Accounting for Strategy Management and Control - Case Study Example

Accounting for Strategy Management and Control Table of Contents Introduction 3 Analysis of the Problems with Control System of Carlton 3 Analysis ofProblems with the Finance System of Carlton 4 Proposed Internal Control System for Carlton 8 Conclusion 10 Reference list 12 Introduction Carlton is one of the oldest producers of bicycles in the world which was established in the year 1897 (Case Study). Conventionally, the product range offered by Carlton was perceived as superior quality products and not very expensive. The tag line attached with Carlton is “a bicycle for everyone” (Case Study). However, in spite of their famous legacy, Carlton has been struggling for a number of years. The company uses two sales and distribution channels: first, through wholesale-retail chain of distribution and secondly, through company website directly to the public. Even though manufacturers from the United States and far-east have taken significant market share, still the company has struggled to overcome their losses and fixed costs to establish a minimum profit. Management of the company failed to assess their loopholes, but many industry experts considered that the products offered by Carlton are too ordinary and dull for the price it charges. This report analyzes the problems with the control systems and finance function of the organization, as retailers who buy from Carlton are less impressed with the product; a recent customer survey drew attention towards terrible customer service, considerable quality issues and problems with on time delivery. Analysis of the Problems with Control System of Carlton Carlton has been struggling for a number of years to break even because the internal control system of the company is not efficient. Internal control is systems used by managers to assist the organization achieve its goals and objectives (Flamholtz, 1996). Though Carlton has successfully established the finance department which exercises control over all other departments, it has failed to establish an efficient control system with respect to all other different departments within the organization. The communication process followed by the company is not appreciable as the problems are addressed during the board meetings which cause a lot of delay in taking immediate action and in the process; the company loses a fair amount of market share to its competitors. As the other departments are asked to follow annual budget strictly, often managers of the respective departments fails to interpret and explain the deviations in the actual performance. Analysis of Problems with the Finance System of Carlton From the case study, it is inferred that Carlton’s primary objective is to strictly follow the annual budget prepared by the chief accountant. The managers or head of different cost centres are accountable and asked to provide an explanation if there is more than 10% deviation in the actual performance than the targeted or budgeted performance (Case Study). The role of chief accountant in the company is given sole importance as he is assigned with the responsibility of approving the new recruits and making all the important forecasts. In the budget, it is noticed that the costs allocated for the staff remains unchanged, marketing costs are expected to be reduced by 12% (Case Study) and material and overhead costs are expected to increase in the current accounting year. However, increase or decrease in the expenses and sales are solely decided and finalised by the accounts team and sent to the cost centre managers who all are instructed to follow the budget accordingly. Once the reports are generated at the end of the month, the heads of different departments such as, production manager, purchase manager, operations manager and logistics manager sit with the chief accountant to analyze the deviations. Carlton is exclusively focussed on performing its operations within the budget prepared by the finance team and when it has achieved the target, they spend next 12 months appreciating the performance without paying attention to the demand of the customers in the market (Case Study). With the aim to operate within the budget of the company in several aspects, the company is compromising with the quality of the product, which is creating numerous quality issues among its customers and ruining the reputation of the company. The company focuses on giving bonus and incentives to the managers if they perform and achieve the budgetary targets. In the process of achieving the budgetary targets and enjoy the incentives provided by the management for achieving the budgetary target, the managers are compelled or encouraged to compromise with the quality issues regarding the products. The management of Carlton is expected to adopt an integrated control system which would focus on all the different aspects of the organization such as, finance, marketing, human resource, market research and development, sales and distribution channels and operations management. Carlton is expected to implement a management control system comprising of different control techniques such as balanced scorecard and strategy map (Kaplan, and Norton, 2006), activity-based costing, kaizen techniques of continuous improvement, total quality management (TQM) and benchmarking (Anthony, 2007). A balanced scorecard is a combination of financial and non-financial components which focuses on the strategic schedule of the company. Different perspectives such as financial, internal business processes, innovation and growth and customers are considered in a balanced scorecard (Kaplan and Norton, 2001). Financial perspective will help in resolving the financial issues of Carlton; customers’ perspective which is neglected by Carlton will also be attained through the balanced scorecard strategy along with improvement in internal business processes and further innovation by the company in product range. Carlton is laying too much emphasis on its finance function and neglecting the other aspects which are equally responsible for the success of the organization. For performing the finance function smoothly, the company can implement activity-based costing which will integrate company accounting, financing and costing activities (Cokins, 2001) and for quality issues the company can adopt the TQM and benchmarking techniques. Total quality management (TQM) ensures that the company makes extensive efforts to set up an ambience in which it can constantly develop its ability to deliver better quality products to the customers (Oakland, 2003). As Carlton is facing several problems regarding quality issues, TQM will help the company to recover from this miserable situation. Companies are often judged on the following parameters: strategy, leadership, operations, workforce, customers, knowledge management, risk management and results (Charles, et al., 2008). If Carlton is judged on the basis of above parameters, then it is will score fairly poor as it has failed to adopt the above roles successfully. The management of Carlton should consider establishing a broad internal control system classified into two categories such as: accounting or financial controls and administrative controls. The accounting controls will ensure that the transactions in the company are executed according to the management’s authorisation and accountability is maintained in preparation of the financial reports. Administrative controls consist of quality control, periodic reporting, policy appraisal and work standards (Pfisher, 2009). Accounting controls and administrative controls comprising operational controls, internal checks and internal audit will ensure efficient performance of the company as a whole. Internal control system will also ensure segregation of duties, accomplishment of organisational objectives and policies, authorisation and approval of transactions from appropriate responsible person, maintenance of records accurately, protection of company assets and helping the management in establishing, monitoring and reviewing the structure of internal control (Moeller, 2009). Internal control system assists the management in carrying out well-organized inter-firm comparison which helps in developing higher management control and planning. The management of Carlton can put into practice a system of internal control questionnaire where the management always asks itself few questions, such as (Rittenberg, Johnstone and Gramling, 2011): Is the company operating as efficiently as it is expected? How are the different units within the company performing in comparison to that of others? Are there areas in existing business where the company can make strong improvements? If the company is successful, what are the strong points on which its success depends? How can the company increase its efficiency and profitability? Inter-firm comparison will provide a comparative picture to the management of Carlton showing its product-cost structure, operating performance and financial results compared to other firms in the same industry (Leitch, 2008). Along with the adoption of inter-firm comparison, Carlton can also implement intra-firm comparison which is a comparison of two or more departments or divisions within the company with the objective of making significant analysis for the purpose of increasing the effectiveness or efficiency of the different divisions or departments in Carlton (Gitman, 2009). Carlton also needs to adopt the process of benchmarking in its internal control system. Benchmarking is an uninterrupted process of measuring services, practices and products against the recognised companies in a particular industry and competitors (Jain and Malehorn, 2006). With the adoption of this technique, Carlton would be able to understand how other companies in bicycle industry are improvising on their core competencies and gaining competitive advantage. This will help Carlton in improving their current business techniques. The process of benchmarking includes; identifying the process or areas to be examined, prepare behavioural and output measures of the process or areas and attain appropriate measurements, choose the best-in-class companies against which to benchmark, calculate the deviations with respect to the best-in-class companies, develop strategic programs for reducing performance gaps and implement the programs and then compare the new results with the benchmark standards already determined (Wealleans, 2005). For performance management, Carlton may adopt the Economic Value Added (EVA) technique. EVA is an approximation of true economic profit after making corrective adjustments according to the generally accepted accounting principles (GAAP), including deduction of the opportunity cost of equity capital. EVA can be measured as net operating profit after taxes after deducting the amount in cost of capital (Flamholtz, 1996). Proposed Internal Control System for Carlton Carlton can develop a control system based on Mckinsey 7s framework to enhance its performance: With the help of 7s framework of Mckinsey, Carlton would be able to establish an overall control mechanism. According to the framework, strategy means the plans adopted by the company to achieve its objectives; structure is referred as the organisational structure which performs the various functions; System refers to a management tool for planning, decision making, communication control and the procedures and processes regularly followed by the organization; Style refers to the patterns of behaviour and managerial style of top management over a period of time; Staff refers to the human resources of the organization and the coordination existing between them. Skills mean the capabilities of an individual and the entire organization; Shared values or the super-ordinate goals are company’s mission, values, philosophy and vision in the backdrop of which organisational goals and objectives are set and strategies are prepared (Cardy and Leonard, 2015). Conclusion The case study on Carlton bicycles brings out the problems with control systems and finance function of the company. It is inferred from the case study that the company focuses mainly on its financial aspects and it compels the other departmental heads to perform according to the annual budget prepared by the head of accounts department or the chief accountant. While the company is focussing primarily on its financial performance, it is losing its market share due to inferior quality of products supplied in the market. As the company failed to adopt an integrated approach, the competitors took away a major portion of the market share. In order to recover from this situation, Carlton needs to adopt an integrated internal control mechanism for performance evaluation, quality control and continuous improvement. From the perspective of strategic management, performance evaluation of the management team is essential. Performance of the management is evaluated on the basis of strategies and goals adopted by it, stock price, insider buying and compensation of management. Carlton needs to implement the balanced scorecard strategy and total quality management policies in order to develop an appropriate balance between strategic and financial controls which will help the company to use its core competencies and gain competitive advantage within the parameters indicated by the firm’s financial position. In order to make sure that the company functions smoothly and efficiently the management of Carlton should equally distribute the responsibility among the various departments instead of vesting the entire power in finance department and also establish separate control mechanism for all the departments. Reference list Anthony, 2007. Management control systems. New York: Tata McGraw Hill Cardy, R and Leonard, B., 2015. Performance management: concepts, skills and exercises. New York: Routledge Charles, R., Moyer, C., McGuigan, J., Rao, R and Kretlow, W., 2008. Contemporary financial management. Mason: South-Western Cengage Learning. Cokins, G., 2001. Activity-based cost management: an executives guide. Danvers: John Wiley and Sons, Inc. Flamholtz, E., 1996. Effective management control: theory and practice. Massachusetts: Kluwer Academic Publishers Gitman, L., 2009. Principles of managerial finance, 11/e. New York: Pearson Education Inc. Jain, C, and Malehorn, J., 2006. Benchmarking forecasting practices: a guide to improving forecasting performance. New York: Graceway Publishing Company, Inc. Kaplan, R, and Norton, D., 2006. Alignment: using the balanced scorecard to create corporate synergies. Boston: Harvard Business School Publishing Corporation. Kaplan, R, and Norton, D., 2001. The strategy-focused organization: how balanced scorecard companies thrive in the new business environment. Boston: Harvard Business School Publishing Corporation. Leitch, M., 2008. Intelligent internal control and risk management: designing high-performance. Burlington: Grower Publishing Limited Moeller, R., 2009. Brinks modern internal auditing: a common body of knowledge. New Jersey: John Wiley and Sons. Oakland, J., 2003. Total quality management: text with cases. Burlington: Butterworth-Heinemann Pfisher, J., 2009. Managing organizational culture for effective internal control: from practice to theory. Lancaster: SPi Publisher Services. Rittenberg, L., Johnstone, K and Gramling, A., 2011. Auditing: a business risk approach. Mason: South-Western Cengage Learning. Wealleans, D., 2005. The quality audit for iso 9001:2000: a practical guide. Hampshire: Grower Publishing Limited. Read More