Porter's value chain is important in P3 as question may ask you to analyse the company using value chain. It is also important in P5 as we desire to add value to the products/services in order to achieve improved performance.
Value chain is the sequence of value activities. Value activities are those that add value to the products/services. There are primary and secondary activities.
Primary activities
The goal of these activities is to create value that exceeds the cost of providing the product/service, thus generating profit margin.
1. Inbound logistics - activities that are involved in bringing the inputs to operations. For example, transportation, warehousing etc.
2. Operations - activities that are involved in transforming the inputs to outputs. For example, manufacturing.
3. Outbound logistics - activities that are involved in getting the outputs to customers. For example, transportation, packaging, storage etc.
4. Marketing and sales - activities that are involved in getting the customers to buy the product/service. For example, advertising, promotion etc.
5. Service - activities that are involved after the sales to maintain and enhance product/service value. For example, upgrading, repairing etc.
Support activities
These don't add value, but they facilitate primary activities.
1. Procurement - acquiring inputs.
2. Technology development - activities such as research and development, process automation etc.
3. Human resource management - activities associated with recruiting, training, developing and rewarding people.
4. Firm infrastructure - this includes the rest of the activities such as general management, finance, legal, accounting etc.
There may be linkages between activities and this happens when the performance or cost of one activity affects that of another. Competitive advantage may be obtained by optimising and coordinating linked activities.
Exam
In P3, you may need to identify the activities that the company is currently performing and analyse whether they add value or not. In P5, it could be more of discussion together with business integration as you know that linking the activities effectively can create value. Question in P5 can also ask you about the amendments that can be made to the value chain to deliver improved business performance. You should read the questions very carefully.
Thursday, February 9, 2012
Results for December 2011 sitting
Results for December 2011 sitting will be available to view at 13rd of February 2012, 0500 GMT. Take note that there is a difference between GMT and BST as last sitting it was stated 0500 BST. You can view your results by going to myacca or https://www.acca-business.org/results_login.html . Email or SMS from ACCA is expected to be late so it is suggested that you use the link provided here which would be less jam compared to myacca. Good luck for your results! :)
Monday, January 16, 2012
Difference between performance measurement and performance management
Performance measurement and performance management look similar but there is a big difference. In short, performance measurement is just part of performance management and they are both an ongoing process. Performance management covers everything, managing the performance from day 1 to the end of the organisation.
In managing the performance, we are aiming to improve the performance of the organisation, process and the employees. Cost information provides us one of the main information to understand the efficiency of process (for example). Cost and management accounting techniques are used as the information provided will be useful for measuring the performance of process. Furthermore, employees' performance can also be measured through this information, for example whether purchasing manager is able to purchase at a good price.
Decision making is directly linked to performance. A good decision will result in good outcome, leading to good performance. Therefore, decision making is part of the syllabus of performance management.
There will also be plans to achieve the company's objectives so budgets will be set. If the actual performance is meeting the budget requirement, it can be said that the performance is good. To manage performance, there should be a plan to achieve (budget) and actively ensure that company is achieving the plan.
After the planning and decision making work, the performance information (such as cost variances) are collected so that control can be taken place. Performance measurement is a control procedure and this aims to measure the actual performance and determine whether it is good or bad so that new actions or changes in existing actions can be planned (which means that the procedure will start again from budgeting).
Performance management covers all the above. In short, we can say that performance management involves planning, control and decision making so that the performance will improve continuously.
In managing the performance, we are aiming to improve the performance of the organisation, process and the employees. Cost information provides us one of the main information to understand the efficiency of process (for example). Cost and management accounting techniques are used as the information provided will be useful for measuring the performance of process. Furthermore, employees' performance can also be measured through this information, for example whether purchasing manager is able to purchase at a good price.
Decision making is directly linked to performance. A good decision will result in good outcome, leading to good performance. Therefore, decision making is part of the syllabus of performance management.
There will also be plans to achieve the company's objectives so budgets will be set. If the actual performance is meeting the budget requirement, it can be said that the performance is good. To manage performance, there should be a plan to achieve (budget) and actively ensure that company is achieving the plan.
After the planning and decision making work, the performance information (such as cost variances) are collected so that control can be taken place. Performance measurement is a control procedure and this aims to measure the actual performance and determine whether it is good or bad so that new actions or changes in existing actions can be planned (which means that the procedure will start again from budgeting).
Performance management covers all the above. In short, we can say that performance management involves planning, control and decision making so that the performance will improve continuously.
Friday, January 13, 2012
Investment appraisal terms
For the first time you approach investment appraisal topic, you might find that the terms used are technical. This article clarifies the meaning of certain basic terms. A number of sentences will be used as examples.
1. Payback method can be used for initial screening of the projects.
As we normally identify a number of projects, calculating the payback periods (the time of breakeven) for each project help in determining which project covers the investment cost in the shortest time. As payback period is simple to calculate, it is normally used at the initial stage to scan through all projects.
2. Discounted cash flows take into account time value of money.
Discounted cash flows mean that the future cash flows are converted to the value now (present value). As the value of money drops each year, discounting the cash flows will take into account the effect of time value of money.
3. We can discount the cash flows at company's cost of capital.
Cost of capital is expressed in percentage. The cost of the company's capital is actually the need of repaying the investors, ie. required rate of return of the investors. So for example, if the cost of capital is 10%, we can refer to the present value table to identify the rate of discount at 10%. Time period of cash flows will be taken into account.
4. Positive net present value (NPV) project generates wealth for shareholders.
NPV is the present value of cash flows less investment cost. As NPV also takes into account time value of money, positive NPV represents the value added to the shareholders and also the value of the company.
5. If internal rate of return (IRR) is greater than cost of capital, project is acceptable.
IRR is the rate where net present value (NPV) is zero. This means that if the IRR rate is used for discounting, NPV will be zero. IRR should be greater than cost of capital so that the margin of safety to meet the required rate of return by investors is large enough. If IRR is less than cost of capital, that means the project reduces the wealth of shareholders as discounting at higher rate (cost of capital) will result in negative NPV.
The above may be some of the new things faced in investment appraisal topic. You need to focus on understanding them as they are useful for future papers. It is okay if you can't understand everything here because you will get a more detailed explanation in class. :)
1. Payback method can be used for initial screening of the projects.
As we normally identify a number of projects, calculating the payback periods (the time of breakeven) for each project help in determining which project covers the investment cost in the shortest time. As payback period is simple to calculate, it is normally used at the initial stage to scan through all projects.
2. Discounted cash flows take into account time value of money.
Discounted cash flows mean that the future cash flows are converted to the value now (present value). As the value of money drops each year, discounting the cash flows will take into account the effect of time value of money.
3. We can discount the cash flows at company's cost of capital.
Cost of capital is expressed in percentage. The cost of the company's capital is actually the need of repaying the investors, ie. required rate of return of the investors. So for example, if the cost of capital is 10%, we can refer to the present value table to identify the rate of discount at 10%. Time period of cash flows will be taken into account.
4. Positive net present value (NPV) project generates wealth for shareholders.
NPV is the present value of cash flows less investment cost. As NPV also takes into account time value of money, positive NPV represents the value added to the shareholders and also the value of the company.
5. If internal rate of return (IRR) is greater than cost of capital, project is acceptable.
IRR is the rate where net present value (NPV) is zero. This means that if the IRR rate is used for discounting, NPV will be zero. IRR should be greater than cost of capital so that the margin of safety to meet the required rate of return by investors is large enough. If IRR is less than cost of capital, that means the project reduces the wealth of shareholders as discounting at higher rate (cost of capital) will result in negative NPV.
The above may be some of the new things faced in investment appraisal topic. You need to focus on understanding them as they are useful for future papers. It is okay if you can't understand everything here because you will get a more detailed explanation in class. :)
Friday, December 30, 2011
Net present value (NPV)
NPV is an important term where you will see it in a lot of your FIA/ACCA papers. Its meaning must be understood in detailed. This article is intended to give an idea about NPV.
Definition
CIMA Official Terminology gives this technical definition: difference between the sum of the projected discounted cash inflows and outflows attributable to a capital investment or other long-term project. In simple words, NPV = present cash flows + future cash flows converted to present values.
Making decision
The decision criteria is to accept a project with positive NPV (but you must also consider non-financial factors such as legal requirement, social responsibility etc). This is because positive NPV project will be able to increase company's value and therefore shareholders wealth.
But what if NPV is zero? In this case, the project is still acceptable, why? This is because it means that the project will not increase/decrease company's value, but the project is still making profit (it can be loss as well). However, in practice management will not accept such project as it is not meeting the company's (stock market listed companies) financial objective of maximising shareholders wealth.
Other uses - F7/P2
The concept of NPV is used in other areas as well. For example, in financial reporting, the term value in use (IAS 36) means the discounted present value of the future cash flows expected to arise from the continuing use of an asset and from the disposal at the end of its useful life. This is actually the NPV of the asset (not considering investment cost). The concept of NPV must be understood and applied in other situations.
Discount rate
This is the rate to be used to convert the future cash flows into present value. For a project it is normally the company's cost of capital (required rate of return by investors of the capital). Therefore, to calculate NPV, you have to first estimate a relevant cost of capital (will be given in FIA papers). Present value table and annuity table will be given in exam, you have to extract the correct rates relevant for different time periods to be used to calculate NPV.
Finally, we can conclude that NPV considers relevant cash flows rather than profits (profits include non-cash items such as depreciation, provision). NPV also considers time value of money (therefore, cash flows in different time periods are discounted/converted to present value at different rates).
Definition
CIMA Official Terminology gives this technical definition: difference between the sum of the projected discounted cash inflows and outflows attributable to a capital investment or other long-term project. In simple words, NPV = present cash flows + future cash flows converted to present values.
Making decision
The decision criteria is to accept a project with positive NPV (but you must also consider non-financial factors such as legal requirement, social responsibility etc). This is because positive NPV project will be able to increase company's value and therefore shareholders wealth.
But what if NPV is zero? In this case, the project is still acceptable, why? This is because it means that the project will not increase/decrease company's value, but the project is still making profit (it can be loss as well). However, in practice management will not accept such project as it is not meeting the company's (stock market listed companies) financial objective of maximising shareholders wealth.
Other uses - F7/P2
The concept of NPV is used in other areas as well. For example, in financial reporting, the term value in use (IAS 36) means the discounted present value of the future cash flows expected to arise from the continuing use of an asset and from the disposal at the end of its useful life. This is actually the NPV of the asset (not considering investment cost). The concept of NPV must be understood and applied in other situations.
Discount rate
This is the rate to be used to convert the future cash flows into present value. For a project it is normally the company's cost of capital (required rate of return by investors of the capital). Therefore, to calculate NPV, you have to first estimate a relevant cost of capital (will be given in FIA papers). Present value table and annuity table will be given in exam, you have to extract the correct rates relevant for different time periods to be used to calculate NPV.
Finally, we can conclude that NPV considers relevant cash flows rather than profits (profits include non-cash items such as depreciation, provision). NPV also considers time value of money (therefore, cash flows in different time periods are discounted/converted to present value at different rates).
Thursday, December 29, 2011
Tucker's 5 questions model - P1
One of the useful models for ethical decision making is the Tucker's 5 questions model. In this model, you ask 5 questions to determine whether a decision is ethical. The 5 questions are:
1. Is it profitable?
2. Is it legal?
3. Is it sustainable/environmentally sound?
4. Is it right?
5. Is it fair?
You will find that answering the first 3 will be straightforward. However right and fairness require judgement. One way to put is "is it right to shareholders" (for profit making companies) and "is it fair to stakeholders" although there are many ways to express ideas.
In exam, don't just say 'yes or no'. You should also justify your 'yes or no' to get maybe 2 marks per question. If majority is 'yes', then the decision may be ethical. :)
1. Is it profitable?
2. Is it legal?
3. Is it sustainable/environmentally sound?
4. Is it right?
5. Is it fair?
You will find that answering the first 3 will be straightforward. However right and fairness require judgement. One way to put is "is it right to shareholders" (for profit making companies) and "is it fair to stakeholders" although there are many ways to express ideas.
In exam, don't just say 'yes or no'. You should also justify your 'yes or no' to get maybe 2 marks per question. If majority is 'yes', then the decision may be ethical. :)
Friday, December 23, 2011
IFRS 11 Joint Arrangements - P2
IAS 31 has been replaced by IFRS 11 and the changes will be outlined here. Joint arrangement is an arrangement of which two or more parties have joint control, ie. contractually agreed sharing of control. Definition of control follows the one defined in IFRS 10.
Types of joint arrangements
There are only two types:
1. Joint operation - parties (joint operators) have rights to the assets and obligations for the liabilities relating to the joint arrangement.
2. Joint venture - parties (joint venturers) have rights to the net assets of the joint arrangement.
Accounting
1. Joint operator accounts for assets, liabilities, revenues and expenses in accordance with relevant IFRSs and only include the portion of share.
2. Joint venturer accounts for the investment using equity method (no more proportionate consolidation) in accordance with IAS 28. This means to present in statement of financial position initially at cost and subsequently increase/decrease with any share of profit/loss.
Therefore, the main changes are the classification of joint arrangement and the accounting for joint venture. This article does not intended to cover IFRS 11 in detailed.
Types of joint arrangements
There are only two types:
1. Joint operation - parties (joint operators) have rights to the assets and obligations for the liabilities relating to the joint arrangement.
2. Joint venture - parties (joint venturers) have rights to the net assets of the joint arrangement.
Accounting
1. Joint operator accounts for assets, liabilities, revenues and expenses in accordance with relevant IFRSs and only include the portion of share.
2. Joint venturer accounts for the investment using equity method (no more proportionate consolidation) in accordance with IAS 28. This means to present in statement of financial position initially at cost and subsequently increase/decrease with any share of profit/loss.
Therefore, the main changes are the classification of joint arrangement and the accounting for joint venture. This article does not intended to cover IFRS 11 in detailed.
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