Guide to Strategic Management Accounting for managers: What is management accounting that can be used as an immediate force by connecting the management team and the operation field?

By Shigeaki Takai

Strategic Management Accounting that creates change resilience and enhances financial strength and profitability
It has been one year and three months since WHO recognized the new coronavirus as a pandemic on March 11, 2020. The infection of the new coronavirus has spread all over the world, and the social and economic conditions of the globalized world have been severely damaged, and its vulnerabilities have been highlighted.

• Deterioration of break-even point due to decrease in sales
• Expanding the gap between management and on-site awareness due to the impact of the COVID-19
• Increasing number of internal frauds, fraudulent accounting of overseas subsidiaries, and inadequate internal control
• Roadmap, goal setting and concrete measures for the realization of a carbon-free society

Under these circumstances, what is most needed is the ability to respond to change by making use of hypotheses and verifications, in addition to the wisdom accumulated in the past, such as failure experiences and success experiences.
In order to build a corporate structure that responds to change, it is necessary to manage change points by narrowing the pitch rather than managing goals. To that end, it is urgent to align the common operation cycle weekly, chain conventional management indicators (financial indicators and non-financial indicators), and manage the cockpit with the idea of ​​the Balanced Scorecard.
As an inventory-centric management consultant, I advocate management accounting that can be used as an immediate force by connecting the management team and the field. In particular, as an evangelist of CCC (cash conversion cycle) and IFC (inventory freshness management) based on the latest case studies of more than 100 Japanese, American and European companies, we explain to executives, business managers, practitioners and students in an easy-to-understand manner in this book.
In addition to the decarbonized society, this book also mentions food issues, marine plastic issues, and clothing disposal issues as non-financial information.
Table of contents
Chapter 1
Management Accounting and Corporate value creation index Management Accounting and Financial Accounting Fixed costs, Variable costs and Break-even point management Corporate value management indicators, especially ROE, ROIC and case studies
Chapter 2
Working capital and Cash Conversion Cycle (CCC) Positioning of CCC CCC comparison between Japan and U.S. and case studies Inventory turnover days as key SCM management indicator Change-responsive company under the COVID-19
Chapter 3
The relation between Inventory and finance What is inventory management? Inventory from financial perspectives
  Profit and Loss statement and Inventory
  Balance sheet statement and Inventory
  Cash Flow statement and Inventory
(3) Stock-out-rate, Appropriate inventory level and Inventory evaluation
Chapter 4
Non-Financial Information
(1) ESG and SDGs
(2) Food problem, Ocean plastic problem
(3) Paris Agreement (greenhouse gas emissions)
(4) Decarbonized society: World trends and the position of the Japanese government
(5) International organizations related to the environment (TCFD, SBT Initiative, RE100)
Chapter 5
Reduction of accounting fraud risks
(1) Increasing accounting fraud risks and countermeasures
(2) Fraud triangle (opportunity, motivation, justification)
Chapter 6
Effective Measures
Chapter 7
Effective management methods
Chapter 8  
Key issues in Japanese commercial practices and accounting system
 

• Language: English
• Publisher: none
• Release date: Jun 21, 2021
• ISBN: 9791220817363

Book preview

Introduction

Strategic Management Accounting that creates change resilience and enhances financial strength and profitability

It has been one year and three months since WHO recognized the new coronavirus as a pandemic on March 11, 2020. The infection of the new coronavirus has spread all over the world, and the social and economic conditions of the globalized world have been severely damaged, and its vulnerabilities have been highlighted.

There is also an interpretation that the background of the virus outbreak is the destruction of the ecosystem due to human beings ignoring nature and promoting economic activities. It can be said that it is necessary to recognize once again that human society is closely related to the natural environment. Early detection of mutant viruses, testing and quarantine and vaccination have proved to be the most effective means of terminating them.

VUCA era (from the 2010s)

VUCA is an acronym for Volatility, Uncertainty, Complexity, and Ambiguity, and is a term that describes the modern chaotic economic environment. In other words, it means unpredictable condition. In addition, global warming and environmental issues are the most important and urgent issues for ESG and SDGs. Awareness of the decarbonization company association has made great strides in the past year.

A decarbonized society is a society that achieves virtually zero greenhouse gas emissions, which causes global warming. By controlling greenhouse gas emissions and recovering the emitted carbon dioxide, greenhouse gas emissions are reduced to zero as a whole. The concept of controlling carbon dioxide emissions, which cause global warming, is also called carbon neutral.

The world is aiming for carbon neutrality by 2050 toward the goals set by the 2015 Paris Agreement.

Specifically, we will strive to keep the world average temperature rise well below 2 ° C compared to before the Industrial Revolution and keep it at 1.5 ° C. Therefore, we will peak out global greenhouse gas emissions as soon as possible, and in the latter half of the 21st century, we will balance greenhouse gas emissions and absorption (by forests, etc.).

As a matter of fact, extreme weather events caused by rising seawater temperatures are causing enormous damage in various parts of the world. The reality that the business and living environment, which had been smooth sailing until yesterday, could change suddenly overnight will continue to repeat.

And it will be difficult for corporate activities to sustainably develop companies that do not contribute to a carbon-free society.

I think that all companies in the manufacturing, distribution, and retail industries are required to take three initiatives.

Stage 1 The stage of controlling carbon dioxide (CO2) emitted by the company's production activities or reducing it to zero online.

Stage 2 The stage that targets indirect emissions through the use of electricity associated with production activities.

Stage 3 The stage of aiming for decarbonization including all supply chains other than our own, such as purchasing raw materials, assembling subcontractors, and selling.

In this book, as non-financial information, in addition to the decarbonized society, food problems, marine plastic problems and clothing waste loss are also mentioned.

Management accounting is quite different from financial accounting and tax accounting in terms of purpose and method.

Financial accounting and tax accounting are intended to be disclosed to the outside, and management accounting is intended to be analyzed from the accounting side within the company. Since financial accounting is open to the outside, it is based on corporate accounting principles, but management accounting is used only to create internal materials, so there are no particular standards.

In-house annual planning, departmental income statement, and cost accounting are common and depend on the department that handles the settlement of accounts. These contributions will be made to the entire company and the business division. So, what does management accounting for corporate executives mean? It will be performance management integrated with business strategy.

-Deterioration of break-even point due to decrease in sales

-Expanding the gap between management and on-site awareness due to the impact of the COVID-19

-Increasing number of internal frauds, fraudulent accounting of overseas subsidiaries, and inadequate internal control

-Roadmap, goal setting and concrete measures for the realization of a carbon-free society

Under these circumstances, what is most needed is the ability to respond to change by making use of hypotheses and verifications, in addition to the wisdom accumulated in the past, such as failure experiences and success experiences.

In order to build a corporate structure that responds to change, it is necessary to manage change points by narrowing the pitch rather than managing goals. To that end, it is urgent to align the common operation cycle weekly, chain conventional management indicators (financial indicators and non-financial indicators) and manage the cockpit with the idea of the Balanced Scorecard.

As an inventory-centric management consultant, I advocate management accounting that can be used as an immediate force by connecting the management team and the field. In particular, as an evangelist of CCC (cash conversion cycle) and IFC (inventory freshness control) based on the latest case studies of more than 100 Japanese, American and European companies, we explain to executives, business managers, practitioners and students in an easy-to-understand manner in this book.

Cashing speed

In case of manufacturing industry, there is a process of purchasing raw materials, manufacturing, selling, and collecting money on products sold, and in case of wholesale industry, there is a process of purchasing goods, selling and collecting money. In the process of the corporate activity of purchasing products, selling and collecting payment, when paying the purchase price of goods before receipt of money on products sold in order to compensate for the time lag, the fixed cash is needed. This is called working capital.

When a working capital increases, cash is newly needed, and when a working capital decreases, it becomes unnecessary to prepare cash of the part conversely. There is a cash conversion cycle (CCC) as a financial indicator a company indicates the efficiency and speed for funds to be collected. In this book, it is called the cashing speed.

CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payable Outstanding (DPO)

The effect of accelerating this cashing speed has not only strengthening the operation but also reducing the room for the occurrence of fraud accounting as much as possible. For example, in addition to fictional sales and purchasing, fraud will be limited in accounts receivable, inventory and accounts payable that appear on B/S. It will not be necessary to analyze whether the financial statement of accounts is fraudulent by AI or big data after closing the fiscal year-end. As a result, it will surely lead to improved profitability and creation of corporate value.

Although Cash Conversion Cycle is widespread in Europe and the United States, it is not yet popularized in Japan except for some companies.

Freshness is the life of products and information

One of my inscriptions is freshness is the life of products and information. Isn't this applicable regardless of industry or industry? This book is also quite different from conventional books in that it explains CCC using the latest quarterly financial results (around the end of March 2021) that can be grasped at the time of publication.

We emphasize the freshness of information and explain it based on the last 3 years (12 quarters).

In addition, my books titled Guide to Japan-born Inventory Freshness Control for managers written in English and Japanese, and e-book titled Guide to Japan-born Inventory and Accounts Receivable Freshness Control for managers written in English, Japanese, Chinese, Vietnamese and Thai , Guide to Management Accounting Inventory turnover for managers written in English and Japanese and Guide to Management Accounting CCC (Cash Conversion Cycle) for managers written in English and Japanese would be of great help for your understanding.

June 2021

Inventory-centric management consultant Shigeaki Takai

Chapter 1

Management Accounting and Corporate value creation index

This chapter outlines management accounting and financial accounting and introduces break-even point management and corporate value management indicators, especially ROE (return on equity), ROIC (return on invested capital) and operational examples of other companies in an easy-to-understand manner.

(1) Management Accounting and Financial Accounting

Let's start with the business process in mind.

When developing a new business, the following process can be considered regardless of industry. Mr. Takeshi Hioki advocates seven processes in his book Accounting & Finance the Business Leader is Learning (Chuo Keizai Sha).

1) Business environment analysis

Generally, analyze the situation of internal environment and external environment comprehensively from the viewpoint of SWOT analysis (Strength, Weakness, Opportunity, Threat).

-Strength: internal characteristics that contribute to achieving goals

-Weakness: internal qualities that will hinder the achievement of goals

-Opportunity: external characteristics such as new entry, which can expect sales contribution

-Threat: external characteristics that impede achievement of goals

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2) Vision / Target

It is an area that demonstrates specificity according to the business environment and corporate philosophy that you enter, and it is needless to say that setting based on the long-term perspective is important.

3) Management strategy / plan

The Competitive Strategy proposed by Michael E. Porter in 1980 is too famous. Let me briefly explain it along with the Lanchester strategy advocated by Nobuo Taoka in Japan in 1972.

The Competition Strategy identifies five strengths and determines whether or not the industry structure is attractive (= profitable) by five competitive factors such as competitors, new entrants, suppliers, customers and substitutes It analyzes the effectiveness of planning strategy based on the analysis, and it advocates three basic strategies.

1.Cost Leadership Strategy: In general, strategies for companies with strong financial strength and large companies

2.Differentiation strategy: Generally, strategies for companies with certain amount of capital and large companies

3.Concentration strategy: In general, strategies that are easy to utilize even for companies with limited management resources

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The Lanchester strategy is the competition strategy born in Japan which is based on the Lanchester's Theory of Warfare (the battle law proposed by British aeronautical engineering researcher Frederick W. Lanchester (1868-1946) during the World War I). Here I will explain the Lanchester strategy for the stronger and the Lanchester strategy for the weaker.

Rule # 1 of Lanchester's Theory of Warfare: It applies to the case of a primitive battle where a one-on-one fights, a narrow range (local battle), and an enemy approaches and fights (approaching fight).

Combat strength = weapon efficiency × number of troops

Rule #2 of Lanchester's Theory of Warfare: A battle method that a group fights using modern weapons (called stochastic weapons) that can attack multiple enemies at the same time is called stochastic warfare, and in a wide range (wide area battle), with enemies It applies to fight away (remote warfare) case.

Battle power = weapon efficiency × square of the number of force

Lanchester strategy is the application of Lanchester's Theory of Warfare to business. They will replace combat capabilities with sales force that pioneers customers and boosts sales and secures profits. And weapons are product power, military power is equivalent to sales power.

Mr. Yoshiaki Kawakatsu explains in his book titled Nidec Motor V-shaped recovery management textbook Toyo Keizai Lanchester strategy is a strategy used by Toyota. According to it, in the 1970s, Toyota and Nissan, the big two of the automobile industry set the stage of high growth, took a fierce share competition, and the market share was in a state of equilibrium at all.

As a catch phrase describing the two companies at the time, Toyota recovered its inferiority against Nissan, which had the head of a day on the technical aspects of the car, as said Strong Technology of Nissan and Strong Sales Power of Toyota To focus on the usefulness of the Lanchester strategy, Toyota has been effectively used the dealer's ability to put in force (Compared to Nissan, how many salesmen will be able to win the area?) in order to use it for all-round warfare.

According to Mr. Kawakatsu, he joined Nidec Motor as a director in charge of M&A and reconstructed Nidec Motor Shibaura just recently acquired, the rebuilding target imposed by President Nagamori is To make the company profitable within one year, Doubles in Sales within 1 Year Measures for that are said to be only one line of message, i.e., to achieve 100 visits monthly per salesperson.

When applying to the Lanchester strategy, to double the company's sales by the previous term is to double the battle result. Required market input energy amount = 2 squared, or 4 times.

If the current salesman's average number of visits is 20 per month, it is necessary to set to 80. If you do not change the number of visits, you will need four time as many as salesman. He says that it is not a costly method of increasing the number of salespeople, it is necessary for the company to produce certain results based on existing factor, that is, without cost increase (fixed cost).

It is quite interesting that Nidec Motor is practicing the following sales activity equation.

Sales = number of visits × inquiries rate (number of inquiries / number of visits) × order rate (number of orders / number of inquiries) × unit order price

In today's competitive era, it is difficult to raise the unit order price, so to raise sales, you can list the number of visits, the number of inquiries, the number of orders received.

In the Lanchester strategy, only companies with the largest market share (42% market share) are strong, and the second and lower are defined as weaker.

Lanchester strategy for the stronger: It is called Meet strategy and it means to contain the differentiation strategy of the weaker. If we bring it to homogenization competition weapon efficiency will be equal so the number of soldiers will decide the outcome. Imitation, follow-up, second-order strategy, etc. are called meet.

Lanchester strategy for the weaker: called differentiation strategy, Mr. Yoichi Takeda in his book entitled Lanchester winning strategy for the weaker - Fifteen Principles to win the stronger. Business Sha has proposed nine strategic concepts.

1. Discard the whole idea and subdivide gist.

2. Choose an easy-to-win scene.

3. Aim for No.1 by devoting themselves to emphasis.

4. Focus on local match for sales activities.

5. Increase battle time.

6. Approach the users in close combat.

7. Maintain high degree of freedom with light equipment.

8. Execute immediately with first strike.

9. Take secret behavior and does not appear on the surface.

(Source: Lanchester winning strategy for the weaker - Fifteen Principles to win the stronger. Yoichi Taoka, Business Sha is reorganized for reference)

It is interesting that Mr. Michael E Porter's Competitive Strategy is in common with the Lanchester strategy.

Recently, all organizations comprising society including government agencies and companies towards ESG (Environmental, Social and Governance) and SDGs (Sustainable Development Goals) are increasing discussions on how to contribute towards the achievement.

Worldwide institutional investors are focusing on the ESG investment (investment method to select business partners to be invested by corporate efforts in three fields of environment, society, corporate governance), mainly by pension funds in Europe and the United States. In Japan, the words ESG management, SDGs management are spreading. Companies have expanded disclosure of non-financial information such as ESG, and in FY2019 a new integrated report covering both financial and non-financial issues was issued, with more than 500 companies issuing. Investors have come to select companies not only with short-term profitability but also with total strength that takes into account sustainability. The spread of non-financial disclosures will increase the flow of funds toward companies with excellent total power. (Nikkei newspaper of March 17, 2020)

The Nikkei newspaper on August 12, 2019, reported the world's top 100 companies on a new index called ROESG, which combines RОE and ESG. Of these, 51 were American companies, 24 were European companies and 4 Japanese companies (Kao, KDDI, NTT DOCOMO and JT Japan Tobacco).

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(Source: Nikkei newspaper on August 12, 2019)

ROESG calculation method

The ESG scores used the ratings as of the end of March 2019 of five ESG rating agencies in Arabesque, Sustainalytics, FTSE, MSCI and Robeco. The top 10% of the companies were scored as perfect (1 point), and 0.1 points were reduced by 10% for each 10%, and the scores of the 5 companies were averaged. Up to 30% of the premium was put on the top, with the highest score of 1.3. The three-term average of ROE was calculated from the QUICK fact set data and multiplied by the ESG score.

For companies with a market capitalization of $ 30 billion or more and a capital adequacy ratio of 20% or more, the return on equity (ROE), which indicates capital efficiency, was multiplied by the ESG score. Only 263 companies with scores from all five rating agencies were targeted.

Today, efforts to contribute to the further development and growth of the global society and economy are required worldwide.

4) Organization / management resources

Plan to raise funds, as people, goods and money are said to be assets of corporation. In addition, information is also an important management resource.

5) Execution P (Plan)

We execute capital investment, also manage risks during the course of execution.

6) Evaluation C (Check)

We evaluate the performance quantitatively by management index. In terms of profitability for capital investment, we will also evaluate by NPV (Net Present Value), IRR (Internal Rate of Return), investment recovery period methods, ROI (Return On Investment), and allocate net income, which is the result of our business activities, by dividend etc.

7) Improvement A (Act)

It goes without saying that corporate value can be raised by continuously implementing improvement at the last A of the PDCA cycle. I will talk about PDCA for problem solving here.

I would like to introduce the theory of the field force (Mr. Isao Endo, Chairman of Roland Berger Japan) for PDCA of problem-solving. According to Mr. Endo, the PDCA cycle of problem-solving is as follows. P stands for Problem-finding (find the problem), D stands for Display (make the problem visible), C stands for Clear (get rid of the problem) and A stands for Acknowledge (confirm the problem solved).

Whereas the PDCA for planning achievement traditional cycle starts from P (Plan), the PDCA for problem solving starts from P (Problem).

In order to aim at the autonomous problem-solving organization, there