The light at the end of the tunnel #woohoo

Yay! So excited to think that I have nearly finished my assignments for the semester. I had to take a break from accounting for a couple of weeks to finish off my economics assignment that was due today. However, after finishing that one off yesterday, I have been able to spend today finishing off accounting.

I am therefore thrilled to be able to share with you my draft work for Steps 7-9 of the final assignment!

Let me know if anyone would like to swap feedback ❤

Assignment 2, Step 6: Chapter 8 KCQ’s

Decisions, decisions…. Life is full of decisions.

Should I travel or should I buy a house?

Should I get a job straight out of school or should I go to uni?

Should I enjoy a Saturday morning sleep in, or should I get up and go to the gym?

Sometimes you can do both, you could work part-time and study part-time; or you could have your sleep in and go to the gym in the afternoon. Other times, there is only one option available to you – you may already have plans in the afternoon, which would mean sleeping in would automatically exclude your gym visit that day.

Chapter 8 is all about decisions, and the various tools and processes that managers can use to help them make the best decision possible.

Managers need to make decisions almost every day, not only in their own personal life, but big decisions which often involve large amounts of money. The hardest part about making any kind of decision is not knowing what the future will bring.  

This really resonates with me right now, as I feel like I am having a bit of a midlife crisis about what I want to do when I “grow up”.  Despite giving this first semester of uni my absolute best over the last 11 weeks, I’m still doubting whether or not I made the right choice, and am considering not coming back next semester. As much as I love the idea of being a registered tax agent and financial planner, it’s going to take me 6-8 years to finish my degree part-time. Is it worth sacrificing potential income earnt from employment or time with my kids, just to have an enjoyable career in my 40’s?

Looking back over the past few months at how much time and income I have lost; it is quite easy for me to predict what the next few years will look like for my family if I continue with my uni degree. However, even in my situation there are variables. My husband’s business could start earning a lot more money which would eliminate the need for me to work part-time. This would mean that I could get a lot more of my uni work done during school hours. I could win the lotto, and not have to worry about working or studying ever again, spending the rest of my days sipping cocktails on the beach. The thing is we don’t know what the future is going to bring, but when we make decisions, we have to predict the future as best as we can.

Managers also need to be able to predict the future in order to make the best decisions for their companies, but rather than consulting a lady with cards at the local markets, they use accounting. They use various ratios and calculation methods to analyse a firm’s past performance, hoping that the same trend will continue in the foreseeable future. Unfortunately, things don’t always work like that, but it’s the best they can do.

The decisions managers make can be short-term such as what products a retail outlet should have on the shelves at Christmas time, or long-term such as whether or not to open up a second store.

Before managers can make any kind of decision though, they need to weigh up the expected costs and the expected income.

However, not all income and costs are necessarily relevant to the decision making process, and a good manager will need to be able to discern the difference… they should only include those costs which can actually be changed by the decision, if they’re going to stay the same regardless, then it’s no point worrying about them.

My beloved Granny passed away several years ago now, but I will always remember the plaque she kept displayed on her writing desk:
“God give me the serenity to accept the things I cannot change, courage to change the things I can, and the wisdom to know the difference”.

Managers need the wisdom to know the difference between the costs they can and can’t change with their decisions. Luckily, there are some guidelines in place to help them.

Sunk costs are those costs which cannot be changed – either they have been paid already, or there is no way we can get out of paying it in the future; basically there is nothing you can do about it. When making business decisions these costs should be ignored. I think as humans, we can find this a difficult concept to grasp. Although we like to think we are logical and rational, we are often governed by our emotions and ego, and we do not like to feel like our activities have been a waste of time. For example, last year myself and a family member went halves in buying approximately 600 baby onesies. They were ex-stock from another business which had closed down and we were hoping to make a profit by reselling them online and at the markets. Unfortunately, the products were not very popular (which is probably why the other business closed down) and we did not sell very many at all. As a result, I currently have several boxes of baby clothing in my garage. After a few failed attempts, I was happy to just give up and donate the clothes to charity. However, my family member keeps wanting to pay fees to go to the markets, hoping to have a different outcome next time. Their view is that if we just give up, we have lost money. Whereas, since learning about sunk costs, I realised that whether we continue with the business or not, we have still spent that initial outlay and cannot change it. The only thing that should affect our decision when we go to the markets is whether we can make more revenue at that particular market than the cost of the stallholder fee (plus other associated costs like petrol to get there, etc).

Managers also need to distinguish between which costs will actually be affected by the decision and which will stay the same regardless. For example, imagine if I were deciding on a market to sell my baby clothes at, and there were two different markets being held on the same day, which each had a stallholder fee of $60. In that case, I would disregard the $60 fee, as it would be the same no matter which option I chose. However, if one had a $60 fee and one had a $80 fee, I could consider the additional $20 as a differential or incremental cost.

Managers also need to consider whether a cost is avoidable or unavoidable.

If I had the option to not sell at any market that weekend, then the market fee becomes an avoidable cost. However, I may be required to work a certain amount of hours each week in order to receive subsidised daycare fees and working at the markets may contribute to those hours – in which case it becomes an unavoidable cost. Unavoidable costs should also be disregarded in the decision making process.

Finally, managers need to look at the opportunity cost. People can often fail to consider the opportunity cost, because it is not actually incurred, however opportunity costs are a very real part of decision making. It basically looks at, in order to achieve Outcome A, this means I have to sacrifice Outcome B or Outcome C. When I have been studying this semester, my costs are not just my uni fees and my textbooks, it is also the loss of income as I have not been able to work as much. Although I have not actually spent this money, it is still a very real cost to me. Opportunity cost basically looks at if I don’t make this decision, what is the next best decision? Missing out on being able to make this next best decision is the opportunity cost. It’s making sure firms (and at times  individuals) make the best use of their resources.

After determining which costs to consider, there are various methods that managers can then use to assist with their decision making.

One of these is the contribution margin. A product’s contribution margin is expressed in dollar terms (or whatever it’s country’s currency may be), where as the contribution margin ratio is a percentage. The contribution margin tells us how much of a product’s revenue contributes to fixed costs and profits after the variable costs have been taken out. I’m still struggling to understand a bit why the amount contributed to fixed costs and profit is grouped as a single figure. I would have thought it was better to look at these separately. Say for example, if I were selling my baby onesies online and paying $40/month for a shopify store. The $40/month is paid whether I sell any baby onesies or not. The onesies cost me $1 each, and I am selling them for $10 each. Out of this I also have to pay postage ($3) and Shopify transaction fees ($1). When calculating the variable costs, I don’t calculate the $1 original cost as this is now sunk. So my variable costs are $4, which would leave me with a $6 contribution margin per onesie. However, I would still need to sell a minimum of 7 onesies per month before my fixed website costs were repaid, and even at this point I would not have repaid my initial investment. I feel that a weakness of using contribution margin is that it does not recognise the break even point, though I do recall Maria mentioning this in her video, so this must be something that is learnt further along in the degree.

Something I found interesting is that the contribution margin focuses solely on the interests of equity investors, because it is looking at profitability. However, there are many others with an interest in the firm as well.

Employees would most likely be happy if the company they worked for had to operate with lower contribution margins if this meant that their pays were higher.

Customers would be happy if the business they frequent had lower contribution margins because they lowered their prices.

My current employer is constantly pushing staff to complete their work at a faster and faster rate, however this is at the expense of very low staff morale and a high staff turnover rate.

This is why good managers need to look at so much more than just productivity, profit and numbers, however contribution margins are able to help prevent them from making a bad decision which would have a negative contribution.

Contribution margins also help managers to make good product mix decisions, such as what products to include and how much of each. When I applied to university at CQU, I received notice of my acceptance almost immediately. However, prior to that, I had also been accepted at University of the Sunshine Coast. When I applied at USC, it took several weeks to hear back. At the time, I found myself wondering if this was because I applied to CQU as a distance student, but USC I applied as an on-campus student. A university could take on distance students with little extra cost, and no limitations such as class sizes. Whereas, in the case of on-campus students, they would be a lot more limited and would need to ensure that they did not take on more students than could adequately fit in their classrooms. I also imagine that they would receive a higher contribution margin from distance students, as they would also then have less associated costs such as direct contact hours, materials and the costs of operating a classroom.

The concept of the time value of money made a lot of sense to me and it reminded me of the old saying “A bird in the hand is worth two in the bush”… or it is better to have something now that is certain, than something in the future that is only a maybe. However, one thing I noticed is that it did not refer to inflation at all. Prior to reading this study guide, if someone talked to me about the time value of money, I would have thought that inflation was what they were referring to. $100 today is going to have more purchasing power than what $100 will in 5 years time. However, as I read over this section again, I realised that it was more talking about how much our money increases by due to investing. For example, the interest rate on my ING saver account is 2.8%. If I’m planning to buy a new handbag in 1 years time that costs $102.80, I would only need to put $100 in the bank now. Therefore the current value of $102.80 is $100. (I know that’s not exactly correct, due to compounding interest being paid monthly, but I’m not mathematical enough to work it out properly!)

I found the idea that cash flow in 40 years time is almost worthless today to be a bit perplexing… if this is true, why does our society place so much importance on superannuation? I personally don’t put anything extra into my super because I don’t want to wait another 24-29 years to get it back… I would much rather invest in things such as property or shares that I can sell today if I need to… however, I also know that there are many others who do not share my point of view on this.

To be honest, I found the calculations such as Accounting Rate of Return, Internal Rate of Return and Net Present Value quite hard to get my head around. I’m going to try to explain them as best as I can, though I feel I have far more questions for this section than what I do “light bulb moments”.

Accounting rate of return = (Average net profit/Initial investment) x 100

This may have been a better measure for me to use, rather than the contribution margin, when looking at the profitability of my baby onesies, as it compares the profit against the initial investment. Though I’m still unsure whether the initial investment would be the total investment or the investment per onesie?

I don’t understand why depreciation is taken off first when calculating the net profit. Depreciation annoys me because it is not a real expense, and I believe it should not be deducted when calculating profit for decision making purposes. Depreciation is more about how it is written off over a number of years for tax purposes, and the amount will vary by the effective life chosen or whether they use prime cost or diminishing value method. The real expense is the purchase of the equipment.

Also, it seems like you basically choose whichever option will pay back the highest percentage, however shouldn’t we be looking at dollar figures as well? If an investment of $100 returns $100 (100%), and an investment of $1000 returns $500 (50%) wouldn’t you still rather choose the second option?

When I read that the Internal Rate of Return uses expected future cash flow rather than accounting profits, I felt like I would prefer this. I feel like cash flow is more “real” as it is the money that actually goes in and out of a firm’s accounts. Even in the case of accrual accounting, there will be income that is entered on the income statement, however for whatever reason does not end up being paid.

I still laugh though when I read the statement “The IRR method has the big advantage that it is easy to understand”… as I did not feel that I understood this very well at all! I even went away and did my step 9 to see if I would understand it but I still don’t… other than the fact that you want it to be higher than your discount rate… I found it quite easy to calculate, but what it actually means… no idea…

The Net Present Value initially also went right over my head. I tried looking up Investopedia for help, and found the following formula:

Hmmm… not any clearer sorry!

However, I did understand the sentence from the study guide which said “The larger the positive amount of NPV the greater the amount of added value for a firm; the larger the negative amount of NPV, the greater the amount of value it would destroy for a firm.”

So essentially, reject projects with negative NPV, accept positive NPV where possible, and the higher the NPV the better!

I then went back and read over Investopedia again, and I think I may get it now.

Net Present Value = Income less expenses over the life of the investment, discounted back to today’s value of money. When discounting money back to today’s value, it’s not the percentage you expect to earn on this particular project, it’s the percentage we would have earnt with the next best alternative (so comparing it to the opportunity cost). If the number is positive, it’s better than the alternative, and so we should do it! If we don’t know the discount rate of alternative uses, we should just use 10% as a standard rate, and this will mean we can easily compare NPV’s with eachother!

Thankfully, I did find the payback period very easy to understand. Basically, it’s how long before the firm recovers the cost. I used to do something similar when selling products online, but with the number of products, instead of the number of years. For example, with the baby onesies, if I was making $5 profit per onesie, I would know that I would need to sell 8 to pay my monthly shopify fees of $40. Once I had sold 8, I would then be able to start paying back the initial purchase. If this amount were $600, I would then need to sell another 120 to pay this back. Any onesies sold after that would be profit. These figures are made up, and I did unfortunately not actually make a profit, however I’m just more demonstrating that this was my thought process.

Although, I am wondering if it would be quicker to work out the payback period using the ARR? Ie. if this was 10%, it would take 10 years to equal 100%? Just a thought…

In closing, I just want to make a few comments that are not directly related to this chapter, but the unit as a whole.

Firstly, I am more than a little excited to be completing my final KCQ’s for the semester. Returning to uni after 15 years was extremely daunting – and at the beginning of the semester when I saw what the assessment entailed I was most unimpressed. I was here to study accounting – not blogging, or “creative writing” as I called it when complaining to my husband. However, 11 weeks down the track, I am so grateful that we had to do it this way. Being forced to read every single chapter of the study guide and actually think about it, helped me to understand the material in a way I never thought possible.

Martin, the dedication and passion you have for both your students and your content are inspirational, and I have really appreciated the support and encouragement you have shown throughout this unit! It is clear to see that you go above and beyond and that you genuinely want us all to succeed! I also loved the way that you had regular due dates spread throughout the semester. It really helped me to stay on track and work on my assessments regularly. Otherwise, I would have been at risk of leaving everything to one big last minute rush (like I have done with economics!)

I still haven’t made up my mind whether I want to continue with uni next semester or not… But if I do, I know that I will be thrilled when I have you for a lecturer again in future subjects!! Thank you 😊

Assignment 2, Step 5 – Chapter 7 KCQ’s

When I first read the title “Budget for the Short Term”, I found myself pondering what this chapter may be about. In economics, we have learnt the difference between the “short run” and the “long run”, and the way that decisions may need to be made differently for each. I wondered if we would be looking at similar concepts in accounting.

I also thought about the personal budget that I use in my own life. I have an extremely anal thorough and well-planned out spreadsheet where I list out all of our family’s income and expenses. I have a section for regular living expenses which are either paid weekly/fortnightly/monthly, and then calculate the fortnightly equivalent of each to match with my pay cycle.  An amount equivalent to the fortnightly total of these expenses is automatically transferred to the bills account as soon as my pay goes in, with all of the direct debits coming out of the bills account. I have another section for annual bills, where I total my yearly expenses and divide this by 26. This amount goes into my “annual bills” account each fortnight, where my money can earn interest while waiting for bills to be paid. I then allocate an amount to grocery shopping, petrol, other spending and saving.

I felt like this would be a fairly easy chapter for me to understand and write about… after all, I know budgets! However, I have to say that I found this chapter to be a lot less about budgets and accounting, and a lot more about people and management. These are topics that I had never really considered having a lot to do with eachother before.

I also feel the need to preface the rest of this discussion, by saying that other than the daily hurdle of making my 5 year old put his shoes on, I have absolutely zero management experience. I do have a sales background, so am quite familiar with having to work to budgets and targets; however I have never had the responsibility of planning or implementing a budget in the workplace. Therefore, my only relatable experience of this is in my personal life.

Reasons for budgeting… well that’s quite simple isn’t it? (Or is it?)

My own reasons for budgeting are to work out my total expenses and make sure that they are less than my income, as well as making sure I have enough put aside for emergencies. Having everything in a spreadsheet helps me measure how I am spending my money to make sure I am sticking to the plan, and then make adjustments if I am finding the plan is not realistic.

When reading the reasons for budgeting listed in the study guide, I found that some of the reasons were quite similar to my own personal reasons for budgeting, however there were other reasons as well that I had not even considered! What surprised me the most though, was how most of these were still actually very relevant to me even though I had not consciously thought about them before!

The first reason for budgeting listed by the study guide was for short-term planning, or basically, making sure that there is money available when it is needed. This made a lot of sense to me because it is exactly what I do now with my own personal budgeting. It is all about planning ahead, knowing what money I am going to need and when, and making sure that it’s available at the right time.

The next reason given was “co-ordinating”. Co-ordinating is all about ensuring that different parts of a firm are working together, looking at how their activities affect one another and ensuring they are working towards the same objectives. I once worked in an insurance call centre where this was done very poorly. Marketing would run ads on TV, but would often forget to tell call centre management when they were scheduled to be run. As a result, we would be inundated with calls and customers would end up waiting on hold for over 30 minutes just to get a quote. Customers would end up getting frustrated and just hang up, which meant that the money spent on marketing was wasted. Co-ordinating (working together) is essential for a business to run smoothly, and is important for all aspects of business planning, not just budgeting!

The next reason for budgeting is communication –  it is not enough for managers to just come up with a plan. They also need to be able to effectively communicate their plans to others in a way that convinces their staff to “jump on board”. I know that it is not enough for me to plan out a fantastic budget. If I don’t take the time to share it with my husband, it will be impossible for us to work towards the same goals. He is very lucky that I am the one who pays all the bills (we are a great team, he earns the money and I spend it!) However, there are still some things that he needs to take personal responsibility for. He needs to fill up his car with petrol each week, and we each get a spending “allowance” each week that we can spend on whatever we like outside of the household bills.

Some weeks if we have a large unexpected bill or have just spent a lot on the kid’s birthdays, we need to reduce our individual allowances for that week to make up the difference. This is where co-ordinating, communication and delegating all intertwine. If we did not have a strict budget that we stick to, this may not work so well, and we would end up having to use our credit cards that fortnight. However, by co-ordinating (reducing one expense because another increased), communicating (telling Daniel what has changed and what we each need to do) and delegating to him we are able to continue to achieve our goals. Delegating is important because it means that we have mutually agreed boundaries and trust eachother.

The final reason for budgeting is to motivate others – to make them want to stick to the plan. If I just told my husband, “You have to spend $50 less this week”, without telling him why, he may not necessarily be happy to go along with this. But if I said, “I’d love to take the kids to the monster trucks this weekend – it will cost $100 for the family, but if we each spend $50 less this week we can afford to do it”, this would be a lot more likely to get him on board. I’ve told him the reason, I’ve given him a clear objective, and I’ve given him an incentive – a fun outing with the family.

I can see how budgets can assist with achieving all of the above goals – planning, co-ordinating, communicating, delegating and motivating. However, I think it really depends on the kind of person that you are dealing with, as to whether or not budgets will help achieve these goals. I am someone who likes numbers, likes black and white and likes absolutes… so using a budget to explain and convince me of something is very useful. However, something I learnt when I worked in sales is that not everyone thinks the same and you need to tailor your presentation based on your audience.

This was very evident to me when selling life insurance. Some customers would respond very well to the emotive sales approach – with these customers we would talk about how hard it can be for family member’s to cope financially when the main breadwinner passes away – we would sell them on the peace of mind and security that life insurance brings, knowing that their family would be taken care of.

Whereas other customers were a lot more “facts and figures” people. If we were too emotional with them, they would see straight through it and be turned off. With these customers, we would talk more about their mortgage balances, their other outstanding debts, and how much they would need from a practical sense.

Picking up what kind of customer I was dealing with early on in the call, and tailoring my presentation accordingly, was often a key factor in gaining their trust and influencing whether or not I got that sale.

I feel that managers need to apply similar principles when communicating their budgets. If managers want to get their staff on board, they need to know their staff, know what drives them, and communicate their budgets in a way that matters to them.

They also need to ensure that budgets and incentives do not motivate people in the wrong way.

Just as Martin discussed the example of the baggage handlers, I have seen similar things happen in my own workplaces.

For example, when we had already hit our sales target for one month, I have had managers tell me to wait until the next month before putting the rest of my sales through. They had two reasons for doing this – one was to give us a buffer for the next month. And the other was that if our results were too high, senior management would increase our budgets for the following month. This is very much like the “game playing” that the study guide referred to.

In another general insurance company I worked for, we had a very high incentive for cross selling, that is selling a new policy to an existing customer. However our system had a bit of a glitch, where if we just did a quote for one product (without actually selling the policy), and then did a second quote (and did sell the policy), the system would recognise this as a cross sell as well. This led to some very unethical behaviour from staff who would receive a call for an insurance quote. They would place the customer on hold, quickly do up a fake quote without telling the customer, and then do the real quote afterward. That way if the customer purchased, it would be treated as a cross sell for the staff member, which paid much more commission than just a normal sale.

Once the glitch was identified by upper management, it was corrected, however this was not before some of the more dishonest staff had earnt some very high commissions for the month.

I really liked reading about the concept that budgets should be set by the people who are actually involved in the achieving of the targets and results. I can see two key reasons why this is important. One is because the “ground level” management and staff actually have a much better idea of what is going on in their department and day to day operations than what senior management often do. Another reason is because if staff feel like they have been involved in the setting of the budget, it becomes a shared goal, rather than a dictated goal; and they are a lot more likely to be committed to it.

Funnily enough, this is something I learnt early on in my parenting. Children (like most adults) don’t want to be told what to do. If I simply said to my son, “eat your veges” this would often be met with a resounding “NO”. However, if I gave him a choice such as “would you like to eat your peas or carrots first?” he would often choose something and eat it because he would feel like he was in control.

Now obviously, adults would see through something like this, which is why the study guide highlighted the importance of not “faking it”.

In a workplace situation, it is better to just be honest and say how it is, rather than to pretend to consult them.

I worked in one workplace where a representative from each team were chosen to be “culture champions”. It was a real honour to be chosen – we were told that we would be having regular social functions where we get to interact with senior management, and we would be involved in organising all the fun workplace activities such as Friday night drinks, awards nights and sales incentive trips. More importantly, in order to find time to organise these activities, we would get to have time off the phones! In addition to the fun we would get to have, we would also represent the staff at management meetings. The management wanted to consult with us about what staff really wanted, so that they could try and make it a better place to work.

Now, I don’t know if this was the original intention, or just what it disintegrated to, but we quickly realised that we were actually being used by management. Whenever they decided to introduce a new policy that they knew the staff would dislike (such as no more facebook access at work, or changes in the commission structure), they would announce it to the culture team first and expect us to pretend to be excited about the changes when they told other staff, hoping that our “attitude” would rub off on them. Instead of consulting with us about what the staff wanted, which was the original (supposed) intention, it was more about convincing the staff of management objectives instead.

And like the study guide said, we definitely saw through it and, no, we did not like it. It did not take long before many of us started coming up with excuses to no longer be a part of this committee.  

It was interesting to see how the different budgeted financial statements can show the activities of a company in very different lights. Especially seeing that the cash flow was a negative amount, but the  income statement showed a profit. I noticed that in Purple Chocolates’ budgeted cash flow statement they purchased equipment in January, which led to a large reduction in their net cash flow. However, only a small proportion of this was actually depreciated on their income statement. The balance sheet then also accordingly shows the increase in assets (machinery) and would show either a decrease in cash, increase in outstanding loans, or both. This emphasised to me how important it is to view all the financial statements together if you want to get an accurate picture of a company, as if you viewed just one of them on their own, you could arrive at very different conclusions, depending on which one you looked at.

I could see how having a budget can help to both prevent future problems and also respond to problems more efficiently when they do occur. The study guide gave the example of having an overdraft facility in place to help cover costs – as sometimes the costs need to be paid before the income from customers is received. A lot of individuals will do a similar thing using their credit card. I am a big fan of my credit card – I will often spend on my credit card when I am out at the shops, but I am also always mindful of how much I expect to be paid in the next fortnight or month – I will only ever spend what I know I can pay off – credit card interest charges are the enemy!

I also liked how it talks about using the budget as a tool to assess your ongoing performance and adapting plans if needed. Scott Pape, the “Barefoot Investor”, recommends re-assessing your personal budget monthly, just to make sure that you are on track with everything, and I try to follow this guideline as well. Once a month, I go through my spreadsheet. If any of my expenses have changed, I adjust these on the spreadsheet, and the formulas will automatically recalculate my totals, and the difference between my income and expenses. I then have a look through and see if there is anything I can try and reduce, eg. Shopping around for insurances. It also provides a good check for me to see if I am spending the allocated amount on petrol, food, etc…

Some weeks I am a very frugal grocery shopper. I will spend half the day at the shops, getting some food from Aldi, some from Coles and some from a local fruit shop. Other weeks if I’m feeling snowed under with work, I will do an online Coles order and have it delivered. The weeks I do this I definitely spend more money. After a few weeks of this, I start noticing that we are not sticking to our budgets very well, and I try to make the time to go back to shopping frugally.

Just as breaking down my budget into chunks allows me to see where I am going over (usually grocery shopping), a firm also can break their budget down into smaller chunks and monitor each individually. They can either do this by departments, or by time periods such as months, weeks or days. This makes it easier to identify where any leakage (if any) is occurring, makes people accountable for their own results, and allows problems to be fixed more quickly if they do occur.

It really resonated with me towards the end of the study guide, where Martin discussed the importance of a “balanced scorecard”. That is, that we should not only assess a business from it’s financial perspective. There are other equally important measures, such as customer satisfaction, employee satisfaction, and achievement of objectives such as on-time deliveries.

I have a very similar outlook in my personal life. I know that there are many more areas where I could be saving money if I chose to. Things such as private school fees, swimming lessons, netflix, dining out and house cleaners are not essential living expenses (though I would definitely not be willing to give up my cleaner without a fight!) However, I also strongly believe that saving money is not the most important thing and to me, having an enjoyable lifestyle is a lot more important than having nice possessions. I will gladly continue to drive my 12 year old car and buy second hand furniture, if it means a better education for my kids, and getting to go out to dinner with friends more often. However, I also know that not everyone has the same values as me and would see some of these expenses as a total waste of money. What I’m trying to say is that in their personal life, everyone measures satisfaction differently and it’s not always about a bank account balance. The same principle applies in business. It’s really important that if managers want their business to be sustainable in the long term, that they figure out what really matters to their customers and their staff, and make sure that they are achieving those objectives too, not just their financial ones.

I didn’t find that I had a lot of questions from this reading, mainly because I find the concept of budgeting pretty straightforward.

It has given me a bit of a nudge to re-assess my own budget again though, as I haven’t done this as recently as I should have (I blame uni for this)! Reading Martin’s statement about how our credit card statements can tell us a lot about someone also prompted me to take a look at mine, and I was horrified to see that I have been purchasing at the “Golden Arches” restaurant lately, a lot more than I realised or should have been. That explains both my increased credit card balance and increased waist line!

There you go, a perfect example of how budgeting has helped me to identify a problem! Now the next step is to make sure that I do something about it!

ASSIGNMENT 2, STEP 3 – RESTATING THE FINANCIAL STATEMENTS

I actually finished these last weekend, but due to also having a major economics assignment due today, I haven’t had a chance to post them on my blog until now!

Compared to the mental strain of cutting 5000 words down to 1500 (economics) and writing up the KCQs for this subject, I actually found the task of restating my financial statements to be a welcome relief for my brain. The hardest part initially was determining whether items were operating or financial, and my tendency to overthink things was not to my advantage in completing this task!

The main one I had trouble getting my head around was the “Defined Pension Benefit Scheme”. From what I could understand, superannuation must be different in the UK to what it is here in Australia, and employers must have to manage their employees own super. Martin helped me to see that it was operating, because paying super is essentially a legal obligation of having employees (like wages), however because they are then investing that money, I wasn’t sure whether to make some of it financial as well. RM PLC’s annual report didn’t help me work this out at all, as the footnotes had almost a full set of extra financial statements just for the pension scheme!

So, when Martin told me on facebook to keep things simple, that was definitely the best thing he could have said to me!

When I got to the deferred tax assets, I wasn’t sure what this was, however I had a read of this explanation on Investopedia: https://www.investopedia.com/terms/d/deferredtaxasset.asp
If I’ve understood correctly, it’s quite similar to an overpayment to the ATO, which would then be used to either reduce the current year’s tax payable, or be refunded.

Maria said in her video to always make tax assets “operating”… but I found myself thinking that this would not always be the case, as some of the tax payable could be for financial income as well… “Remember to keep it simple… remember to keep it simple” became my mental mantra as I finished off the rest of this task!

When it came to the actual restating itself and rearranging of items, I quite enjoyed this part. After days of monopolies and oligopolies swimming around in my head, it was nice to just play with the spreadsheet, and not worry about the “right answer” – I knew that as long as it all balanced in the end, I had done okay.

I was also excited to finally learn how to link a spreadsheet to a cell in another spreadsheet – I knew this was something you could do, but had never been able to figure out how! In my work training session yesterday, we were discussing spreadsheets and I excitedly told everyone that I had learnt how to do this and proceeded to explain how – they all kind of looked at me though, like “Um, duh! We already knew that!” Oh well, it’s still something new to me! 😊

Maria’s videos were really helpful, and I found that by watching her videos, then pausing it and doing mine a little bit at a time, it was quite straightforward. Prior to completing my own spreadsheets, I also took a look at two other student’s spreadsheets when they had had trouble with getting theirs’ to balance. I found that helping them also really helped me when it was time to complete my own work. By seeing mistakes that others had made, I was more careful to not make the same mistakes myself. I also was aware (from seeing it on someone else’s) that because my liabilities and expenses had brackets around them, I would need to change my formulas to have a plus sign instead of minus.

Regarding my company itself, it was interesting to be able to see the difference between their operating and financial activities. I could see that the majority of RM PLC’s income came from operating activities – their income statement only showed a relatively small amount of finance costs and investment income, with no financial comprehensive income.

It was also interesting to see how the operating and financial activities influenced eachother, especially looking at the balance sheet. In 2016, there was £38.3m of cash in the financial assets section; however by 2017 this had dropped to nil. I then also noticed that borrowings increased from nil in 2016 to £13.1m in 2017.

However, a look at the 2016 and 2017 operating assets showed an increase of approximately £60m. The main areas that increased were inventory (approx. £4m), other intangible assets (approx. £19m) and goodwill (approx. £30m). I’m still not sure what other intangible assets means, but I did learn recently that goodwill can only increase through the acquisition of another company. I also read in the annual report about RM PLC’s recent acquisition of Consortium.

Separating the operating and financial activities then made it a lot more clear as to how the acquisition was paid for, that is, from their cash on hand as well as borrowings.

It’s remarkable how much more insight you can get about a firm just by rearranging a few cells in a spreadsheet!

Reflections on Chapter 4 of the Study Guide

Well, chapter 4 was certainly a long chapter!

At this point, the main thing I recall reading about is how much Martin likes Kinder Surprises! I had been wondering why I had been able to think about nothing but chocolate for the last two days, when I realised it was all thanks to the not-so-subliminal messages in this week’s reading!

I kind of hit crisis point tonight when I realised I had no chocolate in the fridge, I couldn’t go to the shops as the kids were in bed, and I found myself googling “How to make chocolate” instead of starting on my KCQ’s.

A little bit of cocoa powder, coconut milk, butter, honey, blueberries, and 3 tablespoons of procrastination later, I’ve currently got these beauties setting in the fridge… hopefully by the time I’ve finished writing this, I’ll be able to tell you how they turned out!

(Edit: They were amazing!!)

Anyway, on a more serious note, I was not long into the reading, when I realised that chapter 4 was going to be crucial for 2 parts of the assignment.

Firstly step 1 of course, as I wouldn’t be able to complete the KCQ’s without reading chapter 4!

However, it also included really critical information about restating the financial statements, as well as calculating the ratios (steps 3 & 8).

I could really relate to the statements that capital markets and equity investors in firms, trade in expectations. Shareholders are essentially investing in what they hope is the future performance of a firm. By the time the company releases it’s annual reports, it is too late for the reader to cash in on that year’s performance. All they can do is hope that the report is a reliable indicator of how well the company will perform in the future.

I have heard friends and associates refer to the share market as “white collar gambling” on more than one occasion. And they would be correct in a sense. Certain investors, including myself at times, will purchase a firm while knowing very little information about it. They may do this based on reading someone else’s opinion of the firm, or even may go on a hunch. I recently purchased mortgage choice shares on a hunch, and sold them a month later, making a 25% profit. Needless to say, I was stoked. However, I also can not honestly say that I did a lot of company research or made a sound investment decision. Really, I just got lucky.

When someone is playing poker, they will often have to act on a hunch about whether they think another player is bluffing or not. However, once they have been playing at the table for a while, they will get to know that player. If they watch carefully, they will learn to read their body language, signals or “tells”. They will begin to identify how they act when they are bluffing, and how they act when they have the winning hand. Eventually, they will be able to make better decisions as they predict the outcome based on past behaviour. We do the same when we analyse firms. As we spend more time at the table that is the stockmarket, we learn, through the analysis of financial statements how to read the firm. Are the annual reports a whole lot of marketing bluff? Or, as we analyse the past performance of the firm, do we believe what we are reading, and feel that we are in this case, able to put our money on the table and wisely invest?

Which brings us to the question, how exactly do we go about analysing a firm’s financial statements? I already know from completing Assignment 1, that they contain a lot of information and it can be hard to know where to begin and what is relevant! Knowing that there are standard frameworks and measures used by accounting professionals is comforting to me for two reasons. One is that knowing that the methods have been tried and tested by many others before me, reassures me that the method must work, and that following this process will be beneficial to me. The other is that it provides me with a standard method of analysing all firms, so that if I am ever needing to compare one firm with another, I am able to easily do this using the same measurements and ratios.

“Restating the financial statements” actually means nothing like what I thought it did. Initially, I had thought that it would be a lot more to do with amending the financial statements based on new information that had come to light. I now see that, in this context at least, we are learning how to separate the operating and financial activities of a firm. Rather than adding, removing or changing any of the financial information, we are essentially rearranging it on the spreadsheet. We do this in a way that allows us to clearly separate the operating and financial activities in the Statement of Changes in Equity, Balance Sheet and Income Statement, and then calculating their respective totals for each.

This then provides us with the key figures of operating income and net operating assets, which are required for the calculation of the various ratios and formulae.

The concept of separating different financial activities actually makes a lot of sense to me, as I already do this for the purpose of my own budgeting. I have a spreadsheet where I total up all of my fortnightly, monthly and annual expenses, and how much I need to earn each fortnight to meet those expenses. However, I don’t actually earn the same amount every fortnight. I have fixed incomes such as rent from my investment property and family tax benefit. My income from dividends and bank interest are not necessarily fixed, however they will continue to be paid without any effort on my part. Whereas my employment income is variable depending on how much I work. By looking at these separately I am able to view the difference between my fixed income and my expenses so that I know how much I need to earn from employment (ie. my operations) in order to be profitable (ie. pay my bills or sometimes even save!) Similarly, I also show my income and expenses related to my investment property in a separate section on the spreadsheet. This helps me to keep track of just how much of my own money I am having to put into the property and how close I am to being positively geared. If I were to just lump all of my income and expenses together, it would not be possible for me to have such an accurate picture as what I do.

Similarly, I can see why doing this for financial statements of a firm would be just as helpful. Even without the calculations of any ratios, it seems like it would make the financial statements much more readable, and would give an immediately clearer picture as to where the firm’s earnings or expenses are coming from.

After we restate the financial statements; namely the Statement of Changes in Equity, Balance Sheet and Income Statement; and separate the operating and financial activities, we are able to then clearly see the respective totals of the net operating assets and the operating income. These figures are essential for the calculation of Return on Net Operating Assets, Economic Profit, Profitability and Efficiency.

When reading the explanations for calculating these measures, one area that really got me stuck was the difference between the cost of capital and capital outlays. Due to my work experience as a tax consultant, I am familiar with the concept of capital expenses being the purchase of assets which are expected to generate income in the future. Depending on the cost of the asset and the size of the business, these may or may not be able to written off as an immediate tax deduction. Otherwise, they need to be depreciated over a number of years based on the asset’s expected effective life. I had then just picked up on the word ‘capital’ and assumed that the cost of capital and capital outlays both also meant the same thing, and originally written quite a lot in this document based on that wrong understanding. This shows that there is at least one instance where having prior knowledge is not always beneficial, as I have read the study guide in that context, rather than what the author was actually trying to convey. I have now come to the understanding that capital outlays are quite similar to what I thought they were. I still don’t feel that the study guide provides a clear enough explanation of the meaning of cost of capital, however I have found an explanation here which made some sense to me:

https://en.wikipedia.org/wiki/Cost_of_capital

If I have understood correctly, cost of capital then means the additional cost to the firm of borrowing or acquiring the money which they then use to invest in capital expenses. For example, I have a mortgage on my investment property. Purchasing this property was a capital expense as it is an asset that is intended to generate an income. The interest that I pay on my mortgage is the cost of capital. For me to be generating value from my investment property, I should be receiving more in rent each month than what I am paying out in interest.

At first I was a little surprised that we are to use a flat rate of 8% for all firms! When we are going to so much effort to restate the financial statements in order to obtain more accurate information about a firm’s performance, using an average estimate like this seemed quite contradictory. However, after seeing the formula that is used to actually calculate cost of capital when one wants to be precise, I am more than happy to go with the 8%!

I read that you can only ever invest capital in one thing at a time, and that the cost of capital is the potential expected returns it could be earning in alternative uses. I have been learning about this concept of Opportunity Cost in my economics unit.

In my own life, I am all too familiar with the concept of trade-offs. I have chosen to send my children to a private school, however to be able to afford this, we need to live in a unit rather than a nice big house with a yard. If I choose to shop at Coles so that I can collect Stikeez, I miss out on the opportunity to shop at Woolworths and collect Disney tiles. There are always trade-offs in life, and unfortunately we can not have everything!

We do not think about all the alternative lives we could have lived; we often fail to realise all the alternatives and options that lie before us, all the dreams, journeys and actions we could be taking instead of what we have chosen to do.”

Reading this actually gave me a huge jolt to the point that it made me stop doing any uni work for 3 days! I still honestly don’t know if I’m making the right decision, and am second guessing myself all the time. If I weren’t studying, I could be in the workforce earning good money right now. Or, I could be a stay at home Mum spending more valuable time with my children. The concept of opportunity costs is a huge reality for me right now, and I am well aware of what I am missing out on in order to undertake this degree.

Firms need to have the same consideration when making decisions, and the measure of economic profit is able to assist them to do this. Has a firm been able to create value greater than the cost of it’s capital? And if so, by how much?

Through reading through the instructions on how to restate the various financial statements, I initially thought that this would be a fairly straightforward process. However, after taking a quick look at my firm’s balance sheet, I quickly realised how wrong I was!

Restating the cash seemed easy enough, however when I checked the footnotes for items such as “trade and other receivables” and “trade and other payables”, I realised that these are actually broken down into many smaller sections, these being a mixture of both operating and financial assets. I’m also still trying to figure out the meaning of tax assets and deferred tax assets, and the difference between current and non-current assets and liabilities. This is definitely going to take a lot longer than I first anticipated (and a lot of wine and chocolate!)

I am fortunate in the fact that my firm already separated it’s operating and financial income and costs in it’s income statements, and the comprehensive income statement is made up operating activities only. I am comforted by the fact that restating the income statements and the statement of movements in equity will at least be a much less arduous task.

I can now clearly see that the return on net operating assets basically looks at the profit that a business generates from it’s operations as shown in the restated income statements and compares this to the net operating assets shown in the restated balance sheet.

This measure of RNOA can then be used to further calculate the economic profit, profitability and efficiency. A quick peruse of the “ratios” tab of the company spreadsheet shows me that there are many other ratios we will be learning to calculate throughout this course as well!

I find the concept of profitability relatively easy to grasp. I have previously dabbled in buying and selling baby clothing online. Essentially, as long as I am selling the products for more than I paid for them, then I am making a profit. However, I can see that the profitability measure calculates this to a more exact percentage which would be helpful when perhaps choosing between two different products to purchase for the purpose of reselling.

I initially found the concept of efficiency a little harder to get my head around, it almost seemed like it would be the same as RNOA. However, I then realised that where the formula for calculating efficiency uses the total sales figure (ie turnover), the RNOA formula uses the operating income which is most likely the same figure, but with the expenses minused off.

I am unsure as to why efficiency would be a useful measure though, as having a high turnover is not that great if there are also a lot of expenses as well. I feel like profitability would be a lot more indicative of whether or not a business is doing well.

As I conclude this reflection, my head is almost bursting with all of the new concepts that I have been learning, and at the same time I am more than well aware that I am only just beginning to scratch the surface. Whilst learning by reading is definitely beneficial, I am someone who much more learns by doing, so I am looking forward to putting my learning into practice as I start to restate the financial statements and see these concepts come to life.

And at least I now have lots of yummy chocolate to eat while I am doing it!

Background information on RM plc

The following is an excerpt from Step 3 of my first assignment…

I had been really hoping to be allocated an Australian firm who I was already familiar with, or at the very least, a firm who did something “exciting”, so when I saw that I had been given a computer software company from the UK, my initial reaction was rather uninspired.

When I perused the firms other students had been given, I have to be honest that I felt more than a little envious. I would have much rather been given firms such as Woolworths (who we are all familiar with), Buderim Ginger (a local company here on the Sunshine Coast), or Diageo (an alcohol distributor who can thank me for at least part of their success).

However as I started reading about RM plc, I found myself becoming surprisingly interested in who they were, especially as I learnt that they predominantly provide technology, software and play-based resources to the education sector. This interests me on multiple levels – my husband is a teacher, my son is a prep student, and I am now a university student. So, education based software is at least something that I feel that I can relate to.

RM plc (formerly Research Machines) are a UK based firm who were founded in 1973.

The group is made up of three distinct companies:

RM Resources
RM Resources supplies schools and nurseries in the UK with curriculum and education resources. They have two key brands – TTS and Consortium. TTS have a lot of the “fun” learning resources like what you often see in classrooms here in Australia, such as building blocks and magnetic letters. They also have other unique products, such as large foam numbers, which are designed for learning math in the outdoors. Consortium, “the education supply people” are a recent acquisition for RM plc. They seem to have more stationery and essential supplies, such as glue and pencils, rather than teaching resources. Both brands appeared to include a wide variety of high quality products.

RM Results
RM Results provide technology and software which allows for exams to be marked electronically. Specifically, they have developed the market leading e-marking platform RM Assessor, which is used to mark around 160 million exam pages each year.

The following short video entitled “What is e-marking?” explains clearly how their software works.
https://vimeo.com/168306296

RM Education
RM Education provide a wide variety of technology-based solutions to thousands of schools throughout the U.K. These include products and services such as charging trolleys and mounting options, RM Accounts – accounting software specifically designed for the education system, audio visual, cloud backup, desk top and laptop computers, device management, tuition software, web filtering, print services, flexible IT support, teaching and learning apps and essential infrastructure hardware.

They are also the UK’s only dedicated educational internet service provider for schools.

To further highlight their position as a market leader in the area of technology, have a quick read about one of their recent staff development events, where they explored the potential development of products such as robots and AI assistants for classrooms, and using facial recognition software to mark attendance!

https://www.fenews.co.uk/press-releases/27365-edtech-athon-at-rm

Reading through RM plc’s website, it seems that the Department of Education in England is one of their biggest customers, as they provide services to over 7000 schools nationally. However, I was surprised to notice that ACCA (Association of Chartered Certified Accountants) is also listed as a client.

If anyone is interested in reading the case study, it can be found here:

https://rmresults.com/case-studies/acca-doubles-exam-capacity-with-rm-assessor

Assignment 1, Steps 3-6

Happy Friday everyone!

I hope you’ve all had a super productive week and are where you want to be with your assignments.

I’ve attached a link of my (very rough) draft work for steps 3-6 of Assignment 1.

Being the perfectionist I am, I’m quite apprehensive about uploading such unpolished work for public viewing, as it still requires a lot of proof-reading and editing. Some of my comments are really just rough notes at this stage, and parts of it definitely need to be made more concise as well!

I am definitely keen to receive feedback from others however, and I look forward to reading your work in return!

Hope everyone has a great weekend!

Cheers
Emma

Assignment 1, Step 1

So for our first assignment, we have been asked to read the introduction and chapter 1 of the study guide, and document some of our ideas, reflections and reactions along the way. I have attached what will hopefully be my final copy, which I am planning to submit before Monday. If anyone has any feedback or suggestions for improvement, I would love to hear them! ❤