I’m not sure when or why this happened, but at some point, holding people fully accountable for their work became very non-politically correct. The idea of “getting on the bus” and building a culture of consensus/conformity has become the norm. I’ve been asked to write on this before, but really needed somewhere to start.
Today, while waiting in my office for a meeting to start, I picked up an old Fortune magazine and proceeded to flip through the pages. In it, I came across an article that described how Steve Jobs and Apple applied the concept of a “directly responsible individual,” referred to as the DRI, within the organization. What does that mean?
With every project, there is one specific person, the DRI, who is totally responsible for its success or failure.
Since my meeting was a 2014 budget review for open entry-level positions and internships, my thoughts segued from the…
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You want your highly talented, top producing employees to stay? Give them more money, right? Well, not necessarily. Sure offering a fair, competitive salary will help attract great talent. To retain great employees they need to be engaged (no, not to each other). What is an engaged employee? Here is how Gallup defines the levels of employee engagement8.
• ENGAGED employees work with passion and feel a profound connection to their company. They drive innovation and move the organization forward.
• NOT-ENGAGED employees are essentially “checked out.” They are sleepwalking through their workday. They are putting in time, but not enough energy or passion into their work.
• ACTIVELY DISENGAGED employees aren’t just unhappy at work; they’re busy acting out their unhappiness. Every day, these workers undermine what their engaged co-workers accomplish.
- Just a 5% increase in your employees overall engagement converts into a…
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This week I’m at the 2012 HR Technology Conference (Twitter: #HRTechConf) where the scene is more than cool – it is hip. In the past several years technology for human resources – now more often called human capital management – has transformed from administrative software to applications anyone in the workforce can use to access information about their company, job, goals, performance, pay, benefits and even what they can do to advance in the organization. HR technology is embracing the six most important current technology trends, namely big data, business analytics, business collaboration, cloud computing, mobile technology and social media. At this year’s conference, the focus on business collaboration called social collaboration and mobile was front and center.
Over the last decade, employee and manager self-service applications have become available for rent via cloud computing and software as a service, letting companies pay only for what they actually use and…
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Social recruiting. It sounds good, it’s ‘buzzy’ – but what does it really mean? More importantly, how can someone new to social media recruiting get started? This is a broad topic; as social recruiting is complex thing with many layers. Over time with, we’ll dissect the layers through a variety of posts covering topics like social referrals, Facebook company pages, employment branding, and sourcing – but today we’re going to focus on using Twitter as a recruiting tool. Specifically, we’ll be sharing tips on how to create, launch, and grow a corporate recruiting Twitter account.
These are some steps I recommend you take (or at least consider) when launching a social recruiting effort on Twitter. This isn’t designed to be an exact blueprint as every company and culture is different so you should personalize these suggestions for your organization. To that point, understand from the outset that you should…
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If you are in finance, you are a risk manager. Say what? Risk management! Imagine being the hub in a spoke of functional areas, each of which is embedded with a risk pattern that can vary over time. A sound finance manager would be someone who would be best able to keep pulse, and be able to support the decisions that can contain the risk. Thus, value management becomes critical: Weighing the consequence of a decision against the risk that the decision poses. Not cost management, but value management. And to make value management more concrete, we turn to cash impact or rather – the discounted value of future stream of cash that may or may not be a consequent to a decision. Companies carry risks. If not, a company will not offer any premiums in value to the market. They create competitive advantage – defined as sorting a sustained growth in free cash flow as the key metric that becomes the separator.
John Kay, an eminent strategist, had identified four sources of competitive advantage: Organization Architecture and Culture, Reputation, Innovation and Strategic Assets. All of these are inextricably intertwined, and must be aligned to service value in the company. The business value approach underpins the interrelationships best. And in so doing, scenario planning emerges as a sound machination to manage risks. Understanding the profit impact of a strategy, and the capability/initiative tie-in is one of the most crucial conversations that a good finance manager could encourage in a company. Product, market and internal capabilities become the anchor points in evolving discussions. Scenario planning thus emerges in context of trends and uncertainties: a trend in patterns may open up possibilities, the latter being in the domain of uncertainty.
There are multiple methods one could use in building scenarios and engaging in fruitful risk assessment.
- Sensitivity Assessment: Evaluate decisions in the context of the strategy’s reliance on the resilience of business conditions. Assess the various conditions in a scenario or mutually exclusive scenarios, assess a probabilistic guesstimate on success factors, and then offer simple solutions. This assessment tends to be heuristic oriented and excellent when one is dealing with few specific decisions to be made. There is an elevated sense of clarity with regard to the business conditions that may present itself. And this is most commonly used, but does not thwart the more realistic conditions where clarity is obfuscated and muddy.
- Strategy Evaluation: Use scenarios to test a strategy by throwing a layer of interaction complexity. To the extent you can disaggregate the complexity, the evaluation of a strategy is better tenable. But once again, disaggregation has its downsides. We don’t operate in a vacuum. It is the aggregation, and negotiating through this aggregation effectively is where the real value is. You may have heard of the Mckinsey MECE (Mutually Exclusive; Comprehensively Exhaustive) methodology where strategic thrusts are disaggregated and contained within a narrow framework. The idea is that if one does that enough, one has an untrammeled confidence in choosing one initiative over another. That is true again in some cases, but my belief is that the world operates at a more synthetic level than pure analytic. We resort to analytics since it is too damned hard to synthesize, and be able to agree on an optimal solution. I am not creaming analytics; I am only suggesting that there is some possibility that a false hypothesis is accepted and a true one rejected. Thus analytics is an important tool, but must be weighed along with the synthetic tradition.
- Synthetic Development: By far the most interesting and perhaps the most controversial with glint of academic and theoretical monstrosities included – this represents developing and broadcasting all scenarios equally weighed, and grouping interaction of scenarios. Thus, if introducing a multi-million dollar initiative in untested waters is a decision you have to weigh, one must go through the first two methods, and then review the final outcome against peripheral factors that were not introduced initially. A simple statement or realization like – The competition for Southwest is the Greyhound bus – could significantly alter the expanse of the strategy.
If you think of the new world of finance being nothing more than crunching numbers … stop and think again. Yes …crunching those numbers play a big part, less a cause than an effect of the mental model that you appropriate in this prized profession.
Accounting and Economics: The Relevance!
This blog is not meant to teach accounting. Target audience is the folks in finance and accounting in small to midsize organizations. You are expected to know the fundamentals of accounting. In the event that you visit this site without knowledge of accounting, I would suggest that you look at the presentation that I have, and www.accountingcoach.com which is a fairly good site to teach you the fundamentals.
It is important to recognize that the fundamental goal of accounting/finance is to best reflect the historical and prospective economics of the business. My schooling has been in economics. For the most part, we (the economists) would look upon accounting with a fair degree of contempt, until reality hit us when we were looking for jobs. I was specifically trained in Austrian Economics and Economic Philosophy in one extreme, and then graduate studies in Mathematical Economics. Neither of which provided me sufficient opportunities to land the job I would have liked to have had then. So necessity forced me into finance, at which point I was specifically urged to also specialize in accounting. One of my professors put it this way – “Finance without accounting is like clapping with one hand.” That left an indelible impression in my mind. So despite my deep-rooted angst against bean-counting, I happenstance entered this profession.
But it was not long after that I realized that economics and accounting do make good bedfellows. As I dove into the theoretical aspects which also meant reading up on much of the debates that occur in the field, it dawned upon me that the aim of the accounting professions was to create a set of standards that would best represent the current and future economic state of the business. Better put, the best standards in accounting would evolve into that pinnacle of perfection where all representations in accounting are congruent to optimal theoretical economic standards. Once we understand this, then things start falling in place. The natural question that you may ask – is it possible for accounting to even come asymptotically close to what constitutes the “true economics”. My response: Not always. To add more clarity: A better response would be a blunt NO. Some things cannot be practically implemented in a double-entry system, and the changing fact patterns that are endemic to all businesses now. So there is always the catch-up, but for your purposes – the catchup is always toward identifying the best and most practicable solutions to reflect the true economics.
Why is this important? Is this purely academic? Does my above explanation lend any light or merit to what you do today and what you may do tomorrow? I would argue – YES. Tremendously so! Why? Because accounting is an application of general principles to gauge true economics! This means that you will have to keep the economics in mind when you resort to interpretation and application.
Let me give you a simple example. A small case study! Many of you will run into an issue where you may have to go back and reconcile a balance sheet item. One key item that is often investigated is what is sitting in your Accrued Liabilities. Since Balance Sheet is a reflection of the liabilities at a given point of time, the question that you may want to ask at that point of time is – If we were to liquidate the company today, how much of the accrued liabilities are true. If there is a difference between what you think is economically the right amount now versus what you see in the balance sheet, and you have been diligent in your forensics … it would make logical sense to increase or decrease the liabilities to reflect your economic standing now. At least, you have a fairly good sense of what it should be, and lay the foundation to be able to figure out why the difference. These are smple heuristics that we have to resort to in order to get a fair shot at comprehending the state of the finances in the organization.
It is thus extremely important to keep in mind the definition of what constitutes the key data elements in an accounting statement. The key data elements are:
Assets: Probable future economic benefit that an entity controls due to past transactions.
Liabilities: Probable future economic obligations that an entity has due to past transactions
Equity: Net worth of the company reflected as the total assets minus the total liabilities
Income: Reflects increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants
Expense: Reflects decreases in economic benefits during the accounting period in the form of outflows or decreases of assets or increases of liabilities that result in decreases in equity, other than those relating to draws against equity from equity participants
The above elements are the key elements, and then you have a myriad of sub-elements. All of the above and the sub-elements have myriads of rules that can be applied based on fact patterns. In audit terminology, these elements are tested for presentation, existence, rights and obligations, completeness and valuation. These five tests can be applied to all relevant accounts. In some instances, one account like Accounts Receivable may have to meet all the tests whereas some accounts like Depreciation Expenses do not.
I will be diving into more details on some of the key elements over time, and summarizing the key pronouncements that you need to be aware of. Obviously, you may be applying some of these, but more importantly, you will need to know this to better do the financial analysis of statements. I am just providing a simple building block. As I said before – In order to do good financial analysis, you must be cognizant of the accounting shenanigans … and good financial analysis coupled with sound economic reasoning and robust models will lead to strong financial planning.
On February 24, 2010, the Securities and Exchange Commission (“SEC”) issued a statement reaffirming its support for a single set of globally accepted accounting standards, yet refrained from establishing a firm timeline for incorporating such standards into the U.S. financial reporting system. The SEC’s statement encourages efforts currently underway to harmonize U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”) and directs SEC staff to develop and execute a work plan on the potential adoption of IFRS for U.S. public companies.
The statement provides that, assuming certain milestones are met, the SEC will be in a position to determine in 2011 whether to transition the U.S. financial reporting system from GAAP to IFRS. If the SEC decides in 2011 that U.S. public companies should transition financial reporting to IFRS, then the statement indicates that the earliest U.S. issuers would be required to report under the new system likely would be 2015.
An overview of the SEC’s statement and work plan is set forth below, and the full text is available at http://sec.gov/rules/other/2010/33-9109.pdf.
Background: Convergence Efforts and the Potential Transition to IFRS
The SEC’s statement comes amid wider efforts to move toward a single set of high-quality, globally accepted accounting standards. The primary goal of these efforts is to enhance the comparability of reporting companies’ financial statements for investors, analysts, and other market participants.
Since 2002, the Financial Accounting Standards Board (“FASB”), which sets standards for U.S. companies, and the International Accounting Standards Board (“IASB”), which establishes IFRS, have worked together to harmonize their financial reporting systems. These efforts gained urgency in September 2009 when leaders of the Group of Twenty nations (“G-20”) called upon the standard-setting bodies to re-double their efforts and complete their convergence projects by June 2011. FASB and IASB expressed commitment to meet this goal in a November 2009 joint statement.
In addition to voicing support for convergence projects, the SEC has taken steps toward the adoption of IFRS for U.S. issuers. In November 2008, the SEC proposed a roadmap for IFRS’s incorporation into the U.S. reporting system. The roadmap proposed a number of milestones and prompted over 200 comments from a wide range of market participants.
Overview of Statement and Work Plan
As the SEC’s first significant action on IFRS since the 2008 roadmap, the SEC’s statement voiced continued support for uniform global accounting standards and signaled that much work remained before any transition to IFRS could occur.
The statement directs SEC staff to develop and carry out an ambitious work plan to assist the SEC in its determination of whether, when, and how to transition to IFRS. Influenced by comments on the 2008 roadmap, the work plan includes six specific areas that SEC staff will analyze relating to a potential transition to IFRS:
1. Sufficient development and application of IFRS for the U.S. domestic reporting system. SEC staff will examine the comprehensiveness of IFRS, the ability to audit and enforce IFRS, and the comparability of IFRS financial statements within and across jurisdictions.
2. The independence of standard setting for the benefit of investors. SEC staff will evaluate oversight of the IFRS Foundation, the body that oversees IASB; composition of the IFRS Foundation and IASB; funding of the IFRS Foundation; the IASB standard-setting process; and whether the IFRS standard setter comports with the requirements of U.S. law.
3. Investor understanding and education regarding IFRS. SEC staff will analyze U.S. investors’ current knowledge of IFRS, gather information on how U.S. investors educate themselves about changes in accounting standards, and consider how to improve U.S. investor understanding of IFRS prior to its adoption.
4. Examination of the U.S. regulatory environment that would be affected by a change in accounting standards. Because U.S. issuers provide financial information to a number of regulators, some of which rely on GAAP, SEC staff will study effects that a transition to IFRS for SEC reporting purposes would have on the wider domestic regulatory environment.
5. The impact on issuers from a transition to IFRS. SEC staff will examine the effect on U.S. public companies, both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations, and litigation contingencies.
6. Human capital readiness. SEC staff will assess the preparedness for a transition to IFRS of all parties involved in the U.S. financial reporting process, including investors, preparers, auditors, regulators, and educators.
The statement requires that SEC staff provide written, public progress reports on the work plan beginning in October 2010 and frequently thereafter until the work plan is completed in 2011 (without giving a more definitive time frame).
In addition to directing SEC staff to execute the work plan, the statement provides a tentative timeline for subsequent SEC actions. Assuming the GAAP-IFRS convergence projects and the SEC staff’s work plan are completed as scheduled, the SEC believes it will be in a position to determine in 2011 whether to transition the U.S. domestic reporting system to IFRS. If the SEC decides in 2011 to make such a transition, then the statement suggests that the first time U.S. public companies would be required to report under the new system would be 2015 or 2016. The work plan, however, will further evaluate this timeline. The statement indicates that the SEC is no longer contemplating voluntary early adoption of IFRS by U.S. public companies, although that too is subject to change.
What Companies Should Do Now
U.S. public companies should consider taking the following steps in light of the SEC’s recent statement:
- Monitor GAAP-IFRS convergence efforts. As FASB and IASB work to complete convergence projects by June 2011, there is potential for significant changes to GAAP in the near term. The two systems of accounting standards deal differently with certain issues–for example, accounting for contingencies–and efforts to bridge these differences could entail modifications to GAAP that would have significant ramifications for U.S. public companies. FASB currently has a number of accounting standards under review with an eye toward harmonizing them with IFRS. Companies will be well advised to watch FASB’s activities in these areas and make an effort to understand the impact of such changes on their own financial reports and disclosures.
- Communicate concerns with potential IFRS adoption to SEC staff. The work plan states that SEC staff will gather information relating to IFRS adoption through a variety of methods, including seeking comment from and holding conversations with U.S. public companies. Companies with concerns about IFRS may seek to participate in these discussions with SEC staff.
- Communicate with auditors regarding IFRS adoption issues. U.S. public companies also may wish to communicate their concerns regarding the adoption of IFRS with their auditors. Auditors often have significant knowledge of transitional issues relating to IFRS and can provide a strong voice with regulators.
- Communicate with auditors about accounting system and other changes that may be required in the event IFRS is adopted. Although still seemingly well into the future, as the convergence process proceeds, companies should consult with their auditors about any changes in systems and procedures that may be required to implement changes required by convergence and the lead times, training and changes in procedures that may be required to implement any such changes. It is fair to assume that some of these transition efforts will take months, if not years, to implement, and having an early assessment of the lead time needed will prove helpful.
I will be laying out, in simple layman terms, all of the elements in what one needs to know in financial management to run small to medium organizations. I hope you will find this as a good reference point, and help you focus on key aspects. Along the way, I will upload several tools and utilities that I have developed that will also be the key essentials in financial operations. As the main blog indicates — there are base requirements which constitutes fundamental financial knowledge, and then it extends into other aspects, including but not limited to areas like systems, analytics, key strategic models and even legalese.
Here is a pdf of a document that I prepared based on a pro-bono course that I gave two years ago in the city for employment training. It is really wonderful to share this information and I am happy to acknowledge the web as being a fine source of much of this information, while some information have been modified based on students’ responses.