and
Reporting
Standards

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è
Why
are
those
costs
so
high?
We
can’t
now
thanks
to
the
figures.
There’s
a
limit.
Those
figures
give
information
up
to
a
certain
limit.
There’s
a
limit
to
the
job
of
management
controller.
You
have
to
talk
with
other
people
to
have
a
better
understanding
of
the
problem.
Role
of
the
Management
Controller:
-‐ Interface
between
strategic
management
and
operational
management
-‐ Getting
data
and
being
able
to
deliver
those
data
as
a
message

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CHAPTER
2:
MANAGEMENT
ACCOUNTING
CONTROL
LINK
WITH
FINANCIAL
MANAGEMENT
OPERATIONAL
CYCLE
When
you
start
a
company,
you
need
first
some
money.
You
get
that
money
thanks
to
Equity
and
LT
Debts
(Bank).
LT
debt
means
that
you’ll
have
to
pay
it
back
within
more
than
1
year.
That
money
is
cash!
I
can
use
this
cash
to
buy
LT
assets
(car,
truck,
etc.).
After
that,
you
can
start
to
operate.
You
find
suppliers;
you
buy
raw
materials,
etc.
And
you
work
to
turn
those
raw
materials
into
finished
products.
You
sell
those
finished
products
in
order
to
win
cash.
The
aim
of
the
game
is
to
have
CASH
thanks
to
this
operational
cycle.
Most
of
the
bankruptcies
start
because
companies
don’t
have
money
to
pay
the
salaries.
They
borrow
then
money
to
the
bank
but
with
an
interest
rate,
and
when
they
have
to
refund
the
bank,
they
face
a
problem.
The
Management
controller
needs
to
reach
a
balance
(both
in
amount
and
timing),
and
they
reach
it
when
they
have
a
really
low
working
capital
requirement
(or
even
negative,
because
it’s
possible).

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Let’s
have
a
look
at
the
balance
sheet:
Ø WC
=
Working
Capital
Ø WCR
=
Working
Capital
Requirement
Ø Left
column:
Assets
(Actif)
Ø Right
column:
Liabilities
(Passif)
LT
Assets:
(>1
year):
It’s
an
asset
used
for
the
production.
It’s
supposed
to
stay
within
the
company
more
than
1
year.
><
ST
assets.

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Difference
between
depreciation
and
the
other
categories
of
costs:
Depreciation:
That’s
not
money
physically
going
out
of
the
company.
It’s
something
that
you
take
into
account
as
if
it
was
a
cost
but
actually
there’s
no
money
going
out
of
the
company
24
physically.
Cash
flow
=
net
income
+
depreciation.
You
may
perfectly
have
situations
with
a
positive
cash
flow
but
a
negative
profit.
EXAMPLE
NB:
between
brackets:
negative
figures
You
use
raw
materials,
workers
(that
you
will
have
to
pay)
to
produce
during
a
period
of
time.
It
means
you’ll
face
cost
for
this
production.
At
the
end
of
the
month,
you
have
to
add
9450.
The
difference
between
the
inventory
at
the
end
of
the
period
and
the
beginning
of
the
period
is
what
has
been
sold.
è
Explanation
in
an
easier
way:
I
have
1000.
I
produce
3000.
I
can
sell
4000
then.
If
at
the
end
of
the
period
I
have
2000,
it
means
that
I
have
sold
for
2000.
(It’s
exactly
the
same
than
previously
but
with
easier
figures).

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25
LINK
WITH
MARKETING
MANAGEMENT
All
the
rates
have
to
be
high
in
order
to
have
a
high
market
share.
This
is
due
to
the
fact
that
if
awareness
rate,
contact
rate
and
hit
rate
are
high
but
consideration
rate
is
low,
your
market
share
is
going
to
be
low.
CONTROLLING
THE
SALES
FORCE
Two
reasons
for
the
control
in
the
sales
force:
-‐ Personal
selling
can
be
a
large
marketing
expense
component
in
the
final
price
of
the
product
or
service.
It’s
worth
to
be
controlled
-‐ It’s
related
to
the
efficiency.
Sales
force
efficiency
can’t
be
maximized
unless
it’s
directed,
motivated
and
audited
on
a
continual
basis.

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In
order
to
have
good
results,
there’s
a
need
of
controlling
the
sales
force
(directing
them,
motivating
them,
etc.)
Controlling
the
sales
force
involves
4
key
functions:
1. Forecasting
sales:
It’s
always
the
starting
point
2. Establishing
sales
territories
and
quotas.
3. Analyzing
expenses:
Sales
involve
expenses.
(E.g.:
restaurants
with
prospects,
clients,
etc.).
4. Motivating
and
compensating
performance.
FORECASTING
SALES
The
sales
forecast
is
an
estimate
of
how
much
of
the
company’s
output
(€
or
units)
can
be
sold
during
a
specified
future
period,
under:
It
lies
in
sales
planning
for
the
next
year
or
in
the
future.
There’s
always
a
forecast
long
term
and
short
term:
-‐ Short
Term:
It’s
basically
a
managing
of
the
sales
force.
It’s
the
starting
point
of
the
budget
process.
The
period
of
time
is
maximum
1
year.
-‐ Long
Term:
To
make
sure
you
have
a
capital
to
finance
the
business
development
and
to
have
enough
production
capacity.
It’s
focused
on
financing,
production
and
development.
The
sales
forecast
is
an
estimate
of
what
we
are
going
to
sell
next
year.
In
other
words,
it’s
how
much
of
the
company’s
output
can
be
sold
during
a
specified
future
period.
It’s
not
easy
to
calculate
it
and
in
order
to
minimize
the
risks
we
have
to
go
through
some
steps:
1. An
assumed
set
of
economic
conditions:
it’s
the
way
the
economy
is
going
to
be
next
year.
About
the
global
economic
environment.
2. A
proposed
marketing
plan:
what
you
plan
to
do
in
the
future.
Each
marketing
plan
will
deliver
a
specific
impact
on
the
product.

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Ø Used
to
establish
sales
quotas
Ø Used
to
plan
personal
selling
efforts
and
other
types
of
promotional
activities
in
27
the
marketing
mix.
Ø Used
to
budget
selling
expenses
Ø Used
to
plan
and
coordinate
production,
logistics,
inventories,
personnel,
etc.
SOME
FORECASTING
TECHNIQUES
JURY
OF
EXECUTIVE
OPINION
METHOD
I
may
ask
to
the
top
management
what’s
their
opinion.
“Next
year,
what
do
you
think
is
going
to
happen?”
The
CEO
and
the
operational
management
meet
to
discuss
the
decision
of
the
company.
Inconvenient:
the
top
management
is
not
in
contact
with
the
customers.
So,
their
decision
is
not
based
on
relevant
decision
or
at
least
not
concrete
enough.
So,
they
may
not
do
the
right
choice.
SALES
FORCE
COMPOSITE
METHOD
Ask
the
sales
people.
The
sales
force
is
directly
involved
with
the
customers.
They
can
bring
a
good
approach
for
the
future
decisions
related
to
the
performance
of
the
company.
Inconvenient:
Not
a
secure
method.
If
they
know
they
are
going
to
sell
20%
more
they
will
never
say
that
to
their
boss,
cause
something
might
happen.
It’s
better
to
say
that
they
are
going
to
sell
10%
more
cause
then
we’ll
give
them
that
as
an
objective
and
if
they
sell
more
than
10%
more,
the
boss
might
give
them
a
bonus.
They
underestimate
what
they
think
they
will
need
for
the
future.
The
salesman
is
going
to
be
careful
in
his
statement
concerning
his
objectives.
He’s
not
going
to
tell
the
truth.
It’s
always
an
estimation;
there
is
a
filter
of
information
As
a
boss
you
might
say:
“Instead
of
asking
my
sales
people,
why
don’t
I
bypass
them?”
CUSTOMER
EXPECTATIONS
METHOD
This
method
is
used
in
case
of
the
company
doesn’t
trust
the
salesman
and
suspects
he
filters
the
information
he
let
the
company
know.
Another
solution
is
to
ask
directly
the
customer
about
his
satisfaction.
It
concerns
the
raw
information,
untreated.
Inconvenient:
number
of
customer
is
too
large
to
be
analyzed.
There
is
a
need
of
samples,
and
as
a
result,
a
limitation
of
the
information.
Moreover,
customers
are
not
always
willing
to
answer
the
questions.
Customers
are
not
always
going
to
tell
the
truth.
If
we
ask
them
how
much
they
are
going
to
buy
next
year,
they
might
not
give
the
good
answer.

Management
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è
Those
3
first
techniques
are
necessary
for
a
good
forecast
even
if
they
suffer
from
imperfections
and
give
truncated
information.
It’s
always
better
to
run
them
because
those
techniques
bring
a
direct
input
from
direct
contact
with
important
actors
of
the
business.
The
3
next
techniques
are
more
technical
and
mathematic.
TIME-‐SERIES
ANALYSIS
You
try
to
use
the
past
to
prevail
the
future.
You
look
at
the
past
evolution
and
try
to
extrapolate.
Ex:
during
the
last
10
years
my
sales
have
been
increasing
by
2%
every
year…
It’s
not
silly
to
extrapolate
then.
CORRELATION
ANALYSIS
You
correlate
something
with
another
forecast.
You
correlate
your
forecast
to
other
forecasts.
A
forecast
can
never
be
something
100%
accurate;
it’s
not
possible
to
predict
the
future.
OTHER
QUANTITATIVE
TECHNIQUES
è
Techniques:
Statistical,
mathematical,
simulation
models,
etc.
The
forecasting
techniques
can
become
highly
sophisticated,
but
they
are
never
a
substitute
to
sound
business
judgment.
We
have
to
take
into
consideration
both
means:
techniques
and
business
judgement.
No
single
method
provides
uniformly
accurate
results
with
infallible
precision
ESTABLISHING
SALES
TERRITORIES
AND
QUOTAS
SALES
TERRITORY
Represent
the
management’s
need
to
match
personal
selling
effort
with
the
sales
potential
(or
opportunity).
Example:
A
first
salesman
contacts
a
customer
to
offer
a
special
package.
Afterwards,
another
salesman
from
the
same
company
contacts
the
same
customer
but
he’s
more
aggressive
and
wants
to
sell
the
same
offer.
There’s
going
to
be
a
big
problem:
the
image
of
the
company
will
be
affected
because
there
is
a
bad
management
and
control
inside
the
company
to
make
such
a
mistake.

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QUOTA
It
represents
goals
assigned
to
salespeople.
As
a
result,
it
gives
benefits
to
the
company:
it’s
an
incentive
for
salespeople,
it
allows
to
evaluate
and
control
salespeople’s
efforts
and
goals
leads
to
quantitative
standard
different
from
the
standards
to
measure
performance.
It
means
that
it’s
an
additional
way
to
measure
performance.
Nevertheless,
it’s
never
easy
to
fix
goals.
There
is
always
a
discussion
to
define
the
goals.
What
is
an
objective?
It
requires
those
conditions
“SMART”.
- S:
it
has
to
be
specific
=
a
clear
objective
- M:
It
has
to
be
measurable
- A:
the
manager
or
the
person
in
charge
must
agree
it.
- R:
it
has
to
be
relevant
and
realistic
(=réaliste).
It
has
to
be
aggressive
enough,
but
realistic.
- T:
it
must
be
an
objective
defined
in
terms
of
time
I
want
to
measure
a
performance
in
the
area
of
sales.
I
want
to
judge
that
performance.
The
list:
different
ways
to
measure
that
performance.
They
are
some
signs
of
good
performance
but
you
won’t
use
all
those
tools,
you
will
have
to
select
the
best
ones
depending
on
your
case.
ANALYSING
EXPENSES

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Selling
cost,
expenses.
You
have
to
look
at
that,
compare
data
between
columns/lines…
and
then
you
can
capture
something.
It’s
important
to
take
the
time
to
have
a
look
at
that.
30
MOTIVATING
AND
COMPENSATING
PERFORMANCE
2
basic
types
of
compensation:
Ø Salary:
In
main
company,
the
base
salary
is
known…
(?)
Ø Commission:
Commonly
used
for
the
sales
people
=>
the
more
you
sell,
the
more
money
you
will
have.
But
numerous
other
forms
of
incentives:
• Positive
feedback
on
salesperson
performance
evaluation
• Company
praise
(ex:
recognition
in
a
newsletter)
• Bonus
(ex:
cash,
merchandise,
or
travel
allowances)
• Salary
increase
• Pay
for
performance
for
specific
new
product
idea
• Paid
educational
allowance
• Earned
time
off
• Fringe
benefits
• Stock
options
• Vested
retirement
plan
• Profit
sharing

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è
The
incentive
system
is
important
in
the
motivation
and
the
compensation
in
order
to
boost
the
workforce.
In
international
business,
we
have
to
think
about
an
international
customer
present
in
different
countries.
So
the
limitation
of
territory
tends
to
disappear
and
multinational
companies
are
growing.
THE
LINK
WITH
HR
MANAGEMENT
The
idea
is
to
make
sure
that
the
customer
will
receive
what
he
asked
for.
Let’s
remember
that
the
simple
aim
of
Management
Control
is
to
make
sure
that
results
conform
to
intentions.
I
want
to
make
sure
that
what’s
going
to
happen
is
what
I
expected.
I
want
to
have
the
measurement
telling
me
whether
I’m
on
the
right
track
è
do
I
have
to
change
something
or
keep
on
doing
like
that?
Applied
to
HR
Management,
this
implies
4
steps:
1)
Deciding
which
behaviors
or
outcomes
are
desired.
I
have
to
decide
what
is
the
outcome
that
I
expect,
what
do
I
want.
The
typical
outcome
expected
when
it
comes
to
HR
is
“I
expect
the
people
to
behave
like
that,
to
be
creative/productive/able
to
work
in
team/customer
focused/etc.”.
You
expect
some
specifics
behaviors
in
the
HR
department.
Another
thing
you
could
expect
are
the
competences.
You
expect
your
people
to
be
good
at
using
computer.
2)
Establishing
ways
to
measure
behaviors
or
outcome.
You
need
to
have
ways
to
measure
in
order
to
reach
your
objectives.
If
you
don’t
measure
there’s
no
chance
that
you’ll
achieve
your
objectives!
Some
measurement
are
easy
to
make,
some
others
are
not.
How
can
we
measure
behaviors?
Ex:
thanks
to
feedback,
or
by
asking
people.
3)
Measuring
what
happens
4)
Allocating
rewards
based
on
achievement

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CHAPTER
3:
BUDGETING
DEFINITION
- A
budget
is
a
set
of
figures
expressing
money
income
and
outcome,
which
shows
whether
a
financial
plan
will
help
reaching
organizational
objectives.
- Budgeting
is
the
process
of
budget
preparation.
- The
various
Budgets
provide
a
tool
to
communicate
short-‐term
objectives.
It
is
the
way
to
communicate
the
budget
inside
the
company
BUDGETING
TECHNIQUES
Initially
I
have
a
strategy.
I
will
translate
that
strategy
into
figures.
Regardless
of
the
business
sector,
the
size
of
the
company,
etc.
There
are
always
three
steps
in
every
budgeting
technique:
1. Forecast
2. Budget:
I
need
to
translate
the
forecast
into
figures
3. Control:
I
need
to
follow
that
budget
=>
control
activities/budget
control.
It
doesn’t
make
sense
to
make
a
budget
if
you
don’t
follow
it
after.
And
you
need
to
follow
it
on
a
regular
basis.
“On
a
regular
basis”
is
different
depending
on
the
business.
Every
planning-‐control
system
is
based
on
the
willingness
to
control
the
future,
and
therefore
to
accept
the
idea
of
forecasting

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This
attitude
must
be
team-‐based,
and
active
rather
than
passive.
è
If
you
take
more
than
one
point
of
view
you
will
reduce
the
uncertainty!
If
you
only
take
one
point
of
view,
the
person
could
be
wrong…
Forecasting
is
more
than
just
extrapolating
the
past
on
a
predictable
trajectory
as
if
nothing
was
changed
in
the
behaviors.
Forecasting
is
necessary,
since
it
is
the
starting
point
of
many
management
tools.
è
Forecasting
is
the
starting
point
of
many
things,
that’s
why
it’s
absolutely
necessary!
Knowing
the
future
is
impossible,
you
may
describe
what
you
think
the
future
is
going
to
look
like
but
nothing’s
sure.
To
know
the
future
is
impossible;
however,
the
experience
shows
that
available
forecast
data,
even
far
from
perfection,
are
always
better
than
no
forecast
data
at
all
Short
term
forecasting
Mid
and
long
term
forecasting
Prospective
Time
Horizon
Close
Far
Very
far
Purpose
Precise:
sales
forecast,
raw
materials
pricing,
salaries
evolution,
etc.
Global
capacities:
production,
distribution,
etc.
Future
trends
Degree
of
certainty
High
Medium
Low
Variables
Based
on
current
economic
environment
Based
on
economic
trends
Qualitatives
Different
times
perspective
for
forecasts:
Ø Short
term
forecasting:
forecast
for
next
year
(1
year)
Ø Mid
and
long
term
forecasting:
(3
to
5
years)
Ø Prospective:
really
long
term
(over
5
years)
Short
term
forecasting:
precise:
how
much
• I
need
to
be
ready
this
year
for
what’s
going
to
happen
next
year.
I
need
to
have
some
very
precise
information
because
based
on
that
I
will
have
to
take
some
actions.
• Very
high
degree
of
certainty
• I
am
going
to
have
a
look
at
the
current
economic
environment.
Mid
and
long
term
forecasting:
Ø Here
we
talk
about
global
capacities.
I
have
to
think
in
term
of
global
capacities,
production
capacities,
etc.
(strategic
decision)
Ø Medium
degree
of
certainty
Ø I
will
take
a
look
at
the
economic
trends

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EFFECTIVENESS
OF
TECHNIQUE
1st
basic
technique:
Extrapolations:
I
look
at
the
past
data’s
and
I
extrapolate.
I
see
that
I’ve
a
2%
increase
in
sales
every
year,
I
can
extrapolate
and
prevail
a
2%
increase
in
sales
for
next
year.
It’s
very
effective
in
the
short
term,
less
effective
in
the
mid
term
and
almost
not
effective
on
the
long
term.
2nd
technique:
Models:
Ex:
Mathematical
models,
etc.
Models
are
not
effective
for
the
short
term
but
are
most
effective
for
the
mid
term
(and
not
effective
for
the
long
term).
They
are
only
effective
for
the
mid
term
then.
It’s
done
through
programs.
3rd
technique:
Prospection:
Prospections
techniques
are
good
for
the
long
term
but
not
for
the
short
and
mid
term.
You
may
have
some
simple
prospection
techniques
like:
get
together
a
group
of
experts.
This
is
the
most
common
technique.
You
have
some
much
more
sophisticated
prospection
techniques
like
econometric
methods.

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SUCCESSIVE
STEPS
FOR
A
BUDGETING
PROCESS:
PLANNING
PHASE
OF
THE
BUDGET
è
Long-‐term
plan:
What
do
I
expect
in
3
to
5
years
from
now?
That’s
my
long-‐term
plan.
A
company
wants
to
know
what
are
the
long-‐term
objectives.
It’ll
reflect
in
the
budget
process.
The
purpose
is
to
influence
the
future.
It’s
more
active,
than
passive
in
order
to
make
the
business
grow.
è
Functional
periodic
budgets:
It
concerns
budgets
established
by
function
for
a
period
of
time.
Ex:
Marketing
Budget,
Financial
Budget,
R&D
budget,
etc.
NB:
Periodic
implies
a
part
of
year:
term,
months,
etc.
è
I
split
the
budget
into
quarterly
or
monthly
budgets:
The
budget
has
to
be
split
into
more
precise
framework
of
time
for
short-‐term
forecast.
CONTROL
ACTIVITIES
è
Once
the
planning
set,
the
budget
is
available
and
departments
will
run
their
projects.
Months
by
months
the
management
controller
will
receive
the
results,
real
data.
Once
all
data
are
available,
a
comparison
with
the
actual-‐forecast
can
be
made.
If
results
are
not
good,
2
options:
Ø I’ve
been
far
too
optimistic
with
my
budgets

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Ø My
forecast
was
really
good
but…
è
Gap
analysis:
I
will
look
at
the
gap
(between
forecast
and
real
data’s),
sometimes
it’s
not
really
big,
and
then
I’ll
just
say
that
the
gap
is
meaningless/not
significant.
That’s
very
tricky,
not
easy
to
do,
but
I
need
to
do
it
for
the
next
step
è
Assessment
of
gap
relevance:
Is
the
gap
relevant
or
not?
If
it’s
not
relevant,
no
problem
but
if
it
is
relevant
that’s
difficult.
The
results
of
the
gap
analysis
will
make
place
to
an
assessment
of
the
gap
relevance.
The
purpose
is
to
know
if
the
gap
could
have
been
forecast
or
if
it
depends
on
external
variables.
The
origin
of
the
problem
is
addressed.
Ex:
quality
problems,
problem
of
communication,
crisis
on
the
market.
The
origin
of
the
problem
is
maybe
not
inclusively
in
the
sales,
but
it
can
come
from
another
department
è
Common
understanding
of
the
gap:
You
have
to
understand
the
reason
of
the
gap.
You
may
have
many
reasons
combined
together
or
one
single
reason
difficult
to
find,
etc.
I
have
to
understand
what’s
the
gap.
Only
20%
of
the
reasons
will
explain
80%
of
the
gap
=>
“80-‐20
rule”!
I
want
to
know
the
main
reasons.
E.g.:
Because
my
customers
are
not
happy
è
Corrective
actions:
Actions
that
I
need
to
take
to
correct
the
situation.
It
may
be:
Ø “I
will
change
my
plans
for
the
following
period”
=>
I
will
train
my
sales
people;
I
will
change
something
for
the
next
period
of
time.
It’s
an
action
that’s
supposed
to
have
an
effect
on
the
next
period.
Ø “I
will
change
my
budget”
which
means:
I
will
change
my
objectives
Ø “I
will
change
my
long-‐term
plan”
è
it
means
you
really
change
your
strategy,
you
have
to
be
careful
with
that!
Once
the
reasons
of
the
gap
are
known,
measures
can
be
taken
to
handle
the
problem.
They
are
likely
to
be
made
in
the
planning:
long-‐term
plan
of
functional
periodic
budget
or
the
split
of
budgets.
And
so,
we
close
the
loop!
Another
way
to
look
at
that:

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PLANNING:
To
identify
short-‐term
objectives
è
To
develop
short-‐term
plans
è
To
develop
the
budget
CONTROL:
To
measure
and
assess
the
performance
è
Reassess
objectives,
goals,
strategy,
and
plans.
PLANNING
AND
CONTROL,
ROLE
OF
BUDGETS
Balance
sheet
expected
at
the
end
of
the
next
year
for
example,
cash
flows,
…è
financial
figures
OPERATIONAL
BUDGETS
Usually
6
operational
budgets:
1. Sales
budget:
how
much
am
I
going
to
sell
next
year
(1st
month,
2nd
month…
1st
quarter,
etc.)
How
many
units
am
I
going
to
sell?
I
may
split
the
sales
budget
into
more
detailed
budget.
(per
categories,…).
It’s
a
forecast;
it
doesn’t
need
to
be
very
précised.
2. Investments:
What’s
the
amount
of
money
I’ll
have
to
invest
next
year
in
order
to
be
able
to
run
my
business…
3. Production
budget:
taking
into
account
what
I
plan
to
sell
next
year,
and
what
I
plan
to
invest,
How
much
will
I
have
to
produce
myself?
It
depends
on
the
sales
forecast
and
on
the
investment.
4. Purchasing
budget:
taking
into
account
all
the
previous
element,
how
much
will
I
have
to
purchase
next
year
5. Personal
and
training:
How
much
will
I
have
to
pay?

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6. Administration
and
other
(advertising,
R
and
D,etc.):
basket
where
you
put
all
the
rest.
You
define
those
operational
budgets
in
the
order
above,
because
some
of
them
depend
on
the
previous
ones.
FINANCIAL
BUDGETS
3
usual
financial
budgets:
Ø Projected
cash
flows
Ø Projected
(pro
forma)
balance
sheet
Ø Projected
(pro
forma)
profit-‐and-‐loss
statement
A
budget
is
a
set
of
figures
expressing
money
income
and
outcome,
which
shows
whether
a
financial
plan
will
help
reaching
organizational
objectives.
Ø If
a
budget
doesn’t
contain
any
figures,
it’s
not
a
budget:
it’s
something
else.
Most
of
the
time
it’s
expressed
in
“money”
=>
Money
income
and
outcome
(but
not
always).
The
figures
are
not
necessarily
financial
figures.
E.g.:
a
company
usually
wants
to
achieve
a
very
high
reputation/
brand
reputation/…
it
would
make
sense
to
put
that
into
the
budget,
even
if
it’s
not
easy
to
measure
and
it’s
not
a
financial
figure.
Other
objectives
you
could
have:
You
want
to
reach
a
certain
number
of
market
shares/
you
want
to
have
“happy”
customers/
you
want
to
have
a
given
level
of
competencies/
you
want
to
launch
a
certain
amount
of
new
products
(innovation
aim).
Budgeting
is
the
process
of
budget
preparation
The
various
Budgets
provide
a
tool
to
communicate
short-‐term
objectives
Ø There
are
several
budgets
(sales
budget,
purchasing
budget,
etc.)
Ø May
be
a
motivational
tool:
it
can
motivate
to
know
that
you
have
to
sell
a
certain
number
of
products.
BUDGETS
FLOW-‐CHART
FOR
SALES

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CLASSICAL
FLOW-‐CHART
Sales
forecast:
I
start
here.
ð Long
term
forecast:
3
to
5
years
ð Mid
&
Short
term
forecast:
next
year
Starting
with
a
sales
forecast
is
always
an
obligation.
It’s
really
difficult
unless
you
are
in
a
really
stable
business,
but
that
happens
less
and
less.
You
have
to
take
plenty
of
things
into
account.
Based
on
the
mid
&
short
term
forecast,
I
will
look
at
what
I
have
to
produce
(production).
That’s
not
necessarily
the
same
amount
as
the
number
of
products
I
have
to
sell.
Why?
BMW
plans
to
sell
100.000
cars
next
year;
do
they
have
to
produce
100.000
cars
next
year?
No
because
they
might
have
cars
in
the
inventory.
It
depends
on
the
amount
in
inventory
then.
Maybe
they
will
subcontract;
it
means
they
don’t
have
to
produce
themselves.
Ø Sales
è
Estimation
Ø Production
èCalculation
based
on
the
estimation.

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è
Purchasing:
If
I
know
what
I
have
to
produce,
I
know
what
I
will
have
to
buy
(raw
materials
and
so
on).
If
BMW
knows
they
have
to
produce
70.000
cars,
they
know
how
much
steel
they
have
to
buy
therefore.
è
Investment
and
financing:
There’s
an
investment
budget
(see
above),
it
depends
on
2
elements:
Long-‐term
sales
forecast
&
mid-‐
&
short-‐term
sales
forecast.
Investment
means
I
will
invest
in
assets
that
are
going
to
stay
more
than
1
year
in
the
company
(Long-‐term
assets).
If
I
look
at
my
long-‐term
sales
forecast,
I
might
see
that
within
3
years
I
won’t
be
able
to
produce
enough,
and
I
can
then
decide
to
invest
in
something
to
improve
the
production.
è
Sales
means
there’s
money
coming
in
=>
cash
flow
è
Production,
purchasing,
investment
means
there’s
money
going
out
è
Every
part
means
there’s
an
influence
on
my
cash
flow.
If
I
have
a
good
idea
of
my
forecast,
I
can
deduct
my
cash
budget,
what’s
going
to
be
my
cash
production
over
time.
Once
I
have
that,
I
can
derive
to
“what’s
my
P&L
Statement
forecast
going
to
look
like
month
by
month
and
at
the
end
of
the
year,
and
same
for
the
balance
sheet
forecast,
I
will
know
what
it’s
going
to
look
like
month
by
month
and
at
the
end
of
the
year.
On
the
long-‐term
:
The
investment
and
finance
of
the
company
are
also
affected
by
the
long-‐
term
sales
forecast.
Indeed,
as
the
long-‐term
concerns
the
future,
the
company
can
plan
the
new
investments
they’ll
have
to
make/buy
in
order
to
support
the
future
activities
of
the
company.
All
the
upper
part
of
the
chart
allows
defining
the
budget
and
the
balance
sheet.
COMPLEX
FLOW-‐CHART

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41
Based
on
the
slide
above,
I
may
decide
on
an
Investment
project.
I
will
translate
my
investment
projects
into
investment
budgets
(a
budget
is
a
set
of
figures).
This
has
an
impact
on
the
cash
budget,
some
cash
money
is
going
out.
I
will
also
decide
my
short-‐term
objectives
=>
Sales
budget,
production
budget
Production
budget:
In
some
case
you
may
have
to
precise
the
purchasing
budget,
the
direct
labor
budget
and
the
production
overhead
budget.
Those
are
the
elements
that
impacts
on
the
cash
budget.
I
divide
the
production
budget
into
those
3
elements.
I
may
derive
a
budgeted
product
cost.
è
Direct
impact
on
the
cash
budget:
It
helps
me
to
define
the
budgeted
P&L.
The
difference
with
the
classical
flow-‐chart
concerns
the
beginning:
we
first
start
with
the
objectives
and
the
strategic
plans
instead
of
the
forecast
on
a
long
and
short
term
like
before.
This
first
step
will
impact
two
dimensions.
- First
dimension:
The
objectives
and
strategic
plans
will
be
reflected
in
the
investment
projects
that
will
directly
define
the
investment
budget
leading
to
a
specific
cash
budget.
- Second
dimension:
The
objectives
and
plans
will
lead
to
the
short-‐term
objectives
defining
the
sales
and
production
budgets.

Management
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Control
2012-‐2013
Manon
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We
always
have
to
read
the
graph
from
top
to
bottom
to
see
the
relations
and
the
consequences.
You
get
the
bottom
level
if
you
fulfil
the
bottom
level.
We’ll
know
analyse
in
details
one
budget
through
an
example.
42
You
may
divide
your
budget
into
variable
expenses.
Ø Variable
expenses
=
commission
on
sales.
The
more
I
sell,
the
more
I
get.
Ø Fixed
expenses
=
salaries,
depreciation,
advertising.
BUDGET
PROCESS
Starting
point:
always
a
sales
forecast.
The
budget
process
lies
in
3
steps:
1)
Estimate
projected
sales
revenue
level
è
ESTIMATION
Ø Historical
data
(You
may
try
to
forecast
the
sales
looking
at
the
historical
sales),
Current
factors,
Economic
variables,
Other
factors,
Specific
points
of
focus
2)
Determine
profit
requirements
è
DETERMINATION
3)
Calculate
projected
expenses
values
è
CALCULATION
based
on
the
elements
above.
There
are
several
ways
to
calculate
that:
Ø Incremental
method
Ø Method
based
on
a
percentage
Ø «
Zero-‐based
»
budget
INCREMENTAL
METHOD

Management
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43
Ø Estimate
future
expenses
based
on
current
expenses:
I
take
every
expenses
and
I
increase/decrease
them
by
5%
for
example
(always
same
percentage);
which
means
that
the
various
expenses
remain
the
same
proportion.
I
keep
the
same
costs
like
they
were
last
year
and
I
will
just
adapt
them.
Ø Current
expenses
levels
are
incremented/decremented
for
the
new
budget
Ø Based
on
the
assumption
that
past
year’s
cost
were
justified
and
reasonable
Ø Any
inefficiency
may
be
reproduced
in
the
new
budget!
If
an
expense
wasn’t
necessary,
it
will
still
be
there
next
year.
The
problem
with
that
method
is
that
I
base
it
on
the
assumption
that
every
expense
was
necessary;
which
may
be
false.
If
I
lost
money
last
year
because
of
inefficiency,
I
will
still
loose
money
this
year.
Example
of
the
incremental
method:
- For
the
sales:
If
we
want
to
increase
our
sales
by
10%,
we
have
to
increase
all
the
elements
in
the
chain
by
10%
to
reach
the
decision.
And,
we’ll
have
the
increase
in
the
future
- For
the
expenses:
If
last
year,
there
were
excessive
expenses,
the
new
budget
will
take
on
this
charge.
The
expenses
can’t
be
deleted.
They
are
transferred
to
the
next
year.
It’ll
be
less
efficient
and
it’s
going
to
be
wrong
in
the
future.
PERCENTAGE
METHOD
This
method
is
similar
to
the
previous
one,
but
we
increment/decrement
a
percentage
of
the
expenses
each
year.
Ø Based
on
the
current
%
of
each
expense
compared
to
total
expenses
Ø Uses
the
same
%
for
next
year.
I
keep
the
cost
structure
identical
for
the
next
year.
Ø Based
on
the
assumption
that
past
year’s
costs
were
justified
and
reasonable.
Ø Any
inefficiency
may
be
reproduced
in
the
new
budget!
«
ZERO
BASED
»
BUDGET
Ø Build
the
expenses
of
the
new
budget
«
from
scratch
»
Ø Previous
year’s
%
are
ignored
Ø Each
expense
must
be
justified
Ø Don’t
produce
inefficiencies
in
the
new
budget
Ø But
is
really
time
and
energy
demanding
Idea:
I
don’t
want
to
look
at
what
was
happening
last
year,
I
want
to
start
with
a
blank
paper,
I
start
from
scratch.
I
don’t
look
at
the
figures
from
last
year
and
increase/decrease

Management
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them.
Each
expense
has
to
be
justified
then
(><
2
previous
methods).
Here
I
don’t
reproduce
inefficiencies.
It
takes
a
lot
of
time
and
a
lot
of
energy
to
proceed
like
this.
What
would
you
recommend?
Starting
from
scratch
again
might
not
be
a
bad
idea
from
time
to
time.
Zero
based-‐budget
every
year
is
not
the
good
solution,
but
you
might
do
it
every
couple
of
year
or
every
3
years.
Every
year
is
a
bit
too
much.
During
2
or
3
years,
use
then
the
easiest
method:
percentage
method
or
incremental
method.
How
many
years?
It
depends
from
the
business
and
from
the
volatility
of
the
budget.
44

Management
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45
CHAPTER
4:
CAPITAL
BUDGETING
In
the
Management
Control
function
you
will
have
to
make
the
good
decisions
and
one
of
the
usual
decisions
is
an
investment
decision.
Is
it
a
good
idea
to
invest
in
that
machine?
To
invest
in
that
company?
To
invest
money
there…?
I
will
have
to
help
the
top
management
to
take
the
right
decision,
the
right
investment
decision.
Whenever
I
need
to
invest
money,
not
as
current
expenses,
it’s
going
to
be
called
capital
budgeting.
Capital
Budgeting
is
the
process
of
identifying,
evaluating,
and
implementing
a
firm’s
investment
opportunities.
It
seeks
to
identify
investments
that
will
enhance
a
firm’s
competitive
advantage
and
increase
shareholder
wealth.
You
don’t
invest
in
something
if
you
don’t
get
a
“payment”
(?)
The
typical
capital
budgeting
decision
involves
a
large
up-‐front
investment
followed
by
a
series
of
smaller
cash
inflows.
If
I
want
to
use
a
robot
in
a
factory,
that’s
a
huge
up-‐front
investment.
Purchasing
price
+
installation
+
training
and
so
on,
but
why
do
I
want
to
use
a
robot
in
a
company?
Because
I
will
save
some
money,
I
want
to
automate
some
activities.
Those
smaller
benefits
I
will
get
them
on
a
long
period
of
time.
During
10
years
for
example
I
will
save
an
amount
of
money,
and
that
amount
of
money
is
the
profit
that
I’ll
get
from
that
investment.
I
will
then
compare.
In
some
cases
the
total
profits
are
going
to
be
higher
but
not
always.
If
they
are
going
to
be
higher,
it’s
a
good
idea
to
invest.
Poor
capital
budgeting
decisions
can
ultimately
result
in
company
bankruptcy.
If
I
don’t
look
carefully
enough
to
the
figures,
I
might
have
problems.
KEY
MOTIVES
FOR
MAKING
CAPITAL
EXPENDITURES
Expansion,
Replacement,
Renewal,
Other
purposes:
- Replacing
worn
out
or
obsolete
assets
:
machines,
investments,
equipment.
- Improving
business
efficiency:
new
products
up
to
date.
- Acquiring
assets
for
expansion
into
new
products
or
market:
most
of
the
time,
we
need
additional
assets
to
enter
into
a
new
market.
- Buying
a
new
business
- Comply
with
legal
requirements:
less
emission,
more
ecological,
trade
union.
- Satisfying
workforce
demands
- Environmental
requirements

Management
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46
EXAMPLES
OF
MOTIVES
FOR
CAPITAL
EXPENDITURES
STEPS
IN
THE
CAPITAL
BUDGETING
PROCESS

Management
Accounting
Control
2012-‐2013
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Overall
process:
I
will
ask
people
(everybody/the
managers/etc.)
to
make
proposals:
“would
you
need
some
specific
investments?”
“Is
there
something
you
need?”
They
will
then
47
generate
proposals.
Those
proposals
are
not
always
going
to
be
accepted.
They
will
review
and
analyze
those
proposals
in
order
to
make
a
decision:
which
one
am
I
going
to
accept/decline.
They
will
then
implement
the
investment
and
there’s
going
to
be
a
follow-‐up.
BASIC
TERMINOLOGY
MUTUALLY
EXCLUSIVE
VS
INDEPENDENT
Ø Mutually
Exclusive
Projects
are
investments
that
compete
in
some
way
for
a
company’s
resources.
A
firm
can
select
one
or
another
but
not
both.
Ø Independent
Projects,
on
the
other
hand,
do
not
compete
with
the
firm’s
resources.
A
company
can
select
one,
or
the
other,
or
both
-‐
so
long
as
they
meet
minimum
profitability
thresholds.
UNLIMITED
FUNDS
VS
CAPITAL
Ø If
the
firm
has
unlimited
funds
for
making
investments,
then
all
independent
projects
that
provide
returns
greater
than
some
specified
level
can
be
accepted
and
implemented.
Ø However,
in
most
cases
firms
face
capital
rationing
restrictions
since
they
only
have
a
given
amount
of
funds
to
invest
in
potential
investment
projects
at
any
given
time.
You
know
that
next
year
you
will
have
to
invest
up
to
1.000.000
euros…
The
total
may
not
go
beyond…
ACCEPT-‐REJECT
VS
RANKING

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48
Ø The
accept-‐reject
approach
involves
the
evaluation
of
capital
expenditure
proposals
to
determine
whether
they
meet
the
firm’s
minimum
acceptance
criteria.
I
may
decide
to
look
at
every
project
with
very
specific
acceptance
criteria!
My
investment
has
to
be
profitable.
Ø The
ranking
approach
involves
the
ranking
of
capital
expenditures
on
the
basis
of
some
predetermined
measure,
such
as
the
rate
of
return.
I
could
decide
to
keep
the
top
3,
or
top
5.
If
I
accept
to
keep
the
top
3,
the
3rd
one
might
only
have
a
3%
return
on
investment,
and
I
have
to
accept
that.
JUSKICI

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49
CHAPTER
5:
CASH
FLOW
Cash
inflows:
income
specifically
related
to
the
project.
In
this
case
it’s
always
2000
$,
we
don’t
need
to
calculate
to
know
if
it’s
profitable.
The
initial
investment
is
10.000
$
and
we
earn
2000
$
every
year
during
8
years.
If
we
only
had
cash
inflows
during
5
years,
would
it
be
an
interesting
investment?
No
I
prefer
to
have
10.000
$
now
than
in
1
year.
Is
it
much
profitable
or
not
so
much?
If
I
want
the
answer
I
will
have
to
make
calculations.
It’s
not
an
income,
it’s
not
a
profit:
it’s
a
cash
flow!
It’s
not
the
same.
In
the
example
above
we
have
cash
flows
every
year.
(Inflows
and
outflows)
THE
RELEVANT
CASH
FLOWS
INCREMENTAL
CASH
FLOWS
Incremental
cash
flows
are
cash
flows
specifically
associated
with
the
investment,
and their
effect
on
the
firms
other
investments
(both
positive
and
negative)
must
also
be
considered.

Management
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2012-‐2013
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For
example,
if
a
day-‐care
center
decides
to
open
another
facility,
the
impact
of
customers
who
decide
to
move
from
one
facility
to
the
new
facility
must
be
considered.
IKEA:
They
have
a
store
in
Zaventem
&
want
to
open
a
new
store
in
Anderlecht.
They
open
a
new
store
in
order
to
attract
new
customers.
Nevertheless
they
will
also
attract
existing
customers
of
Zaventem:
Cannibalization.
50
ð It
will
have
to
be
taken
into
account.
If
I
expect
1.000.000
euros
sales,
maybe
in
my
calculation
here
that’s
not
1.000.000
euros
that
I
need
to
take
into
account.
è
Incremental
cash
flow.
Maybe
800.000
will
come
from
existing
customers
from
other
stores.
Incremental
=
I
decide
to
launch
a
project
and
because
of
that
project,
this
cash
flow
shows
up.
MAIN
COMPONENTS
ð Initial
Investment

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ð Operating
Cash
inflows
ð Terminal
cash
flow:
I
might
have
it
the
next
year
because
some
things
could
happen.
51
Typical
way:
Outflow
(=
initial
investment)
then
series
of
inflows
(=
operating
cash
inflows
and
terminal
cash
flow)
TERMINOLOGY
APD
ICI
NOTES
A
LA
MAIN
EXPANSION
VS
REPLACEMENT
CASH
FLOWS
EXPANSION
CASH
FLOWS
è
Ex:
creating
a
new
plant
(a
fourth
one)
No
problem:
Estimating
incremental
cash
flows
is
relatively
straightforward
in
the
case
of
expansion
projects,
but
not
so
in
the
case
of
replacement
projects.
è
Cash-‐flow
specifically
coming
from
the
project/
specific
to
the
project
REPLACEMENT
CASH
FLOWS
è
Ex:
you
want
to
replace
something
(machine,
pc,
etc.)
With
replacement
projects,
incremental
cash
flows
must
be
computed
by
subtracting
existing
project
cash
flows
from
those
expected
from
the
new
project.
Incremental
cash
flows
must
be
calculated
by
subtracting
everything
that’s
coming
from
the
old
equipment
because
it
might
generate
cash
flows
when
existing.

Management
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52
Those
are
the
formulas
that
we
are
going
to
use.
SUNK
COSTS
VS
OPPORTUNITY
COSTS
• Note
that
cash
outlays
already
made
(sunk
costs)
are
irrelevant
to
the
decision
process.
• However,
opportunity
costs,
which
are
cash
flows
that
could
be
realized
from
the
best
alternative
use
of
the
asset,
are
relevant.
INTERNATIONAL
CAPITAL
BUDGETING
• International
capital
budgeting
analysis
differs
from
purely
domestic
analysis
because:
o Cash
inflows
and
outflows
occur
in
a
foreign
currency,
and
o Foreign
investments
potentially
face
significant
political
risks
• Despite
these
risk,
the
pace
of
foreign
direct
investment
has
accelerated
significantly
since
the
end
of
WWII.
EXAMPLES
OF
RELEVANT
CASH
FLOWS
ü Cash
inflows,
outflows,
and
opportunity
costs
ü Changes
in
working
capital
ü Installation,
removal
and
training
costs

Management
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53
ü Terminal
values
ü Depreciation
CATEGORIES
OF
CASH
FLOWS:
• Initial
Cash
Flows
are
cash
flows
resulting
initially
from
the
project.
These
are
typically
net
negative
outflows.
• Operating
Cash
Flows
are
the
cash
flows
generated
by
the
project
during
its
operation.
These
cash
flows
typically
net
positive
cash
flows.
• Terminal
Cash
Flows
result
from
the
disposition
of
the
project.
These
are
typically
positive
net
cash
flows.
FINDING
THE
INITIAL
INVESTMENT
The
basic
format
for
determining
initial
investment:
EXAMPLE:
TAX
TREATMENT
ON
SALES
OF
ASSETS

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Powell
Corporation,
a
large
diversified
manufacturer
of
aircraft
components,
is
trying
to
determine
the
initial
investment
required
to
replace
an
old
machine
with
a
new,
more
sophisticated
model.
The
machine’s
purchase
price
is
$380,000
and
an
additional
$20,000
will
be
necessary
to
install
it.
It
will
be
depreciated
under
MACRS
using
a
6-‐year
recovery
period.
The
firm
has
found
a
buyer
willing
to
pay
$280,000
for
the
present
machine
and
remove
it
at
the
buyers
expense.
The
firm
expects
that
a
$35,000
increase
in
current
assets
and
an
$18,000
increase
in
current
liabilities
will
accompany
the
replacement.
Both
ordinary
income
and
capital
gains
are
taxed
at
40%.
54

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55
FINDING
THE
OPERATING
CASH-‐FLOW

Management
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Powell
Corporation’s
estimates
of
its
revenues
and
expenses
(excluding
depreciation),
with
and
without
the
new
machine
described
in
the
preceding
example,
are
given
in
next
slide.
Note
that
both
the
expected
usable
life
of
the
proposed
machine
and
the
remaining
usable
life
of
the
existing
machine
are
5
years.
The
amount
to
be
depreciated
with
the
proposed
machine
is
calculated
by
summing
the
purchase
price
of
$380,000
and
the
installation
costs
of
$20,000.
56

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57

Management
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58

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Control
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Cuylits
59
FINDING
THE
TERMINAL
CASH-‐FLOW
Continuing
with
the
Powell
Corporation
example,
assume
that
the
firm
expects
to
be
able
to
liquidate
the
new
machine
at
the
end
of
its
5-‐year
useable
life
to
net
$50,000
after
paying
removal
and
cleanup
costs.
The
old
machine
can
be
liquidated
at
the
end
of
the
5
years
to

Management
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Control
2012-‐2013
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net
$0
because
it
will
then
be
completely
obsolete.
The
firm
expects
to
recover
its
$17,000
net
working
capital
investment
upon
termination
of
the
project.
Again,
the
tax
rate
is
40%.
60
SUMMARIZING
THE
RELEVANT
CASH
FLOWS
HOW
TO
HANDLE
UNCERTAINTY
• Sensitivity
Analysis
-‐
Analysis
of
the
effects
of
changes
in
sales,
costs,
etc.
on
a
project.
• Scenario
Analysis
-‐
Project
analysis
given
a
particular
combination
of
assumptions.
• Simulation
Analysis
-‐
Estimation
of
the
probabilities
of
different
possible
outcomes.

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• Break
Even
Analysis
-‐
Analysis
of
the
level
of
sales
(or
other
variable)
at
which
the
company
breaks
even.
SENSITIVITY
ANALYSIS
EXAMPLE
Given
the
expected
cash
flow
forecasts
listed
on
the
next
slide,
determine
the
NPV
of
the
project
given
changes
in
the
cash
flow
components
using
an
8%
cost
of
capital.
Assume
that
all
variables
remain
constant,
except
the
one
you
are
changing.
POSSIBLE
OUTCOMES

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NPV
calculations
for
pessimistic
investment
scenario
NPV
Possibilities
SCENARIO
ANALYSIS
EXAMPLE
(CONTINUED)
Cash-‐flow
(year
1-‐12)

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BREAK
EVEN
ANALYSIS
EXAMPLE
Given
the
forecasted
data
on
the
next
slide,
determine
the
number
of
planes
that
the
company
must
produce
in
order
to
break
even,
on
an
NPV
basis.
The
company’s
cost
of
capital
is
10%.
ANSWER
Ø The
break
even
point,
is
the
#
of
Planes
Sold
that
generates
a
NPV=$0.
Ø The
present
value
annuity
factor
of
a
6
year
cash
flow
at
10%
is
4.355
Thus,

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Solving
for
“Planes
Sold”
Planes
sold
=
63

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65
CHAPTER
6:
BUSINESS
EVOLUTION
WHAT
ARE
THE
KEY
ELEMENTS
OF
THE
RECENT
BUSINESS
EVOLUTION?
How
can
we
collect
info
from
operations?
It’s
difficult
to
measure
things
especially
in
this
environment.
ð More
cross-‐functionality
Take
large
processes
that
analyze
more
process.
ð Stronger
relationships
with
Customers
&
suppliers
Relationship
with
the
customer
is
much
stronger,
same
for
the
suppliers.
Today
many
automobile
manufacturers
say
to
the
suppliers:
we’ll
five
you
access
to
all
computer
systems,
you
will
look
when
we
need
raw
materials
and
you
will
bring
them
to
the
manufacturing
place,
so
that
we
don’t
interfere
with
you.
You
enter
the
manufacturing
place
and
you
bring
it
to
the
place
where
it’s
needed.
ð The
market
requirements
ð Globalization
ð More
need
for
innovation:
o Shorter
life
cycles
(much
shorter,
especially
in
electronic
equipment).
o Time-‐to-‐market
more
critical:
time
it
takes
to
bring
to
the
market
a
new
product
or
service.
ð Competencies
are
enhanced

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Level
of
needed
competencies
is
much
higher
PARALLEL
BUSINESS
TOOLS
EVOLUTION:
ð TQM
=
Total
Quality
Management.
Focus
on
customer
helps.
Way
to
secure
the
output
of
the
process
and
not
only
it
is
good
but
it’s
exactly
what
the
customers
expect
to
have.
In
many
cases
company
from
the
apst
were
ready
to
accept
...
the
right
output.
TQM
doesn’t
accept
that
idea.
95%
of
the
customers
are
good
but
it
means
that
5%
that’s
not
good
and
that
costs
a
lot
of
money.
ð JIT
Just
In
Time:
work
without
intermediate
inventories.
…
Whenever
there’s
a
problem
the
full
line
has
to
stop,
that’s
what
Toyota
developed.
ð TBC
=
Time
Based
Competition
All
the
tools
that
will
help
the
company
to
shorten
le
life
cycle,
the
production
cycle,
etc.
ð Lean
production
A
production
with
a
minimum
of
overrates
Minimum
production
overate:
minimum
administration
and
so
on.

Management
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ð Customer-‐focused
organization
No
explanation
ð Re-‐engineering
Completely
re-‐inventing
an
existing
process
because
we
are
not
happy
with
this
process.
Replace
a
process
with
a
new
one.
Just
a
human
improvement
isn’t
enough,
there’s
a
need
to
change
the
process.
Ex:
manually
=>
by
computer.
Process
have
a
cost,
it
takes
a
while
and
has
some
cost.
In
90
to
95%
of
the
cases,
the
process
cost
was
higher
than
the
repair
cost.
If
it’s
higher,
that’s
non-‐sense,
something
is
wrong
with
that
process,
need
to
change
this
process,
to
use
a
new
one.
ð ABC
Quite
recent.
ð Empowerment
Giving
authority
to
people.
BUT…
ð Results
sporadic
or
disappointing.
Results
are
not
really
good.
Many
companies
are
not
happy
with
that.
There
has
been
some
improvement
but…
ð Weak
cause-‐and-‐effect
relationship
with
the
strategy
ð Limitations
of
finance
and
accounting
tools
and
methods.
For
example,
how
to
measure
the
financial
value
of:
(Standard
accounting
methods
=>
very
clear
limitations)
o New
products
«
in
the
pipe-‐line
»?

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You
have
money
you
want
to
invest
(?),
let’s
imagine
you
want
to
invest
in
pharmaceutical
company,
you
hesitate
between
2,
the
figures
are
the
same
for
both
companies
(Balance
Sheet,
Profit
and
Loss
statement,
…
everything
based
on
the
financial
information
is
the
same!)
but
you
know
that
one
company
has
20
products
under
development,
while
the
second
one
has
only
10!
Which
of
the
two
are
you
going
to
chose?
Which
one
is
more
likely
to
succeed?
The
first
one
!
20
products
in
the
pipe-‐line.
68
o Process
capability?
What’s
the
process
is
capable
of
doing
or
not?
When
you
take
two
identical
production
lines
(same
machines,
process,
etc.),
you
start
one
production
line
in
Europe
and
the
other
in
Japan.
Systematically
after
a
couple
of
years,
one
production
line
is
doing
better
than
the
other.
Its
capability
has
been
improved,
but
no
investment
has
been
made.
Financially
it’s
impossible
to
detect
that
smth
has
been
changed.
Changing
in
some
of
the
production
steps,
…
something
happened
that’s
not
possible
to
detect
from
a
financial
point
of
view.
Better
company
but
again,
impossible
to
see
that
from
a
financial
point
of
view.
o Personnel
competency?
Not
smth
that
you
can
measure
based
on
the
financial
and
accounting
data?
You
can
pay
someone
more,
but
it
doesn’t
mean
he’s
better
or
works
better.
o Customer
loyalty?
More
able
to
invest
if
I
see
a
better
loyalty
from
customers.
o Quality
of
the
databases?
ð No
systematic
feedback
process
on
the
effectiveness
of
the
strategy.
MAC
is
about
giving
a
good
visibility
to
take
good
decisions.

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