ROUTES TO RECOVERY How businesses can get beyond COVID-19 - Driving innovation in management accounting | June 2020 - Financial Management magazine
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Driving innovation in management accounting | June 2020 ROUTES TO RECOVERY How businesses can get beyond COVID-19
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© 2020 Association of International Certified Professional Accountants. All rights reserved.
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CONTENTS
10 24
ON THE COVER: PHOTO BY RICARDO BLANCO/REUTERS; ON THIS PAGE: COUNTERCLOCKWISE FROM TOP LEFT: PHOTO BY ASOBININ/ISTOCK; PHOTO BY MIRAGEC/GETTY IMAGES;
24 STRATEGIC
IMPLICATIONS OF
COVID-19 AND ITS
AFTERMATH
IMAGE BY GARY WATERS/IKON IMAGES; PHOTO COURTESY OF BREWDOG; PHOTO BY FIONA HANSON/AP IMAGES; PHOTO BY CHENEY ORR/REUTERS
Planning for the future requires
6 A YEAR OF FORWARD 14 THE ART OF MANAGING answers to three strategy
THINKING COST WITHOUT A BUDGET questions.
CIMA President Amal A senior adviser at
Ratnayake, FCMA, CGMA, says Scandinavia’s largest company 28 WUHAN HOTEL
COVID-19 has placed the explains what it means to “kick SERVES UP INNOVATION
profession on the front lines of out the budget”. DURING LOCKDOWN
economic recovery. Finance director Janet Yan,
20 MODELLING WORKING FCMA, CGMA, explains how
8 THE FUNDAMENTALS CAPITAL ADJUSTMENTS her staff helped find new
OF RESILIENCE IN EXCEL business as the COVID-19
Andrew Harding, chief
executive–Management
Excel MVP Liam Bastick, FCMA,
CGMA, teaches some
outbreak gripped the city.
36
Accounting at the Association spreadsheet skills to help you 32 COVID-19: FROM
of International Certified manage your company’s SPIRITS TO HAND 36 MAKING RISK A
Professional Accountants, says all-important cash. SANITISER IN DAYS CENTRAL FOCUS
finance leaders need to be Ben Press, ACMA, CGMA, When deployed properly,
resilient both for themselves BrewDog’s retail finance risk management becomes
and for their teams.
20 manager, explains how the
company quickly switched
an integral part of a
company’s operations,
10 A PLAYBOOK TO production from gin, rum, and according to Sarah Kuijlaars,
MANAGE CASH IN A vodka to hand sanitiser. FCMA, CGMA.
CRISIS
The coronavirus pandemic is
forcing businesses worldwide
to tightly manage their cash.
Here are five critical steps to
tackle liquidity stress in a crisis.
14
32
FM-MAGAZINE.COM June 2020 I FM MAGAZINE I 3
44 50
48 INSTITUTE NEWS
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the profession and your
membership.
50 LAUNCHING A
38 NEW ERA
Take a look at how the science
and business of satellites are
38 SERVING AS A ROLE 42 FINESSING YOUR 44 STRATEGIES FOR evolving.
MODEL FOR ETHICAL RETURN TO A PREVIOUS EMBEDDING CLIMATE
BUSINESS EMPLOYER REPORTING
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FM is now shipped whenever
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be humble. climate-related financial reduce waste.
disclosures.
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Paul Ash, FCMA, CGMA 220 Leigh Farm Road, Durham, NC 27707-8110
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4 I FM MAGAZINE I June 2020
2020 Annual MiP Conference:
Going for Gold
The CIMA Members in Practice Conference is organised Date and time:
and run by members in practice. It is tailored to provide Monday 19 and Tuesday
maximum value for existing members in practice, those 20 October 2020.
working within SMEs as well as those looking to start
Location:
their own practice.
Chesford Grange Hotel, Kenilworth,
Your 2020 conference will focus on providing in-depth technical Warwick CV8 2LD
advancement — real, solid, tangible knowledge and skills that you
Expert presentations, including:
can apply in your business the next day.
Technical updates
As accountants in practice, we are business people — and as
Sales and marketing
business people, it is important that we invest time in ourselves.
Software advice
If we improve and develop as individuals, we have a greater chance
of improving our business performance. Technology
Soft skills
In its 35th year, the conference will give you the tools to run your
CIMA support and initiatives
business the best way. It will give you the opportunity to gain
valuable CPD, to network with other members in practice and unlock
the secrets to growing your business!
For the full programme and
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cimaglobal.com/MiP2020.
© 2020 Association of International Certified Professional Accountants. All rights reserved. CIMA and The Chartered Institute of Management Accountants are trademarks of The Chartered Institute of
Management Accountants and are registered in the United Kingdom and other countries. The Globe Design is a trademark owned by the Association of International Certified Professional Accountants
and licensed to CIMA. 1912-01223
THE VIEW FROM THE PRESIDENT
AMAL RATNAYAKE, FCMA, CGMA
F
or the past year, I have been was beginning to creep across
honoured to serve as CIMA the globe. Since then, we have
president and chair of the all witnessed a paradigm shift in
Association of International the way we do business —
Certified Professional everywhere. Car manufacturers
Accountants. When my tenure shifted from producing cars to
began in June 2019, we were building respirators. Clothing
halfway through the year of manufacturers began making
celebrations for CIMA’s centenary hospital gowns. Offices closed,
and well into our third year of and employees began working
A year of forward
operating the Association. For from home while learning to
the remainder of the year, I balance home-schooling their
travelled across the globe, children and shopping online
meeting with members,
students, and business leaders as
we celebrated the evolution of
thinking for groceries. Restaurants
shifted from dine-in to takeout
and delivery. Telemedicine and
TOP: PHOTO BY FIONA HANSON/AP IMAGES; BOTTOM LEFT: PHOTO BY ANTHEA DAVISON/ANTHEA DAVISON
our organisation and looked drive-through lab testing grew
forward to the continued success ‘Now is the time to put others apace. Online learning platforms
of our profession. first. To see the human element became the norm.
In early 2020, when I was What do these business
visiting Sri Lanka, the country in our business. To do our part to model shifts have in common?
where I was born, we began to
hear more about the coronavirus,
protect others as we rebuild our Technology has been the
foundation of their success.
a new and dangerous virus that global economy.’ At CIMA and the
PHOTOGRAPHY; BOTTOM RIGHT: PHOTO BY DALE MARTIN
CIMA President Amal Ratnayake, FCMA, CGMA, spoke at the In June 2019 in London, Ratnayake told new members that
CGMA Africa Conference in September in Cape Town, South they should never stop learning: “Predict what gaps you might
Africa. come up against in the future and start closing those gaps.”
6 I FM MAGAZINE I June 2020
Association, we had already made a start on a portion of the CIMA Professional Qualification Syllabus, and
transformational shift. Although a year ago no one could have reworked the CGMA Competency Framework. Now, more
foreseen the impact of this global health pandemic, our than ever, these tools will help students and current
commitment to reimagining the profession and ourselves professionals learn the vital technology and interpersonal
provided us with the tools we needed to pivot to this new skills needed going forward.
world order. In this moment of major transformation, CIMA and the
We had already begun implementing the technology Association remain dedicated to supporting the
infrastructure needed, enabling us to continue delivering management accounting professionals who have again been
value to our members and the profession without called upon to find opportunities in a world that is
interruption. Our employees began to work from home, and constantly changing.
we accelerated initiatives for learning, resources, and We have long been the voice of calm in a sea of disruption,
programmes to support our members as they began to help helping others assess the damage and make difficult
their organisations and clients brave this crisis. We decisions that directly affect employees and their families.
implemented at-home testing for CIMA exams with Now, COVID-19 has placed our profession on the front lines
safeguards against fraud and initiated discussions with of economic recovery, advising our organisations and clients
governments across the globe to take immediate steps to on what to do next.
support small business. Amid these difficult decisions, our trusted adviser role is
We were able to send on-the-moment updates with new paramount. We can interpret data, consider financial
information and resources, and we created free podcasts, recovery options, and forecast outcomes.
checklists, business tools, and online education courses for The next step, though, is providing trusted advice on how
our members that catered to the fluctuating business to handle our greatest asset: our people. Now is the time to
landscape. put others first. To see the human element in our business.
Our forward-thinking initiatives from 2019 and earlier also To do our part to protect others as we rebuild our global
proved beneficial. Our Digital Mindset Pack had sprung to life economy.
online, and because we partnered with the online education Our members past and present have always been eager and
platform Coursera, our Go Beyond Disruption learning series willing to dive headfirst into new challenges, grow, and help
became available to help millions build critical skills in business leaders thrive during periods of tumultuous change. It
technology and human intelligence. Based on our Future of is my hope that, as an honorary officer, I have fostered a culture
Finance research, we had written the Re-inventing Finance for that celebrates that legacy while laying a foundation to
a Digital World white paper, updated the digital finance reimagine the profession for the next wave of disruptions. ■
RIGHT: PHOTO BY BENIL MARCUS
Ratnayake visited New Zealand in November and recognised The CIMA president spoke at a convocation in Colombo in
the service of Auckland branch chairperson Niroshini his native country of Sri Lanka early this year.
Jayasekera, CPA (Australia), ACMA, CGMA.
June 2020 I FM MAGAZINE I 7
The
fundamentals
of resilience
By Andrew Harding, FCMA, CGMA
I
f ever there was a period in our emerge from the crisis. downturn. One finding that struck me as
lifetimes when we have had to tap into Throughout this period, management particularly relevant to finance is that
stores of resilience, it has been the past accountants have played key roles in digital and analytics-driven productivity
few months. sustaining their businesses and planning improvements matter. Companies that are
An unexpected, fast-changing for the rapid ramp-up of capabilities to further along the digital adoption journey
global health situation, the lives of our minimise the economic impact. Always are creating more than 7% more revenue
loved ones at risk, an uncertain economic looking forward, remaining objective, and growth than their competitors. This shows
time ahead. Who is not affected? understanding the drivers of performance why the right tools and data, plus the ability
As the coronavirus situation escalated, is in our management accounting DNA. to adapt, will serve you and your business
and I led colleagues in managing the And all through this, I have put aside time well in even more competitive times.
impact of the coronavirus on our for family, friends, and exercise while While we are busy keeping pace with
management accounting activities, I used encouraging others to do the same. technological change, managers should not
experience built from many years of If we can take any positives from this forget to invest in people. Make sure your
PHOTO BY STE V E FORREST/STE V E FORREST PHOTOGR APH Y
practising resilience. I am a passionate otherwise terrible period, it would be that it teams have the tools they need to do their
advocate of this tool, often labelled is an opportunity to build up our resilience jobs and the support they need to cope with
somewhat misleadingly as a “soft” skill. In so that we become more capable of dealing the crisis. Keep staff skills up to date so you
my view, it’s as solid a skill as you could with adversity. As finance leaders, we must can pivot when circumstances change.
have. It is a fundamental part of the be resilient not only for ourselves, but also Know that an adaptable, resilient mindset
leadership toolkit. for the people we manage. will match technology every time.
Resilience is about keeping a focus on Knowledge is fundamental to personal Finally, I would like to send you, your
key issues as well as making time for resilience. Confidence in the knowledge families, and friends my very best wishes.
personal wellbeing. We have concentrated that you have, along with curiosity to
initially on what support our members’ discover what you do not know, is a good
businesses need from government. We position to be in. Also important is having
Andrew Harding, FCMA, CGMA,
have also looked at how we can enable our the foresight to see the benefits of adapting
is chief executive–Management
students to continue building their skills to changing technology. Management
Accounting at the Association of
— which they will need in the future to consultancy McKinsey conducted research
International Certified Professional
work through adversity. After that, we will into what made some firms more resilient
Accountants.
focus on the impact we can deliver as we than others following the last economic
8 I FM MAGAZINE I June 2020
Opportunity,
meet preparation.
The Finance Transformation Certificate Program
is for leaders in the future of finance.
What your finance team looks like now is not what it will For more information on
need to look like in the near future. learning for your finance
The Finance Transformation Certificate Program helps you and accounting staff, visit
lay the groundwork with insights into why the changes are cimaglobal.com/learning.
necessary and how your team will need to respond.
In association with
© 2020 Association of International Certified Professional Accountants. All rights reserved. AICPA and CIMA are trademarks of the American Institute of CPAs and The
Chartered Institute of Management Accountants, respectively, and are registered in the US, the EU, the UK and other countries. The Globe Design is a trademark of the
Association of International Certified Professional Accountants. 2001-23377
2001-23377_1908-08442 Finance Trans FM Ad.indd 1 2/4/20 3:49 PM
A playbook to
manage cash
in a crisis
The coronavirus pandemic is forcing
businesses worldwide to tightly manage
their cash. Here are five critical steps to
tackle liquidity stress in a crisis.
By Andy Gifford
T
he shock to the economy from
the coronavirus pandemic has
been swift and extreme. Full
lockdowns closed factories
and retail outlets, and
work-from-home rules emptied business
districts and transport hubs.
Organisations have already initiated
operating working capital tactics. They are
reducing inventory levels, pressuring
customers to settle early, or at a minimum
to terms, and stretching payables as far as
possible.
This pressure on customers to pay,
together with deferral of payables, is
irreconcilable across the economy, as the liquid until trading returns to normal. 5 steps to tackle liquidity stress
factors are in direct conflict with each There may be contingency plans in motion There are many practices for managing
other. The outcome is that on a macro- for revenue, costs, operations, and staffing, cash in a crisis, but they all include five
level, the pace of cash movement between but ultimately, they need to be validated by critical actions:
trading entities is slowing to a snail’s pace. a cash affordability test.
This is in turn leading to conservative
trading conditions, where elective
Organisations will consequently look to
finance to take the lead. Through 1 Forecast
To manage the risk to liquidity, the
PHOTO BY ASOBININ/ISTOCK
spending is cancelled, driving markets implementing rigorous cash management company will need rolling cash forecasts.
into a recessive state. principles, finance can add clarity to plans The current level of uncertainty suggests a
Without clear direction, paralysis can and steer the business through this minimum term of at least six months with
set in, inhibiting decision-making across difficult period. (See the sidebar, scenarios mapped out for a range of
all levels of management. An “Prioritising Cash Management”, which trading conditions, updated monthly.
organisation’s ability to weather this storm discusses the importance of planning Any aspect of the business with
will depend on its capacity to remain ahead to respond to a cash crisis.) enough impact to “move the cash needle”
10 I FM MAGAZINE I June 2020should be forecast in enough detail to secondary vendors and lenders. plans and implemented as soon as they
allow for both monitoring and action. It’s important to assess existing debt become available.
This forecast will provide a valuable tool positions and check covenants before
for management to visualise the
challenges and come to grips with them
electing to withhold interest or principal
payments. Where extensions are required, 3 Communicate with stakeholders
and staff
in a proactive way. these have to be pre-approved by the Internal and external communication
lenders, and variations to terms confirmed strategies must be drawn up that target
2 Set spend priorities
Using this detailed forecast, leaders
in writing. Once the priorities are agreed, a
stand-alone approval process should be
stakeholders impacted by the cash plan.
Suppliers and creditors need as much
can then look at each category of spend implemented for all significant items. lead time as possible if the intention is to
and prioritise it based on what provides Meanwhile, governments across the break normal payment terms. Similarly,
the business with the greatest level of world are offering relief programmes on dialogue should be opened early with
resilience. Typically, payroll comes first, tax, payroll, and loans. Where appropriate, those customers identified as critical for
thereafter key suppliers, and then on to these should be built into the payment receipts.
FM-MAGAZINE.COM June 2020 I FM MAGAZINE I 11deviations, creating greater opportunity for
Prioritising cash management corrective action.
The cash plan will be managed through a
By Jeff Drew simple set of reports, including at a
minimum:
Many businesses are struggling to secure enough cash to deal y Daily cash-on-hand reports.
with the economic impact of the coronavirus pandemic. y Weekly inflow and outflow reviews.
It’s a challenge that requires purposeful cash management, y Individual approvals for
said Ankur Agrawal, a partner in McKinsey’s New York office and disbursements of significant value —
co-author of McKinsey’s recent report, “The CFO’s Role in in this regard a low threshold should
Helping Companies Navigate the Coronavirus Crisis” (available at be set.
tinyurl.com/y9kbml49). Setting up a war room to drive near-term y Monthly reforecasts based on the
cash flow implications is very important, Agrawal said. Ankur Agrawal reviews, looking critically at actual
“What we mean by cash war room is an infrastructure that performance with revisions based on
allows you to rapidly get organised around key cash events, key the outlook for trading conditions.
cash KPIs, key cash metrics,” he explained. Such an infrastructure is supported by Sharing this data widely through the
a cash culture, which prioritises management of cash-related items, whether it is company will demonstrate the importance
receivables, payables, outstanding purchase orders, or incoming sales. of cash management and secure
Liquidity is one of four top priorities CFOs should be focusing commitment to the plan.
on, said Sarah Ghosh, FCMA, CGMA, director and co-founder of
Onyx AI and a board member for both CIMA and the Association
of International Certified Professional Accountants. The other 5 Plan for low cash points
When low points are identified,
three are supply chains, workforce, and communication with specific plans must be put in place to cover
shareholders. them. Operating actions such as reduction
In reviewing their company’s cash position, CFOs should be of inventory, early receipt from customers,
looking at ways to retrench cash flow in the short term without and slower payments should be planned at
eroding assets for the medium and long term. Another key for Sarah Ghosh, a detailed level then recorded and tracked as
medium- and long-term success is working with suppliers to FCMA, CGMA part of the forecast. Thereafter, financing
keep the supply chain moving as much as possible. will be required to cover any still existing
“This may mean supporting them by paying earlier if this is feasible,” she said. holes.
Another challenge is financial forecasting. It will be more difficult to generate Headroom under existing arrangements
revenue projections based on historical data as some key parameters will no must be assessed and positions confirmed
longer be applicable. before they are required to be drawn on.
“CFOs are having to start from a zero base, to determine new assumptions,” Where new sources are needed, proposals
Ghosh said. “These current trends are unprecedented, so recent historical trends must be put in front of lenders early to
are not relevant.” avoid putting additional time pressure on
Ghosh said that the Great Recession of 2007–2009 is the closest comparison to the business. It’s certainly worth
the current environment and may provide some insight. investigating small business government-
Regardless, CFOs need to create multiple scenarios for financial modelling backed loan programmes, where available,
FROM TOP: PHOTO COURTESY OF MCKINSEY; PHOTO COURTESY OF SARAH GHOSH
— and look at the company’s ability to support each one from a liquidity point of as a potential source.
view, she said. A potential outcome of what we are learning from these This basket of actions will not be a
unprecedented times is that companies may look to build up larger cash reserves surprise to those who have faced liquidity
than they have in the past. stress periods. They are the steps to be taken
when cash is the primary focus irrespective
Jeff Drew (Jeff.Drew@aicpa-cima.com) is an FM magazine senior editor. Senior of the cause. There will be times when the
editors Sabine Vollmer (Sabine.Vollmer@aicpa-cima.com) and Drew Adamek organisation needs to consider liquidity as
(Andrew.Adamek@aicpa-cima.com) contributed to this article. the primary driver, and having a proven
playbook ready for implementation creates
a base for immediate and effective action. ■
It goes without saying that decisions that Post-crisis recovery is a key factor.
affect staff must follow proper channels. Transparency and honesty will go a long
Initiatives that change terms of way to safeguarding business relationships Andy Gifford, ACCA, is a partner at
employment must be consulted on and until things return to normal. More Falcor BC, an accounting and business
agreed with staff before decisions to communication is much better than less coaching practice in the UK. To
implement are made. Where numbers of communication when news is bad. comment on this article or to suggest
staff are concerned, this could require an idea for another article, contact
collective discusssions involving workers’
councils and possibly unions. The earlier 4 Shorten the reporting cycle
Time is the enemy in these periods.
Sabine Vollmer, an FM magazine
senior editor, at Sabine.Vollmer@
these conversations are initiated, the less Short reporting cycles provide early aicpa-cima.com.
stressful it will be for those involved. recognition of actual and forecast
12 I FM MAGAZINE I June 2020ADVERTISING SUPPLEMENT
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for InDesign documents). at +44 203 630 0133.The art of
managing cost
without a budget
A senior adviser at Equinor, Scandinavia’s largest company, shares
how the oil giant ‘kicked out the budget’ and explains the mindset
shift needed to become more agile.
By Bjarte Bogsnes
T
he energy company Equinor changes in both the traditional budget traditional budget is used to set financial
(formerly Statoil) is process and the mindset behind it. We targets, but it is also meant to describe
Scandinavia’s largest company, actually ended up kicking out the what we believe next year will look like (a
with operations in more than 30 traditional budget in favour of a new set of forecast). Finally, we use the budget to
countries and a yearly turnover much more effective processes, including hand out bags of money to the
PHOTO BY MIRAGEC/GETTY IMAGES
of $64.4 billion. In 2005, we made radical one for cost management. We found organisation (resource allocation).
changes to our management processes, inspiration in the management model Three purposes in one process and one
with two purposes: to make them more “Beyond Budgeting”, which is described set of numbers might seem very efficient,
aligned with our people-focused and more in depth later. but here lies also the problem. An
values-based beliefs and to make them “Kicking out the budget” might seem ambitious sales target will seldom
more adaptive and robust against a scarier than it really is. It starts with represent a good sales forecast. You can’t
dynamic and unpredictable business “debundling” or separating the three mix aspirations and expectations. Cost and
environment. budget purposes, which are target setting, investment numbers sent upstairs might
Both these purposes required major forecasting, and resource allocation. A also be affected by everybody
14 I FM MAGAZINE I June 2020remembering that last year’s proposals ways, some much simpler than what we constraints on our overall investment
were cut by 30%. do. I point to two examples later in this level, there is no annual, detailed
Fortunately, there is a simple solution. article. investment budget with all decisions made
As mentioned, we need to solve the three in the autumn.
purposes in separate processes. (See the Managing investments and Instead, “the bank is always open”.
graphic, “Solving the Budget Conflict”.) operating costs What this means is, the business can
This enables significant improvements Equinor is in a capital-intensive energy forward projects for approval at any time.
for each budget purpose, as they are now business, so let’s start with how we handle How high up one needs to go is regulated
handled in separate processes. investments. We invest between $10 by a mandate structure, which needs to be
This article is about the third process, billion and $20 billion annually. Despite generous enough to avoid too many
resource allocation, and how to manage the big money involved, it is not that decisions ending up in the Executive
cost without a budget. Here is what we do difficult for the company not to have an Committee.
at Equinor. Please note that this is our annual investment budget. Although we “Yes” or “no” to a project depends on
way, not the way. Others have found other lately have had some self-imposed two things:
FM-MAGAZINE.COM June 2020 I FM MAGAZINE I 15Solving the budget conflict
Solving the budget conflict
The budget 1. Separate 2. Improve
purposes
Target • Inspiring and stretching
What we want • Volatility, uncertainty,
to happen complexity, and ambiguity (VUCA)
• Target
Forecast • Unbiased — expected outcome
• Forecast What we think • Limited detail
will happen
• Resource allocation
Resource • Dynamic — no detailed allocation
• Key performance indicator targets,
allocation mandates, decision
What it takes
gates, and decision criteria
to make it happen
• Trend monitoring
Same number — conflicting purposes Different numbers Event driven — not calendar driven
y How good is the project — Instead, we offer a menu of alternative mindset. Management processes drive
strategically, financially, and mechanisms to help the business manage culture, for better or for worse.
nonfinancially? its own costs. These include:
y Do we have the capacity — y Burn rate guiding (“operate with full Asking the right questions
financially, organisationally — as autonomy within this approximate The mindset we are after implies asking
things look today? activity level”). different questions when a decision with
The second question is answered by y Unit cost targets (“you can spend cost implications is made. It is about
checking our latest forecast information. more if you produce more”). frugality, about being cost-conscious on
Many companies use rolling forecasts to y Benchmarked targets (“eg, unit cost every dollar spent.
obtain this information. The forecasts are below average of peers”). The traditional question is “Do I have a
typically updated every quarter and usually y No target at all (“we’ll monitor budget for this?” Here, the budget
have a five-quarter time horizon. At cost trends and intervene only if represents a “ceiling” that we set on costs,
Equinor we instead apply a dynamic necessary”). where anything higher than the ceiling is
forecasting approach. (Read more about the The further to the right we move on this not considered. By all means, it works! But
difference in my earlier FM article, “Want menu (in the “Operating Costs: Tools that ceiling is just as effective as a “floor”.
Business Agility? Throw Out the Calendar!”, Available” chart), the more trust is shown. Budgets that are set aside tend to be spent,
available at tinyurl.com/r7ps4sv.) There is, however, one thing that is bound and it is nothing but rational management
We use dynamic forecasting, as opposed to happen when trust is shown: Someone behaviour. Don’t overspend (you will be
to rolling forecasting because we have no will abuse it. At Equinor, it has happened, beaten up), but don’t underspend either.
predefined frequency. This is to ensure and it will happen again. The simple but Otherwise, you might be asked, “Why did
that we have the capacity — which also is a wrong response is to put everyone in jail you ask for more money than you really
dynamic picture — and to confirm that because someone did something wrong. needed?” You might also risk getting less
new commitments are within our The right response is to deal firmly with money next year.
constraints. those involved and let it have the The result? Almost everybody comes in
Managing operating costs without a necessary consequences, which of course spot on budget. And how do many finance
budget is more challenging, as there are should be in proportion to the severity of people react? “What fantastic control we
fewer big and distinct decision points. the incident. This could involve dismissal, have!” I beg to differ. What if some should
Here we need other mechanisms. (See the although this would not happen very have spent more, or some less, because
chart, “Operating Costs: Tools Available”.) often. This is not about being soft and things had changed? I can hardly think of a
What we no longer do is the detailed, evasive. bigger illusion of control.
annual budgeting, as depicted on the left These mechanisms need to sit on top of Instead of the “Do I have a budget?”
in the chart. It is too detailed, too early, and what we call a “cost-conscious mindset”, question, we should ask different and
often “too high up” decision-making. but they also stimulate and develop such a better questions:
16 I FM MAGAZINE I June 2020Operating costs — tools available
Operating costs: Tools available
Traditional
cost budget Absolute KPIs Relative KPIs No Targets
Detailed and Ambition level/ Unit cost Unit cost vs. Bottom-line Messaging and
Increasing
annual burn rate input/output peers focus only monitoring
autonomy
and flexibility
Xx
Xx
Xx
Xx “USD/bbl” EBIT
Xx “1. Quartile” “More video, Increasing
Xx “USD/customer” RoACE less travel ”
Xx
“Better than need for
Xx “USD/employee” average” (abs/rel) strong values
1003,4 ~1000 and clear
direction
Select based on what works best in your business
Monitoring of actual development, intervention if needed only
y Is this really necessary? 12 Beyond Budgeting principles also address recommendations about how to manage
y What is good enough? key leadership issues, including purpose, cost in different and better ways than
y Is this creating value? values, autonomy, and transparency. through the traditional, detailed, and
y Is this within my execution The second misunderstanding is that, annual budget. Although this might be
framework? (Refer to the tools because Beyond Budgeting means no regarded as “finance stuff”, it is too
described earlier.) budget, cost is not important, and important to be ignored. Hardly any part of
These are questions that should be everybody can spend whatever they want. the management model affects a manager
asked all the time, on every dollar. While This is definitely not the message. more decisively than a budget. Everyone is
we also hear such questions in a budget As already discussed, we will still be involved in the budget process, and almost
regime, it is normally at the end of the doing what the budget tried to do for us. everyone hates it.
budget period, typically in November and We are not kicking out some of the good
December. “The budget bag is almost and necessary intentions of a budget. We
empty; we have to be cost-conscious!” (but are simply saying that we need something
only until year end because then the bag is more intelligent and effective than what a Resources
filled up again). 100-year-old management technique can
The ultimate goal is to get people to offer. That is how old the traditional Articles
think about company money in the same budget concept is.
“Want Business Agility? Throw Out the
way as their private money. The first step is The pioneer of budgeting? James O.
Calendar!” FM magazine, 2 September
to start trusting people more than McKinsey, the founder of the consulting
2019, tinyurl.com/r7ps4sv
traditional budgeting does. firm McKinsey & Company. I am sure that
As mentioned at the beginning of the his intentions were the best in explaining “If the Coronavirus Outbreak Disrupts
article, we found inspiration from the budgeting as a management tool in his Your Budget,” FM magazine, 11 March
Beyond Budgeting model. There are two 1922 book, Budgetary Control; he wanted to 2020, tinyurl.com/vch4cjv
common misunderstandings about help organisations perform better. Today,
Publication
Beyond Budgeting. First, many believe that we are living in very different times. It is
it is just another way of managing cost. these new realities that Beyond Budgeting Budgeting, Forecasting and Planning in
That is correct in a sense (and we have just reflects and addresses. (See the list, “12 Uncertain Times, tinyurl.com/va2bprc
discussed how it can be done). But Beyond Principles of Beyond Budgeting”.) (ebook)
Budgeting is about so much more. Many other great concepts and
Online resource
The model addresses many other communities also challenge traditional
important parts of a management model management, and beliefs about leadership CGMA Cost Transformation Tool,
such as rhythm, target setting, forecasting, and management. To my knowledge, tinyurl.com/ujp9n9b
performance evaluation, and rewards. The however, none of these have any clear
FM-MAGAZINE.COM June 2020 I FM MAGAZINE I 1712 principles of Beyond Budgeting
Leadership principles Management processes
1. Purpose: Engage and inspire people around bold and 7. Rhythm: Organise management processes dynamically
noble causes — not around short-term financial targets. around business rhythms and events — not around the
calendar year only.
2. Values: Govern through shared values and sound
judgement — not through detailed rules and regulations. 8. Targets: Set directional, ambitious, and relative goals
— avoid fixed and cascaded targets.
3. Transparency: Make information open for self-regulation,
innovation, learning, and control — don’t restrict it. 9. Plans and forecasts: Make planning and forecasting lean
and unbiased processes — not rigid and political exercises.
4. Organisation: Cultivate a strong sense of belonging and
organise around accountable teams — avoid hierarchical 10. Resource allocation: Foster a cost-conscious mindset
control and bureaucracy. and make resources available as needed — not through
detailed annual budget allocations.
5. Autonomy: Trust people with freedom to act — don’t
punish everyone if someone should abuse it. 11. Performance evaluation: Evaluate performance
holistically and with peer feedback for learning and
6. Customers: Connect everyone’s work with customer
development — not based on measurement only and not for
needs — avoid conflicts of interest.
rewards only.
12. Rewards: Reward shared success against competition
— not against fixed performance contracts.
For a company embarking on a radical effective. Handelsbanken is among the see much more “good cost” (which creates
transformation journey, there is therefore most cost-effective universal banks in value) and much less “bad cost” (which
hardly a more effective place to start. Europe, with a cost-to-income ratio lower doesn’t).
Making tangible and positive changes to the than most international banks. Editor’s note: Case studies on
budget process is a very effective way of The Norwegian IT company Miles, with Handelsbanken and Miles are taken from the
signalling real change. It affects all operations in Norway, the Baltics, South author’s book Implementing Beyond
managers, instantly and concretely. Africa, and India, never had a budget. Budgeting: Unlocking the Performance
I conclude with two examples from Employees can buy whatever PC they want, Potential. ■
other companies. They have both built a as expensive as they want, and replace it as
mindset and a culture so strong that they often as they want. They can attend any
hardly need anything in addition. course or conference, wherever in the
A Beyond Budgeting pioneer, the major world, as often as they want. Miles only
Swedish bank Handelsbanken has operated requires one thing: You must post what you
Bjarte Bogsnes is active in the Beyond
without budgets (and also without targets bought or what you did, and the cost of it,
Budgeting movement and heads the
and individual bonuses) for almost 50 on the intranet.
implementation of Beyond Budgeting
years. Cost control is achieved through And the company’s only concern about
at Equinor (formerly Statoil),
autonomy and transparency. Branches are using transparency as the only control
Scandinavia’s largest company. He is
benchmarked on the key performance mechanism? That it would be too effective!
the author of Implementing Beyond
indicators (KPIs) return on equity, cost-to- Many organisations adopting Beyond
Budgeting: Unlocking the
income ratio, and customer satisfaction. It’s Budgeting experience lower costs (although
Performance Potential. To comment
all visible, and nobody likes to be a laggard. many admit that they feared the opposite).
on this article or to suggest an idea for
The branches have full autonomy to apply Others see little change in their cost levels,
another article, contact Alexis See Tho,
the right doses of cost to optimise their and a few even see somewhat higher costs.
an FM magazine associate editor,
performance on these three KPIs. Very What they all have in common, however, is
at Alexis.SeeTho@aicpa-cima.com.
simple, very self-regulating — and very a change in the composition of cost. They
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its best every day, from anywhere.Modelling
working capital
adjustments in Excel
IMAGE BY GARY WATERS/IKON IMAGES
Manage your all-important cash with these spreadsheet skills.
By Liam Bastick, FCMA, CGMAS
preadsheet modellers love to forecast income and Income and cash relationship graph
expenditure items for the company’s income
statement and then tack on the cash flow statement
as an afterthought. As we are all fully aware given the
economic hardships caused by the COVID-19
pandemic, it is essential to look after cash. Following are some
tips for deriving cash flow figures from existing profit-and-loss
projections.
To best explain this, we need to start at the beginning.
Please feel free to use the accompanying Excel file, which
can be downloaded from the online version of this article
at tinyurl.com/y8hkznse, to help clarify the ideas discussed
below.
Consider the example shown in the screenshot “Control
Account Example 1”.
Imagine a company just starts off in business (ie, it has no
amounts due) and generates sales of $1,000 in the period. At
the end of the period, assuming no bad debts, $753 has been
paid, leaving a closing debtor balance of $247. This difference
is what I refer to as the working capital adjustment.
If we had modelled the sales of $1,000 in the period, (2) all customers pay their invoices on the day the amounts fall
how might we generate the cash receipts forecast such due; and (3) no bad debts are incurred, this can be reflected as
that, as assumptions changed, the receipts would calculate shown in the image “Income and Cash Relationship Graph”.
appropriately? Clearly, the credit period is the “gap” at the beginning of the
Clearly, if we are given the closing debtor balances, the time period, ie, 247 ÷ 1,000 × 365 days = 90 days. This can be
problem becomes trivial, so this example assumes we are not represented formulaically as:
given those balances. Therefore, let’s consider an alternative
approach and some of the associated underlying issues that Days Receivable =
need to be considered when modelling. (Closing Debtors × Days in Period) ÷ Sales in Period
Let’s assume that the sales accrue evenly over a period of
time and, for the sake of this example, that period is one year Rearranging, this becomes:
(365 days). Presuming (1) all sales are made on credit terms;
Closing Debtors =
(Sales in Period × Days Receivable) ÷ Days in Period,
Control Account example 1
eg, in our example: 247 = (1,000 × 90) ÷ 365.
Therefore, in modelling, we often set the number of days
receivable (and days payable) as key assumptions for cash flow
forecasting.
However, it’s not always as simple as that. Consider we are
planning to build a monthly model (assuming 30 days in a
month), and sales for the month are again $1,000. Debtor days
remain at 90.
FM-MAGAZINE.COM June 2020 I FM MAGAZINE I 21Control Account example 2 we are building a monthly forecast model but that the days
receivable is 75. For the purposes of keeping this article
reasonably brief, I will simplify the problem by assuming
an average number of days in a month (say, 30). Using this
simplifying assumption, this means that payments are made
on average 2.5 (2.5 = 75 ÷ 30) months after the sale has been
made.
That 2.5 months figure is important. The integer part (2)
denotes how many complete months (including the current
month) have sales payments outstanding. The residual (0.5)
shows the proportion of the month preceding these complete
months that is also outstanding. With this borne in mind, the
OFFSET function can now come to the rescue, as shown in the
Based on these calculations, we would generate the results screenshot “Monthly Calculations Example”.
shown in the screenshot “Control Account Example 2”. In the illustration, cells J18 and K18 break the number of
Erm, that’s right: make sales of $1,000 and have $3,000 days receivable (cell G18) into the number of whole months
(= 90 ÷ 30 × 365) owing to you by the end of the month. and residual proportion, respectively, assuming that each
Welcome to Loan Sharks R Us. That’s nonsense — and yet, month has 30 days (cell H13).
as an experienced model auditor, I have seen this erroneous The key formula here is the calculation for Closing Debtors
calculation crop up on a regular basis. (Cash Receipts is simply the balancing figure). For example,
the formula in cell J28 is:
Monthly forecasting
The problem is that in this current economic climate most =IF($J$18,SUM(OFFSET(J26,,,1,-MIN($J$18,J$23))),)
businesses want to prepare monthly — more likely weekly +IF(J$23-$J$18More sophisticated monthly example
it sums the sales for the relevant number of completed Word to the wise
months (ie, starts with the current month and then This article is intended to be a starting point for considering
considers the sales in previous months, working from right the modelling issues surrounding working capital
to left in the spreadsheet). The MIN formula is required to adjustments. You can complicate matters further by
ensure that the model does not try to include periods prior considering any or all of the following:
to the beginning of the forecast period. y What proportion of sales or costs is made on credit
2. IF(J$23-$J$18Strategic implications
of COVID-19 and its
PHOTO BY CHENEY ORR/REUTERS
aftermath
24 I FM MAGAZINE I June 2020Instacart employee Eric Cohn
wears a respirator mask and
gloves while searching for
an item for a delivery order
at a supermarket in Tucson,
Arizona, in the US in April.
I
Interaction with n the long term, the effects of the
coronavirus pandemic on business
financial and supply chain resilience
in times of stress?
companies, employees, remain unclear. In the short term, y How should planning and
company leaders are focused on management processes be adapted
and supply chains will ensuring the safety of employees and post-pandemic?
continue to change. A customers, maintaining financial
sustainability, and plotting a path to Interactions with employees,
consultant offers planning resuming business operations. partners, and customers
Even if that path can’t be seen yet, it is The shutdown of large segments of the
advice for moving forward. possible to identify the key strategic global economy, increased working from
questions CFOs and other executives will home, and social-distancing guidelines
By David A. J. Axson need to address: have changed the nature of almost every
y How will the nature of interactions human and commercial interaction.
with workers, partners, and China’s economy went from 6.1% growth
customers change? in 2019 to a 6.8% decline in the first quarter
y How can an organisation increase of 2020, the first decline since quarterly
FM-MAGAZINE.COM June 2020 I FM MAGAZINE I 25You can also read
