With Thyra’s last post on June 13, our financial analysis educational series comes to an end for this year.

Please feel free to e-mail us or comment in blog posts if you have any questions.

We hope you enjoyed the series and benefited from them.

Best,

Deniz

b)      Poor top management support – in order to gain the cross-functional support, there should be formed new initiatives for the company to perform management actions, since the ABC model needs the support of senior management.

c)       Entrusting the ABC project to the chosen consultants- a lot of consulting firms endow services features of software and consulting, which are needed for developing ABC models as well as the other business analysis tools. Yet, cross functional teams assigned in the company are also needed to gain success in project implementations.

d)      A substandard ABC design – if there are too much measurements or complex measurements with ineffective time consuming, the design needs to add more work for people who see no benefits.

e)      Added risks in change.

These are:

1. The costs of these different resources are designated in particular activities.
2. The costs used in activities are interlinked with the objects that have definite costs and used in the activities. 

How is an ABC Model Designed in a Small Business?

1. List down the main activities and write an activity dictionary to keep things organized.
2. Define particularly the resources and its costs needed to be used in an activity with the use of a financial analysis.
3. Mapped goals and objectives of the activities.
4. Use tools for measurement of starting activities in order to know reasons behind why the activity is needed to be pursued by the business.
5. Calculate the activity rate with the formula of activity cost driver rate equal to the quotient of normal cost of support activity and normal level of driver, wherein normal level is the long run capacity (activity cost driver rate = Normal cost of support activity ÷ Normal level of driver.)
6. The computed activity cost driver rates should be assigned to cost objects.

Second, now you know that management accounting is just a part of accounting in the big picture. Yet, it is its biggest area and, also, has a number of departments, like tax accounting, internal auditing and financial analysis accounting, which is our concern for this series.

 “Management accounting is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information utilized by management to plan, evaluate, and control within an organization and to assure appropriate utilize of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies, and tax authorities.”

– National Association of Accountants

Under it are several lines of functions in cost accounting, cost management, activity management and investment management. The reports written and completed in management accounting are intended for the internal users of a business, all levels of management and others members working within the company. It is very rare that outside parties get to read this report, all the more have a copy of their own.

In addition, since management accounting is, also, an office department, it needs a multidimensional focus, so that its staffs and accountants are able to fulfill their jobs as assigned by the business owner or accounting manager. Hence, aside from accounting, this department’s concern is also areas of organizational, behavioral, decisional, planning and others needing accounting services. With this, there is a new role for management accountants.

Now, four (4) areas of specializations are added with their roles in the office. These are: customer care, key success factors (cost, quality, time and innovation,) continuous growth, as well as value-chain and supply-chain study.

Management accounting deals with the endowment of information that entitles the different departments of a company in:

• Re-search and development
• Design of products, services or processes
• Production
• Marketing
• Distribution
• Customer Service

Lastly, managerial accounting shares data that are shown, only, in its external financial statement analysis to other departments. Since, this type of report is different from the internal versions, they are allowed to write it in a more detailed approach, provide this data in a regular basis (like monthly or year ends) and use different forms, which depends on the need and objectives on how a data is going to be used. A key difference between financial and managerial accounting is that the latter bears reports that are not directly controlled by generally accepted accounting principles (GAAP).

Here they are:

1. Activity-Based Costing Method (ABC)
2. Just-in-time or JIT
3. Business Process Reengineering or BPR

What are the financial issues to be tackled? The issues change basing from the industry type your small, medium or big business has tied-up. Whether you are a new or old business owner, be sure to always monitor the business performance and plan ahead of what to come. Financial issues should be closely monitored before arriving at the conclusion: poor cash flow management, getting sued in cases, added capital for any expansion or reinvestment plans, compensating for sudden changes in the economy and over-expanding your business. There are cases that even a well generated income and balance statement will show an amount of loss or shortage in cash.

The above should be helpful tools, but not just them, in coming up with a very reliable investment decision today. Aside from the numbers, investigating the downturns and improvements will require a breakdown of the business measures according to its values. I will say here that quantity and quality are both given particular attention. That is why I am discussing not only financial statements, but, as well, the three (3) theories I have mentioned above in improving business profitability. How will these affect your business? When does a good investment decision take place?

Types of Finance Analysts

• Buy-Side – the kind of financial advisor assigned at big firms, like insurance selling companies. In which, the only concern is securing the welfare of its organizational line. Meaning to say, work is internal.
• Sell-Side – this type of financial advisor belongs to stock brokers and banks, wherein work is more on selling retail investments to clients. Service is, usually, free. In comparison, this has a higher job scope level than the buy-side.
• Independent – this is a financial advisor not working under any known financing firm and earns by conducting a free-based research or selling subscription-based reports. Service is strictly under financial rules and accounting standards, but allows profitability to the client.

A secret to choosing a financial advisor is that he or she should never give you doubts. Or else, everything will fail.

Yet, the raw productivity calculations are not enough for you to tell the whole story of the competition. Absent major structure differences should not be present. In this way, a business owner has greater lead with the business he or she is handling. The computations presented in comparing productivity measures should be able to answer these questions: “Is this partial productivity measurement a good and adequate amount to start the firms’ future investment decisions?” Or “Should you also consult at results from productivity measures for these 2 major competitors in judgment?” Take note, productivity measure allows business owners to know factual information on how well a business performance is, amidst critical factors seen at present.

If, using a small business analysis, Firm A has shown above level results from Firm B, though, it has exhausted also a bigger amount on input factors and, on the other hand, its sales generated 75% more from Firm B. Considering this, hence, it only shows a better business performance in terms of competitive priorities, like flexibility, cost, time and quality records. The productivity measures actually indicates how efficiently Firm A utilized own resources. Such results will be useful in coming up with a strategic goal as well as operations strategy and business strategy to be able to produce excellent products that should be inline with its mission and its core competencies.

Managers can also improve their ability of assessing the organization’s external business environment, because this is found to be greatly affecting to performance. In this lieu, the SWOT technique helps in showing effective explanations of an organization’s strategic choices to be able to produce timely decisions basing from results of risk assessment and defining threats. Furthermore, the SWOT analysis can also judge against the present traits and probable improvements on traits of the organization. It is supporting of an evaluation on the present consequences suffered due to failing decisions that are done as actions on found risks and threats needed to be converted into opportunities.

Force 1: Your Business and its Rivalry among Existing Competitors – Historically, the concentration of prime competitors has been fragmented by geography in small business analysis. This performance should actually aid in alleviating some of the price competition in the industry that was driven by small, highly fragmented competitors in contending your business.

Force 2: Your Business and the Threat of Substitutes – The active relative price of substitutes among products plays a role in determining profitability. Wherein, any priced product reflects the high labor costs in its cultivation. This can be a good reason of not being ranked 1 in the mainstream.

Force 3: Your Business and the Buyer Power – There are products typically seen as somewhat resistant to economic downturns, which to an extent lead to consumer budgets that are price insensitive and low buyer powers. Yet, there is still a fear that these consumers will switch their product preferences to stretch the lowering incomes further when in a downturn market.

Force 4: Your Business and its Supplier Power – There are times when a business would need to cut down its suppliers, since it will need reasons to lower costs. Hence, instead, it chooses to use services from its main suppliers.

Force 5: Your Business facing a Threat of New Entry – During a low performance, your business has a critical stand among its competitors in terms of costs advantage in financial analysis. A business that is best able to control costs (like operating and technology) will be the most profitable. Other areas that affect new entry into a market include capital requirements, economies of scale, and brand identity.

I think, for a small business, the most viable option that a business owner can complete is strength, weakness, opportunities and threat (SWOT) report. In this, you will know the level of completion in the industry your business belongs into, of whether the same target market is occupied between you and competitors.

How does a SWOT function? This report should bear data from competitors, which will be evaluated and surveyed in certain factors that are in most concern to business owners. There will be a financial ratio analysis, which presents a source for gained, computed and compared in relevant ratios that relate to business functions. Remember, once you stop monitoring competitor activity and implementing new actions as an investor, your business can be at stake.

Know who is across the other side of the wall. Who is your competitor? Who else is selling similar products with your offer? The battle of business vs. business, also, considers the country strategic place, diagram management models, competitive pricing, of course, a financial analysis and a lot more. Wherein, competition is, really, tough. Hence, if the SWOT report is not good enough for you, you can complete other analysis. Now, another very good tool, in lieu of the said factors, is the market survey. Your customers are top reasons why your business exists and the road to its progress. The goal of a market survey is to protect your business as well as your customers, who buy your products.

Next important thing to give importance during competition is credibility. What you have gained from competitors serves as helpful data in making or breaking an investment decision. The most viable thing you should next do here is to show some critical skills. All of these reports are not good enough, if the investor is not acting. The accuracy and quality of sources are, always, made sure to be reliable.

What to do? Check competitor public sources and promotional schemes or do a market analysis for a better business plan, like an industry description and assessment, aligning your target market sector, doing a series market tests, improving customer services (like lessening lead times), product or service competitive analysis, be strict of regulatory restrictions in your business and, lastly, benchmark your performance in ally with competitors.