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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 
Cuylits 
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.
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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 
Cuylits 
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 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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 
Manon 
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.
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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 
Accounting 
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.)
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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.
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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.
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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.
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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.
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
21 
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
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
22 
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).
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
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23 
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.
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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).
Management 
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Manon 
Cuylits 
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.
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
26 
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.
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
28 
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.
Management 
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2012-­‐2013 
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29 
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
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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
Management 
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31 
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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2012-­‐2013 
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33 
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
Management 
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Manon 
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34 
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
Management 
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Manon 
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36 
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:
Management 
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Control 
2012-­‐2013 
Manon 
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37 
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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2012-­‐2013 
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38 
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
Management 
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Control 
2012-­‐2013 
Manon 
Cuylits 
39 
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
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
46 
EXAMPLES 
OF 
MOTIVES 
FOR 
CAPITAL 
EXPENDITURES 
STEPS 
IN 
THE 
CAPITAL 
BUDGETING 
PROCESS
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
55 
FINDING 
THE 
OPERATING 
CASH-­‐FLOW
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
57
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
58
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
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 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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.
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
61 
• 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
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
62 
NPV 
calculations 
for 
pessimistic 
investment 
scenario 
NPV 
Possibilities 
SCENARIO 
ANALYSIS 
EXAMPLE 
(CONTINUED) 
Cash-­‐flow 
(year 
1-­‐12)
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
63 
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,
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
64 
Solving 
for 
“Planes 
Sold” 
Planes 
sold 
= 
63
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
66 
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 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
67 
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 
»?
Management 
Accounting 
Control 
2012-­‐2013 
Manon 
Cuylits 
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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Management accounting control

  • 1. 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
  • 2. 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
  • 3. Management Accounting Control 2012-­‐2013 Manon Cuylits 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.
  • 4. 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.
  • 5. Management Accounting Control 2012-­‐2013 Manon Cuylits 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:
  • 6. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 7. Management Accounting Control 2012-­‐2013 Manon Cuylits 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.
  • 8. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 9. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 10. Management Accounting Control 2012-­‐2013 Manon Cuylits 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).
  • 11. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 12. Management Accounting Control 2012-­‐2013 Manon 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.
  • 13. Management Accounting Control 2012-­‐2013 Manon Cuylits 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.
  • 14. Management Accounting 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.)
  • 15. Management Accounting Control 2012-­‐2013 Manon Cuylits 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.
  • 16. Management Accounting Control 2012-­‐2013 Manon Cuylits 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.
  • 17. Management Accounting Control 2012-­‐2013 Manon Cuylits 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.
  • 18. Management Accounting Control 2012-­‐2013 Manon Cuylits 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.
  • 19. Management Accounting Control 2012-­‐2013 Manon Cuylits 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.
  • 20. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 21. Management Accounting Control 2012-­‐2013 Manon Cuylits 21 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
  • 22. Management Accounting Control 2012-­‐2013 Manon Cuylits 22 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).
  • 23. Management Accounting Control 2012-­‐2013 Manon Cuylits 23 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.
  • 24. Management Accounting Control 2012-­‐2013 Manon Cuylits 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).
  • 25. Management Accounting Control 2012-­‐2013 Manon Cuylits 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.
  • 26. Management Accounting Control 2012-­‐2013 Manon Cuylits 26 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.
  • 27. Management Accounting Control 2012-­‐2013 Manon Cuylits 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.
  • 28. Management Accounting Control 2012-­‐2013 Manon Cuylits 28 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.
  • 29. Management Accounting Control 2012-­‐2013 Manon Cuylits 29 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
  • 30. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 31. Management Accounting Control 2012-­‐2013 Manon Cuylits 31 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
  • 32. Management Accounting Control 2012-­‐2013 Manon Cuylits 32 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
  • 33. Management Accounting Control 2012-­‐2013 Manon Cuylits 33 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
  • 34. Management Accounting Control 2012-­‐2013 Manon Cuylits 34 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.
  • 35. Management Accounting Control 2012-­‐2013 Manon Cuylits 35 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
  • 36. Management Accounting Control 2012-­‐2013 Manon Cuylits 36 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:
  • 37. Management Accounting Control 2012-­‐2013 Manon Cuylits 37 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?
  • 38. Management Accounting Control 2012-­‐2013 Manon Cuylits 38 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
  • 39. Management Accounting Control 2012-­‐2013 Manon Cuylits 39 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.
  • 40. Management Accounting Control 2012-­‐2013 Manon Cuylits 40 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
  • 41. Management Accounting Control 2012-­‐2013 Manon Cuylits 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.
  • 42. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 43. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 44. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 45. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 46. Management Accounting Control 2012-­‐2013 Manon Cuylits 46 EXAMPLES OF MOTIVES FOR CAPITAL EXPENDITURES STEPS IN THE CAPITAL BUDGETING PROCESS
  • 47. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 48. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 49. Management Accounting Control 2012-­‐2013 Manon Cuylits 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.
  • 50. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 51. Management Accounting Control 2012-­‐2013 Manon Cuylits 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.
  • 52. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 53. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 54. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 55. Management Accounting Control 2012-­‐2013 Manon Cuylits 55 FINDING THE OPERATING CASH-­‐FLOW
  • 56. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 57. Management Accounting Control 2012-­‐2013 Manon Cuylits 57
  • 58. Management Accounting Control 2012-­‐2013 Manon Cuylits 58
  • 59. Management Accounting Control 2012-­‐2013 Manon 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
  • 60. Management Accounting Control 2012-­‐2013 Manon Cuylits 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.
  • 61. Management Accounting Control 2012-­‐2013 Manon Cuylits 61 • 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
  • 62. Management Accounting Control 2012-­‐2013 Manon Cuylits 62 NPV calculations for pessimistic investment scenario NPV Possibilities SCENARIO ANALYSIS EXAMPLE (CONTINUED) Cash-­‐flow (year 1-­‐12)
  • 63. Management Accounting Control 2012-­‐2013 Manon Cuylits 63 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,
  • 64. Management Accounting Control 2012-­‐2013 Manon Cuylits 64 Solving for “Planes Sold” Planes sold = 63
  • 65. Management Accounting Control 2012-­‐2013 Manon Cuylits 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
  • 66. Management Accounting Control 2012-­‐2013 Manon Cuylits 66 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.
  • 67. Management Accounting Control 2012-­‐2013 Manon Cuylits 67 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 »?
  • 68. Management Accounting Control 2012-­‐2013 Manon Cuylits 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.