Financial Analysis - Case Study Example

Management Accounting Table of Contents Management Accounting Table of Contents 2 Introduction 3 Barclays Plc: An Overview 3 Management Accounting 3 Activity Based Costing 4 Balanced Score Card 4 Value Chain Analysis 5 Barclay Plc: Management Accounting 6 Activity Based Costing 6 Balanced Score Card 6 Value Chain Analysis 7 Conclusion 7 Reference 9 Bibliography 10 Introduction This report offers an insight of the ‘Management Accounting’ techniques. The techniques are discussed in the light of Barclays Bank. The recommendations will be discussed by analysing the feasibility and suitability of the tools and accounting in banking organisations. At the end, a conclusion has been inferred from the analysis with a discussion of the strengths and weaknesses of the analysis. Barclays Plc: An Overview Barclays Plc, the global financial group, owns one of Europe’s largest banks. Apart from that, it has leading investment bank and an international wealth management organisation under its sleeves. The flagship Barclays Bank has around 1700 branches spread across UK and other countries (Hoovers, “Company Description”). The group has its operation across Europe, Africa, the United States and the Middle East countries. The company deals in financial products and competes within the global financial services industry. Management Accounting The control and authority of an organisation lies with the corporate managers. Undoubtedly, it indicates that the managers must be conversant with the accounting position of the organisation. “The term management accounting refers to accounting the management i.e. accounting which provides necessary information to the management for discharging its function” (Anbuvelan, “Management Accounting”). Management accounting provides variable assistance to the management to carry out the managerial functions with more efficiency. There are a number of tools and techniques in Management Accounting arena. The whole process includes gathering required information and analysing them to make decision making process much uncomplicated. Activity Based Costing A number of companies use ‘Activity Based Costing’ to identify and allocate the cost of the products or services. This includes identifying the cost pools or the activity centres and within the organisation and allocating cost to the activities using the cost drivers. The assignment of the cost is done based on the contribution of various activities in any particular product or service. As this costing process considers multiple cost drivers with different activities, the distortion risk is minimised considerably, providing the required cost information. As ABC indentifies each of the overhead costs with the products and services, produced and delivered to the customers, the process is more advanced than the traditional cost techniques. The significant steps in ABC are identification of the companies’ key activities, identification of related cost amount, establishment of a cost pool for each of the significant activities and allocation of the activity costs to the products as per the contribution of those activities to the product division. It would not be wrong to say that this costing process has certain benefits as it offers better profitability measurements, detailed realisation of the overheads, appropriate decision making and enhanced control. Balanced Score Card A balanced score card can be defined as the set of vigilantly selected quantifiable measures drawn from the organisation strategy. The leaders can use the chosen attributes to convey the organisations’ strategic objectives to the internal and external stakeholders of the organisations. In this competitive environment, most of the organisations fail to align the strategies and performance in compliance with their vision statements. The score card takes into account four perspectives such as Financial Perspective, Internal Process, Customer perspective and innovation and learning and aligns all of the perspectives along with the strategic objectives. Each of these perspectives has certain significance in management accounting principles and practices. The ultimate financial goal of any organisation is to make profit. The financial perspective is considered to have an insight if the organisation’s strategy and implementation of the same are into alignment with the strategic objectives of the organisation. Measures such as Gross Profit Margin, Return on Investment, Return on Equity and Earnings per share are used to evaluate the contribution of the strategies to the enhancement of the profitability. Enhanced quality, better service, improved performance and less time are significant to offer increased satisfaction to the customers. Apart from that, customer retention, customer acquisition, customer profitability and the market share are also key factors to evaluate the ‘customer perspective’ of the score card. The internal perspective of the organisation takes into account the means through which the organisations will be able to attain the customer satisfaction through increased revenue and enhanced profitability. In this case, the processes would include various operational processes, innovative as well as customer satisfaction processes. Human resource component finds its significance mainly in its contribution to align the learning and growth perspectives along with the strategic goals of the company. This segment includes measures like number of employees trained, employee turnover rates and training cost per employee. The balanced score card brings in several components together to enable success by attainment of company’s own specific goals. Value Chain Analysis The activities with an organisation are more or less connected with each other and that is why coordination among the activities is significant to optimise the value provided through the value chain. This evaluation of the organisational activities reveals about the activities, adding value to the stakeholders as well as activities which may not be so much encouraging for the company. So, it would not be wrong that the value chain analysis has a significant contribution to help the managers take on decision on various operational activities. Barclay Plc: Management Accounting With a large number of companies getting into this industry, it has been quite tough to survive in the competitive market of financial services. Offering customer quality service and products at a cost effective way is the most significant factor which can help the financial institution to beat the competition. Activity Based Costing The concept of ABC is required to be introduced in the Barclays Plc as this can emerge as the viable solution for the organisation’s product profitability concerns. In this process activities such as management, security, auditing, marketing, data processing, accounting, Introduction of new products, development and advertisement of same, opening, closing and withdrawal of accounts should be taken into account as well as the relative cost drivers are required to be identified. For an instance, opening, closing and withdrawal can be associated to the mortgage loans, savings and credit account. ABC will consider all these tasks as a contributor to the cost drivers. So, the overhead costs would be identified along with the products and services without less distortion risk. When the company will be able to identify the product unit, responsible for large revenue, it can accelerate the related activities to enhance its profitability further. Balanced Score Card Undoubtedly, this is also a significant tool for the banking and other financial services industry. In the wake of recent recession, the organisations have realised the significance of strong cash inflow and a stable profitability. The company must used profitability measurements like ROA, ROE, gross and net profitability margin to evaluate its financial perspectives and dig deep to see if they are able to fulfil the strategic objectives of the organisation. Satisfying the customers is of utmost importance. The company can use measurements to evaluate the customer satisfaction towards Barclays. In the process the effort should be put to enhance its internal processes to increase profitability and to enhance customer satisfaction. The company must not forget the significance of human resources. So, it should nurture its human resources to have required learning and growth which would ultimately contributes to the success of the company. Barclays must establish a strong coordination among these activities and align the same with its goals and objectives. Value Chain Analysis Value chain of any bank is an accumulation of several and primary and support activities. The primary activities of Barclays would include marketing and sales, product and transaction. Each of these would have certain components, adding value to the customers. Activities like advertising, sales support, market expansion, extensive and quality product offering, product expansion, payment, clearing settings are supposed to add value to the customers. The technological development, human resources of Barclays, infrastructure and risk management guidelines are assumed to be the supporting activities in the values. All of these activities are required to be performed in an effective way to add value to its customers. Conclusion Undoubtedly, the introduction of management accounting has been blissful for the companies. While in the traditional costing, products used to be charged for all activities irrespective of the contribution of those to the product or service. However, now the situation has been changed. The cost of the products or services is calculated considering all the activities, relevant to the products. Balanced score card and value chain analysis are also being used for the enhancement of customer satisfaction through a successful completion of all the activities and a tightened coordination among all its functions. However, in this report there are few deficiencies as it only includes three major tools used in the management accounting. Apart from that there are tools like total quality management, which are not being discussed in this paper. Despite of this fact, the report is supposed to be strong as three techniques have been discussed in considerably detailed matter, which has been significant while discussing those techniques in the light of Barclays Plc. Reference Anbuvelan, K. Management Concepts for Civil Engineers. Laxmi Publication, 2005. Hoovers. “Company Description”. 2010. Barclays Plc. December 24, 2010. < http://www.hoovers.com/company/Barclays_PLC/crkhci-1.html>. Bibliography Hopwood, G. A. & Miller, P. Accounting as social and institutional practice. Australia: Cambridge University Press, 1994. Kaplan, S. R. & Atkinson, A. Advanced management accounting. Prentice Hall, 1998. Kaplan, S. R. & Anderson, R. S. Time-driven activity-based costing. Harvard Business School Publishing Corporation, 2007. Khan, Y. M & Jain. Management Accounting. McGraw Hill, 2006. Patankar, S. Management Accounting. Nirali Prakshan, 2008. Read More