Reporting the Business Model - Assignment Example

Reporting the business model Introduction Most successful firms in the contemporary business world have designed business strategies that help them to compete effectively to remain relevant in their respective industries. A business strategy is a framework that has components that define how the organization intends to attain its goals. One of the most powerful components of a business strategy is a business model (Pwc.de 1). In definition, a business model is the plan implemented by an organization to generate income and make profits from the operations. It mainly includes the components and operations of the business (Anne &Chris 68). It also includes the income it generates as well as the expenses that are incurred. In simple terms, a business model is how an organization makes money (Holmes & Gee 23). In the corporate world, the term business model is used in many contexts both formal and informal to refer to the core aspects of business operation which involves the purpose of the business, the processes, the target customers, the strategies; the trading practices the infrastructure and policies (Gogagon 35). Thus, a business model is one of the business strategies organizations put in place in order to attain their set goals. Question 1 Throughout history, the practice of financial reporting has evolved over time. Organizations have been designing their business models and these models were not easily disclosed to the public because they contained organization’s secrets (Aruwa 3). Indeed, as mentioned earlier, business models show how a company make money, therefore, these secretes were kept confidential by the management because they are competitive weapons that are used to out do the competitors (Anne &Chris 68). Since the business models were taken to be secrets, they were not disclosed or reported in the annual financial reports. This is because it was thought that the competitors would check out the secrets and they would use them to counter the competition (Gould 24). Therefore, the company’s annual reports did not show the models of the companies. The users of the financial reports just checked the financial status, the performance level and the profitability of the company from these annual reports (Holmes & Gee 21). When the shareholders for example wanted to check on how the company makes money or rather the company’s business model, it was a private affair to ensure that the information is not leaked out to the competitors (Gogagon 35). However, in recent years, the international accounting rules have been adjusted and changed dramatically in that the generally accepted accounting principles (GAAP) and the international financial reporting standards (IFRS) require that the management of the companies should disclose their various business models in the annual reports (Aruwa 3). In modern business language, including business models in the annual financial reporting is called integrated reporting (IR) (Gould, 2014, pp24). Many scholars have questioned the issue of including organization’s business models in the annual reporting whether it is a good idea or not? The proponents of the inclusion of business models into the annual reports explain several reasons why they think that it is wise to do so (Anne &Chris 57). The first reason given is that integrating business model into the annual reporting helps the users of the financial reports to see interconnectedness between the capital they invest in the business and the how the model creates sustainable value (Gould 24). Thus, it is one way of showing the investors how their capital is being used to create more wealth. This would encourage them to invest more and be confident that their capital would have to reap more profits (Gogagon 35). Secondly, disclosure of business model in the annual report links the internal environment and external environment in which the business operates. Thus, it enables the financial records users to see the critical connectedness and linkages among the organization’s operations (Aruwa 3). Another reason why business models should be shown in the annual reports is that it highlights the initiatives that affect the effectiveness and efficiency of business functions (Holmes & Gee 19). They include process improvement, employee training and development and innovation. Therefore, in the modern days, it is a good idea to include business models in the final annual reports so that the users of these reports can be aware of various issues about the organization (Gould 24). Moreover, the supporters of this argument assert that ignoring the business model in the financial reporting would show changes in the value that are quite irrelevant to the financial position and the performance of the organization (Pwc.de 1). However, as much as modern scholars support the disclosure of the business models in the annual reports, the interpretations of this concept within accounting conventions some times becomes a bit difficult (Efrag.org 1). One of the problems encountered is how to understand and identify the trade-offs. The process of describing how capital interrelates and where the trade-offs lie during the making of integrated reports becomes a bit difficult (Weill, Malone, D’Urso, Herman &Woerner 6). To overcome this problem, the accountants should focus on material factors that tend to affect value creation over time by using quantification where applicable. The second problem encountered in the accounting of business models in the final reports is whether to report multiple business models (Efrag.org 1). It is common that one organization can have various business models in various markets. This majorly applies to those organizations that are diversified in nature or multinationals corporations (Holmes & Gee 32). It is likely that the model used in a particular market is not the one that can work in another market. Therefore, it compels such organizations to adopt several business models. This poses a problem to the accountants whether to report multiple business models or just use the model that is used in one particular market or environment. Question 2 Most of the financial services companies in the current business world are not satisfied with their measurement systems. Most of them believe that much emphasis is placed on financial measures such as earnings and accounting returns and less emphasis is put on non financial measures such as employee satisfaction, quality and innovation (Gogagon 42). To counter this challenge, many companies are implementing new performance measures. The inadequacies of the financial performance measures have led to the many innovations which range from the use of the non-financial indicators and intellectual property (Pwc.de 1). Non-financial measures play various roles in reporting a company’s business model. First, they bring a closer link to the long-term performance against accounting measures (Xifeng, Guocai, Xiaoyan, Chow hou, & Elison 16). The financial measures majorly focus on annual short-term performance. They do not consider the progressive relative to the customer’ or competitors’ needs in attaining profitability and competitive strengths (Wharton.upenn.edu 1). However, using the non-financial measures communicates objectives and enables the managers of the companies to address long-term strategies. Secondly, the fact that it is hard to quantify the intangible assets in financial terms, the non-financial information can provide indirect quantitative indicators of the company’s intangible assets (Efrag.org 1). Most scholars argue that the main drivers of success in many industries are intangible assets which include non-financial measures such as customer loyalty and intellectual property (Weill, Malone, D’Urso, Herman &Woerner 4). This means that in case these non financial measures are excluded in the accounting, the financial measurements alone can mislead the managers to settle on poor or harmful decision that can affect the company in future (Wharton.upenn.edu 1). Thus, non-financial measures helps the managers to get the necessary details that concerns the organizations so that they reach to accurate decisions that would be of value to the organization. The third role which the non-financial; measures play is that they are always better indicators of the future financial performance of the organization. Sometimes, the financial measures miss out in capturing the long term benefits from the current decisions being arrived at (Wharton.upenn.edu 1). For example, the investment in the consumer satisfaction may lead to the increased sales in future due to the loyalty of customers and even more new customers consequently reduction in the operations costs (Efrag.org 1). Thus, the non-financial measures provide the missing link that between the beneficial functions and the financial results through looking information on stock performance. Finally, the nonfinancial measures are less susceptible to external interferences as compared o the financial measures. It implies that when the accountants use non-financial measures in the accounting work, the managers’ performance can improve greatly (Gogagon 44). They make managers to provide more precise evaluation of their actions. Moreover, it lowers the magnitude of risks the managers may face when determining important decisions such as pay, contracts award and pricing. One of the companies that have used non-financial measures is McDonald’s Inc. One of the non-financial measures utilized by this company is recruitment and training of employees (Wharton.upenn.edu 1). MacDonald’s train and develop its employees so that they can produce to their maximum potential. The process of recruitment may be too expensive but the positive long-term impact of this exercise to this firm is very enormous (Weill, Malone, D’Urso, Herman &Woerner 6). Once an organization builds its workforce through equipping it with the necessary skills, then the organization stands high chances of sustaining high performance for a long time. Another non-financial measure that is used in McDonald’s is effective customer service (Mcdonalds.co.uk, 2008, pp1). This company is more concerned with high level customer service. These employees are trained on how to deal with customers and the customers who come in this store experience good services and they even become loyal by coming back whenever they need the services (Xifeng, Guocai, Xiaoyan, Chow hou, & Elison 11). They also advise other new customers to try McDonald’s to have this good experience. Re-imaging is another non-financial measure that McDonald uses to boost its functions (Mcdonalds.co.uk 1). This is where the company spends a lot of funds in changing its face so that it looks more appealing to the customers. Re-imaging raises the interests of the customers to want to shop in the stores so that they can have a new experience (Mcdonalds.co.uk 1). McDonald’s rebrands or re-image after some time by changing the structure of the display and the colors of the stores. Re-imaging is one of the non-financial measures that should be considered in the accounting in the final report. Bibliographic references Anne, B, &Chris, W. “Financial accounting “. (2010). 5th Ed. New York; Prentice Hall. Aruwa, S. “Corporate reporting and analysis.” (2010). Accessed 8 Dec 2014. Lagos; Nasarawa State University Bouchaud, J. “Crises and Collective Socio-Economic Phenomena: Simple Models and Challenges.” (2013). Journal of Statistical Physics, 151(3/4), 567-606. Bloch, G. (2003). “Auditing.” The CPA journal. Accessed 8 Dec 2014. Efrag.org. “Getting a better framework : The role of the business model in financial reporting.” (2013). Accessed 8 Dec 2014. Gogagon, P. “The money machine. How the city works.” (2012). 5th Ed. New York; Penguin Publishers Gould, S. “Business models in integrated reporting –Learning from the pioneers.” Accessed 8 Dec 2014. Holmes, S & Gee, J. (2008). “Interpreting company reports and accounts.” (2008). 10 Ed. New York Prentice Hall. Mcdonalds.co.uk. “Finance at McDonald’s.” (2008). Accessed 8 Dec 2014. Pwc.de. “Integrated reporting: The future of corporate reporting.” (2012). Accessed 8 Dec 2014. Wharton.upenn.edu. “Non-financial performance measures: What works and what doesn’t.” (2000). Accessed 8 Dec 2014. Weill, P., Malone, T., D’Urso, V., Herman, G &Woerner, S. “Do some business models perform better than others? A study of the 1000 largest US firms. Massachusetts institute of technology.” (2005). Accessed 8 Dec 2014. Xifeng, W., Guocai, W., Xiaoyan, W., Chow hou, W., & Elison, L. (2014). “Unpacking the black box of multi-focused customer loyalty”. Social Behavior & Personality: An International Journal, 42(6), 959-968. Read More