smoothly ahead. Managers will need to manage the project actively through to com- pletion. This, in turn, will require further information-gathering exercises. Management should receive progress reports at regular intervals concerning the pro- ject. These reports should provide information relating to the actual cash flows for each stage of the project, which can then be compared against the forecast figures provided when the proposal was submitted for approval. The reasons for significant variations should be ascertained and corrective action taken where possible. Any changes in the expected completion date of the project or any expected variations from budget in future cash flows should be reported immediately; in extreme cases, managers may even abandon the project if circumstances appear to have changed dramatically for the worse. We saw in Real World 8.12, on p. 289, that Rolls-Royce undertakes this kind of reassessment of existing projects. No doubt most other well-managed businesses do this too. Project management techniques (for example, critical path analysis) should be employed wherever possible and their effectiveness reported to senior management. An important part of the control process is a post-completion audit of the project. This is, in essence, a review of the project’s performance to see if it lived up to expecta- tions and whether any lessons can be learned from the way that the investment process was carried out. In addition to an evaluation of financial costs and benefits, non-financial measures of performance such as the ability to meet deadlines and levels of quality achieved should also be reported. We should recall that total life-cycle costing, which we discussed in Chapter 5, is based on similar principles. The fact that a post-completion audit is an integral part of the management of the project should also encourage those who submit projects to use realistic estimates. Real World 8.15 provides some evidence of a need for greater realism. CHAPTER 8 MAKING CAPITAL INVESTMENT DECISIONS 306 ‘ REAL WORLD 8.15 Looking on the bright side McKinsey and Co, the management consultants, surveyed 2,500 senior managers world- wide during the spring of 2007. The managers were asked their opinions on investments made by their businesses in the previous three years. The general opinion is that estimates for the investment decision inputs had been too optimistic. For example, sales levels had been overestimated in about 50 per cent of cases, but underestimated in less than 20 per cent of cases. It is not clear whether the estimates were sufficiently inaccurate to call into question the decision that had been made. The survey went on to ask about the extent to which investments made seemed, in the light of the actual outcomes, to have been mistakes. Managers felt that 19 per cent of investments that had been made should not have gone ahead. On the other hand, they felt that 31 per cent of rejected projects should have been taken up. Managers also felt that ‘good money was thrown after bad’ in that existing investments that were not performing well were continuing to be supported in a significant number of cases. Source: ‘How companies spend their money: a McKinsey global survey’, www.theglobalmarketer.com, 2007. Other studies confirm a tendency among managers to use overoptimistic estimates when preparing investment proposals. (See reference 1 at the end of the chapter.) It seems that sometimes this is done deliberately in an attempt to secure project approval. M08_ATRI3622_06_SE_C08.QXD 5/29/09 3:31 PM Page 306 Where overoptimistic estimates are used, the managers responsible may well find themselves accountable at the post-completion audit stage. Such audits, however, can be difficult and time-consuming to carry out, and so the likely benefits must be weighed against the costs involved. Senior management may feel, therefore, that only projects above a certain size should be subject to a post-completion audit. Real World 8.16 describes how two large retailers, Tesco plc and Kingfisher plc, use post-completion audit approaches to evaluating past investment projects. MANAGING INVESTMENT PROJECTS 307 REAL WORLD 8.16 Looking back In its 2008 corporate governance report, Tesco plc, the supermarket chain, stated: All major initiatives require business cases to be prepared, normally covering a minimum period of five years. Post-investment appraisals, carried out by management, determine the reasons for any significant variance from expected performance. In its 2007/8 financial review, Kingfisher plc, the home improvement retailer, stated: An annual post-investment review process will continue to review the performance of all projects above £0.75 million which were completed in the prior year. The findings of this exercise will be considered by both the new Retail Board and the main Board and directly influence the assump- tions for similar project proposals going forward. Sources: The websites of Tesco plc (www.tescocorporate.com) and Kingfisher plc (www.kingfisher co.uk). As a footnote to our discussion of business investment decision making, Real World 8.17 looks at one of the world’s biggest investment projects, which has proved to be a commercial disaster, despite being a technological success. REAL WORLD 8.17 Wealth lost in the chunnel The tunnel, which runs for 31 miles between Folkestone in the UK and Sangatte in Northern France, was started in 1986 and opened for public use in 1994. From a techno- logical and social perspective it has been a success, but from a financial point of view it has been a disaster. The tunnel was purely a private sector venture for which a new busi- ness, Eurotunnel plc, was created. Relatively little public money was involved. To be a commercial success the tunnel needed to cover all of its costs, including interest charges, and leave sufficient to enhance the shareholders’ wealth. In fact the providers of long-term finance (lenders and shareholders) have lost virtually all of their investment. Though the main losers were banks and institutional investors, many individuals, particularly in France, bought shares in Eurotunnel. Key inputs to the pre-1986 assessment of the project were the cost of construction and creating the infrastructure, the length of time required to complete construction and the level of revenue that the tunnel would generate when it became operational. ‘ M08_ATRI3622_06_SE_C08.QXD 5/29/09 3:31 PM Page 307 The main points of this chapter may be summarised as follows: Accounting rate of return (ARR) is the average accounting profit from the project expressed as a percentage of the average investment. l Decision rule – projects with an ARR above a defined minimum are acceptable; the greater the ARR, the more attractive the project becomes. l Conclusion on ARR: – Does not relate directly to shareholders’ wealth – can lead to illogical conclusions. – Takes almost no account of the timing of cash flows. – Ignores some relevant information and may take account of some that is irrelevant. – Relatively simple to use. – Much inferior to NPV. Payback period (PP) is the length of time that it takes for the cash outflow for the initial investment to be repaid out of resulting cash inflows. l Decision rule – projects with a PP up to a defined maximum period are acceptable; the shorter the PP, the more attractive the project. l Conclusion on PP: – Does not relate to shareholders’ wealth. – Ignores inflows after the payback date. – Takes little account of the timing of cash flows. – Ignores much relevant information. – Does not always provide clear signals and can be impractical to use. – Much inferior to NPV, but it is easy to understand and can offer a liquidity insight, which might be the reason for its widespread use. SUMMARY CHAPTER 8 MAKING CAPITAL INVESTMENT DECISIONS 308 Real World 8.17 continued In the event l Construction cost was £10 billion – it was originally planned to cost £5.6 billion. l Construction time was seven years – it was planned to be six years. l Revenues from passengers and freight have been well below those projected – for example, 21 million annual passenger journeys on Eurostar trains were projected; the numbers have consistently remained at around 7 million. The failure to generate revenues at the projected levels has probably been the biggest contributor to the problem. When preparing the projection, planners failed to take adequate account of two crucial factors: 1 Fierce competition from the ferry operators. At the time (pre-1986), many thought that the ferries would roll over and die. 2 The rise of no-frills, cheap air travel between the UK and the continent. The commercial failure of the tunnel means that it will be very difficult in future for projects of this nature to be funded by private funds. Sources: Annual reports of Eurotunnel plc; Randall, J., ‘How Eurotunnel went wrong’, BBC news, 13 June 2005, www.newsvote.bbc.co.uk. M08_ATRI3622_06_SE_C08.QXD 5/29/09 3:31 PM Page 308 Net present value (NPV) is the sum of the discounted values of the net cash flows from the investment. l Money has a time value. l Decision rule – all positive NPV investments enhance shareholders’ wealth; the greater the NPV, the greater the enhancement and the greater the attractiveness of the project. l PV of a cash flow = cash flow × 1/(1 + r) n , assuming a constant discount rate. l Discounting brings cash flows at different points in time to a common valuation basis (their present value), which enables them to be directly compared. l Conclusion on NPV: – Relates directly to shareholders’ wealth objective. – Takes account of the timing of cash flows. – Takes all relevant information into account. – Provides clear signals and is practical to use. Internal rate of return (IRR) is the discount rate that, when applied to the cash flows of a project, causes it to have a zero NPV. l Represents the average percentage return on the investment, taking account of the fact that cash may be flowing in and out of the project at various points in its life. l Decision rule – projects that have an IRR greater than the cost of capital are accept- able; the greater the IRR, the more attractive the project. l Cannot normally be calculated directly; a trial and error approach is often necessary. l Conclusion on IRR: – Does not relate directly to shareholders’ wealth. Usually gives the same signals as NPV but can mislead where there are competing projects of different size. – Takes account of the timing of cash flows. – Takes all relevant information into account. – Problems of multiple IRRs when there are unconventional cash flows. – Inferior to NPV. Use of appraisal methods in practice: l All four methods identified are widely used. l The discounting methods (NPV and IRR) show a steady increase in usage over time. l Many businesses use more than one method. l Larger businesses seem to be more sophisticated in their choice and use of appraisal methods than smaller ones. Investment appraisal and strategic planning It is important that businesses invest in a strategic way so as to play to their strengths. Dealing with risk l Sensitivity analysis (SA) is an assessment, taking each input factor in turn, of how much each one can vary from estimate before a project is not viable. – Provides useful insights to projects. – Does not give a clear decision rule, but provides an impression. – It can be rather static, but scenario building solves this problem. l Expected net present value (ENPV) is the weighted average of the possible outcomes for a project, based on probabilities for each of the inputs: – Provides a single value and a clear decision rule. – The single ENPV figure can hide the real risk. SUMMARY 309 M08_ATRI3622_06_SE_C08.QXD 5/29/09 3:31 PM Page 309 – Useful for the ENPV figure to be supported by information on the range and dispersion of possible outcomes. – Probabilities may be subjective (based on opinion) or objective (based on evidence). l Reacting to the level of risk: – Logically, high risk should lead to high returns. – Using a risk-adjusted discount rate, where a risk premium is added to the risk-free rate, is a logical response to risk. Managing investment projects l Determine investment funds available – dealing, if necessary, with capital rationing problems. l Identify profitable project opportunities. l Evaluate the proposed project. l Approve the project. l Monitor and control the project – using a post-completion audit approach. CHAPTER 8 MAKING CAPITAL INVESTMENT DECISIONS 310 Accounting rate of return (ARR) p. 261 Payback period (PP) p. 265 Net present value (NPV) p. 269 Risk p. 270 Risk premium p. 272 Inflation p. 272 Discount factor p. 276 Cost of capital p. 277 Internal rate of return (IRR) p. 279 Relevant costs p. 283 Sensitivity analysis p. 292 Scenario building p. 295 Expected net present value (ENPV) p. 296 Objective probabilities p. 299 Subjective probabilities p. 301 Risk-adjusted discount rate p. 302 Post-completion audit p. 306 Key terms ‘ 1 Linder, S., ‘Fifty years of research on accuracy of capital expenditure project estimates: a review of findings and their validity’, Otto Beisham Graduate School of Management, April 2005. If you would like to explore the topics covered in this chapter in more depth, we recommend the following books: McLaney, E., Business Finance: Theory and Practice, 8th edn, Financial Times Prentice Hall, 2009, chapters 4, 5 and 6. Pike, R. and Neale, B., Corporate Finance and Investment, 5th edn, Prentice Hall, 2006, chapters 5, 6 and 7. Arnold, G., Corporate Financial Management, 3rd edn, Financial Times Prentice Hall, 2005, chap- ters 2, 3 and 4. Drury, C., Management and Cost Accounting, 8th edn, Thomson Learning, 2009, chapters 13 and 14. Further reading References M08_ATRI3622_06_SE_C08.QXD 5/29/09 3:31 PM Page 310 EXERCISES 311 REVIEW QUESTIONS EXERCISES Answers to these questions can be found in Appendix C at the back of the book. Why is the net present value (NPV) method of investment appraisal considered to be theoretic- ally superior to other methods that are found in practice? The payback method has been criticised for not taking the time value of money into account. Could this limitation be overcome? If so, would this method then be preferable to the NPV method? Research indicates that the IRR method is extremely popular even though it has shortcomings when compared to the NPV method. Why might managers prefer to use IRR rather than NPV when carrying out discounted cash flow evaluations? Why are cash flows rather than profit flows used in the IRR, NPV and PP methods of investment appraisal? 8.4 8.3 8.2 8.1 Exercises 8.3 to 8.8 are more advanced than 8.1 and 8.2. Those with a coloured number have answers in Appendix D at the back of the book. If you wish to try more exercises, visit the students’ side of the Companion Website at www.pearsoned.co.uk/atrillmclaney. The directors of Mylo Ltd are currently considering two mutually exclusive investment projects. Both projects are concerned with the purchase of new plant. The following data are available for each project: Project 1 Project 2 £000 £000 Cost (immediate outlay) 100 60 Expected annual operating profit (loss): Year 1 29 18 2 (1) (2) 324 Estimated residual value of the plant 7 6 The business has an estimated cost of capital of 10 per cent, and uses the straight-line method of depreciation for all non-current (fixed) assets when calculating operating profit. Neither pro- ject would increase the working capital of the business. The business has sufficient funds to meet all capital expenditure requirements. Required: (a) Calculate for each project: (1) The net present value. (2) The approximate internal rate of return. (3) The payback period. 8.1 M08_ATRI3622_06_SE_C08.QXD 5/29/09 3:31 PM Page 311 312 (b) State which, if either, of the two investment projects the directors of Mylo Ltd should accept, and why. C. George (Controls) Ltd manufactures a thermostat that can be used in a range of kitchen appliances. The manufacturing process is, at present, semi-automated. The equipment used cost £540,000, and has a written-down (balance sheet) value of £300,000. Demand for the product has been fairly stable, and output has been maintained at 50,000 units a year in recent years. The following data, based on the current level of output, have been prepared in respect of the product: Per unit ££ Selling price 12.40 Labour (3.30) Materials (3.65) Overheads: Variable (1.58) Fixed (1.60) (10.13) Operating profit 2.27 Although the existing equipment is expected to last for a further four years before it is sold for an estimated £40,000, the business has recently been considering purchasing new equipment that would completely automate much of the production process. The new equipment would cost £670,000 and would have an expected life of four years, at the end of which it would be sold for an estimated £70,000. If the new equipment is purchased, the old equipment could be sold for £150,000 immediately. The assistant to the business’s accountant has prepared a report to help assess the viability of the proposed change, which includes the following data: Per unit ££ Selling price 12.40 Labour (1.20) Materials (3.20) Overheads: Variable (1.40) Fixed (3.30) (9.10) Operating profit 3.30 Depreciation charges will increase by £85,000 a year as a result of purchasing the new machinery; however, other fixed costs are not expected to change. In the report the assistant wrote: The figures shown above that relate to the proposed change are based on the current level of output and take account of a depreciation charge of £150,000 a year in respect of the new equipment. The effect of purchasing the new equipment will be to increase the operating profit to sales revenue ratio from 18.3% to 26.6%. In addition, the purchase of the new equipment will enable us to reduce our invent- ories level immediately by £130,000. In view of these facts, I recommend purchase of the new equipment. The business has a cost of capital of 12 per cent. 8.2 CHAPTER 8 MAKING CAPITAL INVESTMENT DECISIONS M08_ATRI3622_06_SE_C08.QXD 5/29/09 3:31 PM Page 312 EXERCISES 313 Required: (a) Prepare a statement of the incremental cash flows arising from the purchase of the new equipment. (b) Calculate the net present value of the proposed purchase of new equipment. (c) State, with reasons, whether the business should purchase the new equipment. (d) Explain why cash flow forecasts are used rather than profit forecasts to assess the viability of proposed capital expenditure projects. Ignore taxation. The accountant of your business has recently been taken ill through overwork. In his absence his assistant has prepared some calculations of the profitability of a project, which are to be discussed soon at the board meeting of your business. His workings, which are set out below, include some errors of principle. You can assume that the statement below includes no arith- metical errors. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 £000 £000 £000 £000 £000 £000 Sales revenue 450 470 470 470 470 Less Costs Materials 126 132 132 132 132 Labour 90 94 94 94 94 Overheads 45 47 47 47 47 Depreciation 120 120 120 120 120 Working capital 180 Interest on working capital 27 27 27 27 27 Write-off of development costs 30 30 30 Total costs 180 438 450 450 420 420 Operating profit/(loss) (180) 12 20 20 50 50 ==Return on investment (4.7%) You ascertain the following additional information: l The cost of equipment contains £100,000, being the carrying (balance sheet) value of an old machine. If it were not used for this project it would be scrapped with a zero net realisable value. New equipment costing £500,000 will be purchased on 31 December Year 0. You should assume that all other cash flows occur at the end of the year to which they relate. l The development costs of £90,000 have already been spent. l Overheads have been costed at 50 per cent of direct labour, which is the business’s normal practice. An independent assessment has suggested that incremental overheads are likely to amount to £30,000 a year. l The business’s cost of capital is 12 per cent. Required: (a) Prepare a corrected statement of the incremental cash flows arising from the project. Where you have altered the assistant’s figures you should attach a brief note explaining your alterations. (b) Calculate: (1) The project’s payback period. (2) The project’s net present value as at 31 December Year 0. (c) Write a memo to the board advising on the acceptance or rejection of the project. Ignore taxation in your answer. (£28,000) £600,000 Total profit (loss) Cost of equipment 8.3 M08_ATRI3622_06_SE_C08.QXD 5/29/09 3:31 PM Page 313 Arkwright Mills plc is considering expanding its production of a new yarn, code name X15. The plant is expected to cost £1 million and have a life of five years and a nil residual value. It will be bought, paid for and ready for operation on 31 December Year 0. £500,000 has already been spent on development costs of the product, and this has been charged in the income statement in the year it was incurred. The following results are projected for the new yarn: Year 1 Year 2 Year 3 Year 4 Year 5 £m £m £m £m £m Sales revenue 1.2 1.4 1.4 1.4 1.4 Costs, including depreciation 1.0 1.1 1.1 1.1 1.1 Profit before tax 0.2 0.3 0.3 0.3 0.3 Tax is charged at 50 per cent on annual profits (before tax and after depreciation) and paid one year in arrears. Depreciation of the plant has been calculated on a straight-line basis. Additional working capital of £0.6m will be required at the beginning of the project and released at the end of Year 5. You should assume that all cash flows occur at the end of the year in which they arise. Required: (a) Prepare a statement showing the incremental cash flows of the project relevant to a deci- sion concerning whether or not to proceed with the construction of the new plant. (b) Compute the net present value of the project using a 10 per cent discount rate. (c) Compute the payback period to the nearest year. Explain the meaning of this term. Newton Electronics Ltd has incurred expenditure of £5 million over the past three years researching and developing a miniature hearing aid. The hearing aid is now fully developed, and the directors are considering which of three mutually exclusive options should be taken to exploit the potential of the new product. The options are as follows: 1 The business could manufacture the hearing aid itself. This would be a new departure, since the business has so far concentrated on research and development projects. However, the business has manufacturing space available that it currently rents to another business for £100,000 a year. The business would have to purchase plant and equipment costing £9 mil- lion and invest £3 million in working capital immediately for production to begin. A market research report, for which the business paid £50,000, indicates that the new product has an expected life of five years. Sales of the product during this period are pre- dicted as follows: Predicted sales for the year ended 30 November Year 1 Year 2 Year 3 Year 4 Year 5 Number of units (000s) 800 1,400 1,800 1,200 500 The selling price per unit will be £30 in the first year but will fall to £22 in the following three years. In the final year of the product’s life, the selling price will fall to £20. Variable produc- tion costs are predicted to be £14 a unit, and fixed production costs (including depreciation) will be £2.4 million a year. Marketing costs will be £2 million a year. The business intends to depreciate the plant and equipment using the straight-line method and based on an estimated residual value at the end of the five years of £1 million. The busi- ness has a cost of capital of 10 per cent a year. 2 Newton Electronics Ltd could agree to another business manufacturing and marketing the product under licence. A multinational business, Faraday Electricals plc, has offered to undertake the manufacture and marketing of the product, and in return will make a royalty payment to Newton Electronics Ltd of £5 per unit. It has been estimated that the annual 8.5 8.4 CHAPTER 8 MAKING CAPITAL INVESTMENT DECISIONS 314 M08_ATRI3622_06_SE_C08.QXD 5/29/09 3:31 PM Page 314 number of sales of the hearing aid will be 10 per cent higher if the multinational business, rather than Newton Electronics Ltd, manufactures and markets the product. 3 Newton Electronics Ltd could sell the patent rights to Faraday Electricals plc for £24 million, payable in two equal instalments. The first instalment would be payable immediately and the second at the end of two years. This option would give Faraday Electricals the exclusive right to manufacture and market the new product. Required: (a) Calculate the net present value (as at 1 January Year 1) of each of the options available to Newton Electronics Ltd. (b) Identify and discuss any other factors that Newton Electronics Ltd should consider before arriving at a decision. (c) State what you consider to be the most suitable option, and why. Ignore taxation. Chesterfield Wanderers is a professional football club that has enjoyed considerable success in both national and European competitions in recent years. As a result, the club has accumulated £10 million to spend on its further development. The board of directors is currently considering two mutually exclusive options for spending the funds available. The first option is to acquire another player. The team manager has expressed a keen inter- est in acquiring Basil (‘Bazza’) Ramsey, a central defender, who currently plays for a rival club. The rival club has agreed to release the player immediately for £10 million if required. A decision to acquire ‘Bazza’ Ramsey would mean that the existing central defender, Vinnie Smith, could be sold to another club. Chesterfield Wanderers has recently received an offer of £2.2 million for this player. This offer is still open but will only be accepted if ‘Bazza’ Ramsey joins Chesterfield Wanderers. If this does not happen, Vinnie Smith will be expected to stay on with the club until the end of his playing career in five years’ time. During this period, Vinnie will receive an annual salary of £400,000 and a loyalty bonus of £200,000 at the end of his five-year period with the club. Assuming ‘Bazza’ Ramsey is acquired, the team manager estimates that gate receipts will increase by £2.5 million in the first year and £1.3 million in each of the four following years. There will also be an increase in advertising and sponsorship revenues of £1.2 million for each of the next five years if the player is acquired. At the end of five years, the player can be sold to a club in a lower division and Chesterfield Wanderers will expect to receive £1 million as a transfer fee. During his period at the club, ‘Bazza’ will receive an annual salary of £800,000 and a loyalty bonus of £400,000 after five years. The second option is for the club to improve its ground facilities. The west stand could be extended and executive boxes could be built for businesses wishing to offer corporate hospitality to clients. These improvements would also cost £10 million and would take one year to complete. During this period, the west stand would be closed, resulting in a reduction of gate receipts of £1.8 million. However, gate receipts for each of the following four years would be £4.4 million higher than current receipts. In five years’ time, the club has plans to sell the exist- ing grounds and to move to a new stadium nearby. Improving the ground facilities is not expected to affect the ground’s value when it comes to be sold. Payment for the improvements will be made when the work has been completed at the end of the first year. Whichever option is chosen, the board of directors has decided to take on additional ground staff. The additional wages bill is expected to be £350,000 a year over the next five years. The club has a cost of capital of 10 per cent. Ignore taxation. Required: (a) Calculate the incremental cash flows arising from each of the options available to the club. (b) Calculate the net present value of each of the options. (c) On the basis of the calculations made in (b) above, which of the two options would you choose and why? 8.6 EXERCISES 315 M08_ATRI3622_06_SE_C08.QXD 5/29/09 3:31 PM Page 315 [...]... and decision making For example, we need to understand the environment within which the business operates when we are undertaking a position analysis or when we are formulating plans for the future Management M09_ATRI3622_06_SE_C09.QXD 5/29/09 3:32 PM Page 319 FACING OUTWARDS accounting can play a useful role here by providing information relating to the environment, such as the performance of the business s... so each business should develop objectives and measures that reflect its unique circumstances The balanced scorecard simply sets out the framework for developing a coherent set of objectives for the business and for ensuring that these objectives are then linked to specific targets and initiatives A balanced scorecard will be prepared for the business as a whole or, in the case of large, diverse businesses,... to pursue them 5 Reviewing business performance and exercising control by assessing actual performance against planned performance (identified in Step 4) To some extent, conventional management accounting already supports this strategic process We have seen in Chapter 7, for example, how budgets can be used to compare actual performance with earlier planned performance We have also seen in Chapter 8... that strategies adopted by a business are increasingly providing the basis for both long-term and short-term decisions If management accounting is to help guide decision making within a strategic framework, the reports provided and techniques used must align closely with the framework that has been put in place Conventional management accounting has been criticised, however, for failing to address fully... costs of the business to fit the strategic objectives l There must be a concern for monitoring the strategies of the business and for bringing these strategies to a successful conclusion This means that management accounting should place greater emphasis on long-term planning issues and on developing a comprehensive range of performance measures to try to ensure that the objectives of the business are... senior colleagues Business- wide initiatives for cost management which have been developed by senior management are unlikely to have the same beneficial effect 4 Benchmark continually Benchmarking should be a never-ending journey There should be regular, as well as special-purpose, reporting of cost information for benchmarking purposes The costs of competitors may provide a useful basis for comparison,... sufficient information to manage a business effectively Non-financial measures must also be used to gain a deeper understanding of the business and to achieve the objectives of the business, including the financial objectives 333 M09_ATRI3622_06_SE_C09.QXD 334 CHAPTER 9 ‘ 5/29/09 3:32 PM Page 334 STRATEGIC MANAGEMENT ACCOUNTING Financial measures portray various aspects of business achievement (for example,... profiles and information systems capabilities These four areas are shown in Figure 9.6 The balanced scorecard approach does not prescribe the particular objectives, measures or targets that a business should adopt; this is a matter for the individual business to decide upon There are differences between businesses in terms of technology employed, organisational structure, management philosophy and business. .. analysis and economic value added in strategic decision making What is strategic management accounting? Strategic management accounting is concerned with providing information that will support the strategic plans and decisions made within a business We saw in Chapter 1 that strategic planning involves five steps: 1 Establishing the mission and objectives of a business 2 Undertaking a position analysis,... consequences arising from management decisions that were made earlier Non-financial measures can also be used as lag indicators, of course However, they can also be used as ‘lead’ indicators by focusing on those things that drive performance It is argued that if we measure changes in these value drivers, we may be able to predict changes in future financial performance For example, a business may find from . 8. INTRODUCTION 9 M 09_ ATRI3622_06_SE_C 09. QXD 5/ 29/ 09 3:32 PM Page 317 Strategic management accounting is concerned with providing information that will support the strategic plans and decisions made. the business operates when we are undertaking a position analysis or when we are formulating plans for the future. Management What is strategic management accounting? CHAPTER 9 STRATEGIC MANAGEMENT. in strategic decision making. M 09_ ATRI3622_06_SE_C 09. QXD 5/ 29/ 09 3:32 PM Page 318 accounting can play a useful role here by providing information relating to the envir- onment, such as the performance