Please enable JavaScript.
Coggle requires JavaScript to display documents.
MODULE 5C : MANAGEMENT ACCOUNTANT'S ROLE IN PROJECT SELECTION…
MODULE 5C : MANAGEMENT ACCOUNTANT'S ROLE IN PROJECT SELECTION
PROJECT SELECTION 4 MAIN TASKS :
STRATEGIC ANALYSIS / FIT
STAKEHOLDER ANALYSIS (STAKEHOLDER IDENTIFICATION & ASSESSMENT)
RISK ASSESSMENT
FINANCIAL ANALYSIS
DEVELOPING A BUSINESS CASE FOR PROJECTS
A DOCUMENT THAT CONTAINS AN ANALYSIS OF THE COST, BENEFITS AND RISK ASSOCIATED WITH THE PROPOSED PROJECT
PROVIDES INFORMATION ABOUT PROJECT THAT ENABLES DECISION MAKERS WHETHER TO PROCEED WITH THE PROJECT OR NOT.
IDENTIFY THE PROCESS THAT NEEDSS TO BE UNDERTAKEN TO IMPLEMENT PROJECT
A GOOD BUSINESS CASE :
PROVIDES THE BASIS FOR A CLEAR DECISION ABOUT THE PROJECT
CONTAINS COMPARISON OF THE COST AND BENEFIT OF THE PROJECT
IDENTIFIES A PREFERRED OPTION WITH A RATIONALE WHERE THERE ARE ALTERNATIVES SOLUTIONS TO THE PROBLEM THAT THE PROJCET NEEDS TO ADDRESS
MAKES CLEAR THE COST OF THE PROJECT BEYONG ITS COMPLETION
CONTENTS OF BIZ CASE
BACKGROUND & PROBLEM - REASON & PROBLEM THAT HAS TRIGGERED THE NEED FOR PROJECT (OPPORTUNITIES? OR PROBLEM TO THAT NEEDS FIXING)
STRATEGIC FIT - OUTLINES THE EXTENT TO WHICH THE PROJECT FITS INTOTHE ORGANISATION'S STRATEGY
OBJECTIVE - OBJECTIVE OF PROJECT AND WHAT "SUCCESS" LOOKS LIKE IN A TANGIBLE OR MEASURABLE WAY
IDENTIFICATION OF ALTERNATIVES - OPTIONS OR RECOMMENDATIONS ALONG WITH SUPPORTING ANALYSIS
SELECTED PROJECT - DETAILED ANALYSIS OF THE SELECTION OPTION THAT CONTAINS : RISK ASSESSMENT, FINANCIAL ANALYSIS, BENEFIT ANALYSIS, COST BENEFIT ANALYSIS, PROJECT PLANNING, PROJECT BUDGET, PROJECT MONITORING AND PERFORMANCE MEASURES, PROJECT COMPLETION & REVIEW PROCESS
STRATEGIC ANALYSIS FIT
STRATEGIC FIT BETWEEN PROPOSED PROJECT AND ORGANISATION'S STRATEGY & OBJECTIVES
PROJECT NEEDS TO SUPPORT ORGANISATION'S STRATEGY AND HELPS ACHIEVE ITS OBJECTIVES
1. CLARIFY BIZ STRATEGY PG 510
(LOCH & KAVADIAS 2011)
WHAT PRODUCT DOES THE ORGANISATION OFFER?
WHO ARE THE ORGANISATION'S CUSTOMER?
HOW DOES THE ORGANISATION DELIVER IT'S PRODUCT/SERVICES?
WHT DO CUSTOMERS BUY FROM THIS ?ORGANISATION RATHER THAN FROM SOMEWHERE ELSE?
WHAT WILL HAPPEN IF THE ENVIRONMENT CHANGES ?
*THE ANSWERS TO THESE QUESTIONS ARE USED TO INFORM THE PROJECT STRATEGY, WHERE CLEAR UNDERSTANDING OF WHAT PROJECT DELIVERS AGAINS THE BIZ STRATEGY IS DEVELOPED
*ASSUMPTION MADE : A PROJECT IS SUBORDINATED TO THE STRATEGY OF AN ORGANISATION OVERALL AND THAT THE PROJECT SHOULD FIT THE ORGANISATION'S OBJECTIVES
3 QUESTION WHILE EVALUATING STRATEGIC FIT PG511
WHAT IS THE LIKELY LONG TERM IMPACT OF THIS PROJECT ON KEY MEASURES USED TO EVALUATE BUSINESS SUCCESS ( AND PRESENTED IN THE STRATEGY MAP)
IS THIS PROJECT IN LINE WITH THE OBJECTIVES AND ACTIONS LISTED IN THE ORGANISATION'S STRATEGY DOCUMENT?
DOES THIS PROJECT ADDRESS AN EMERGING OR EXISTING RISK/ NEW OPPORTUNITY?
STAKEHOLDER IDENTIFICATION & ASSESSMENT PG 515
2 TYPES OF STAKEHOLDERS (PINTO 2010)
INTERNAL
TOP MANAGEMENT
FINANCE & ACCOUNTING
FUNCTIONAL MANAGEMENT
PROJECT TEAM MEMBERS
EXTERNAL
CLIENTS
END USERS
REGULATORS
COMPETITORS
SUPPLIERS
COMMUNITY & SOCIETY
THE ENVIRONMENT (PHILIPS & FREEMAN 2003)
ETHICALLY INFORMED DECISION MAKING ISSUES PG516
EVALUATE WHETHER A PROJECT DECISION IS ETHICAL OR NOT (DRELLINGER CITED IN TURNER 2003)
WHICH
GOALS OR PRIORITIES
DOES THIS SOLUTION SUPPORT OR WORK AGAINST?
DOES THE SOLUTION REFLECT THE
VALUES
OF THE ORGANISATION AND DECISION MAKERS?
WHAT IS THE
CONSEQUENCES
AND RAMIFICATION FOR EACH STAKEHOLDERS?
WHAT QUALMS WOULD THE DECISION MAKER HAVE ABOUT THE
DISCLOSURE
OF A FAVOURABLE DECISION TO THIS SOLUTION TO THE CEO, BOD,FAMILY & PUBLIC?
WHAT IS THE POSITIVE / NEGATIVE
SYMBOLIC POTENTIAL
OF THIS SOLUTION IF UNDERSTOOD/MISUNDERSTOOD BY OTHERS? WILL IT CONTRIBUTE TO BUILDING & MAINTAINING AN ETHICAL ENVIRONMENT?
RISK ASSESSMENT PG517
EDEN & ACKERMANN 2005 - " COST COMBINED TOGETHER IN A NON LINEAR WAYS AND ACCELERATING PROJECTS CAN SET UP VICIOUS CYCLES THAT INCREASE COST MANY MORE TIMES THAN EXPECTED"
RISK IDENTIFICATION PG518
WHAT
WHAT IS THE OUTCOME?
WHAT SKILLS REQUIRED?
WHO
WHO ARE STAKEHOLDERS?
WHO INVOLVED&SUITABLE PERSONNEL?
WHO IS RESPONSIBLE?
TO WHOM THIS PROJECT IS A THREAT?
WHY
WHY THEY INVOLVE? -TO IDENTIFY THE AIMS OF DIFF. STAKEHOLDER
HOW
HOW TO ENSURE REQUIRED ACTIONS ARE UNDERTAKEN AND REQUIRED RESOURCES ARE AVAILABLE
WHERE
WHERE IS THE PROJECT LOCATED ?
WHERE WILL HAVE IMPACT? - TO IDENTIFY RISK ASSOCIATED WITH PROJECT LOCATION
WHEN
WHEN WILL PROJECT TAKE PLACE?
WHAT ARE THE MAIN THREATS TO TIMELINES
WHAT IS IMPACT WHEN DEADLINE IS MISSED?
HOW MUCH
COST OF PROJECT?
LEVEL OF UNCERTAINTY IN PROJECT COST ?
MAX & MIN COST ESTIMATION ?
RISK CLASSIFICATION PG518
2X2 MATRIX APPROACH
A) HIGH FINANCIAL IMPACT, HIGH PROBABILITY
B) HIGH FINANCIAL IMPACT, LOW PROBABILITY
C) LOW FINANCIAL IMPACT, HIGH PROBABILITY
D) LOW FINANCIAL IMPACT, LOW PROBABILITY
FINANCIAL ANALYSIS - SINGLE PROJECT
NET PRESENT VALUE (DISOUNTED CASHFLOW ) PG520
SUITABLE FOR LONGER TERM PROJECTS
COMPARES PV OF ALL PROJECT CASH INFLOW AND OUTFLOW WITH INITIAL INVESTMENT
ALL PROJECT CASJ FLOW ARE DISCOUNTED USING RATE OF RETURN / DISCOUNT RATE
SUM OF THE PVs oOF ALL PROJECT CASH FLOW
NPV > 0 = YEILD RETURNS ABOVE RRR
INTERNAL RATE OF RETURN PG525
EXPECTED RETURN FROM A PROJECT
NPV OF PROJECT CASHFLOW = 0
IF PROJET IRR > ORG RRR = PROFITABLE
USE TRIAL AND ERROR METHOD
PROFITABILITY INDEX PG526
PI = PV OF ALL FUTURE EXPECTED CASH FLOWS / BY THE INITIAL CASH INVESTMENT
PI = 1 = (NPV=0)
PAYBACK PG526
BREAK EVEN CONCEPT
PAYBACK = INITIAL INVESTMENT COST / ANNUAL NET CASH INFLOW
DISOUNTED PAYBACK CALCULATIONS
IDENTIFY ANNUAL CASH FLOW
CALCULATE DISCOUNT FACTOR FOR EACH PERIOD
APPLY EACH DISCOUNT FACTOR TO RESPECTIVE ANNUAL CASH FLOW TO CALCULATE PV OF CASH FLOW
CUMMULATIVELY SUM ALL DCFs STARTING WITH YR0 UNTIL INITIAL INVESTMENT IS FULLY REPAID
RETURN ON INVESTMENT ( ROI) / AVERAGE ACCOUNTING RATE OF RETURN (ARR) PG527
ROI = RETURN / INVESTED CAPITAL
AVERAGE INVESTMENT = (INITIAL INVESTMENT+ RESIDUAL) / 2
RESIDUAL INCOME PG 527
RI = DEDUCTING NOTIONAL CAPITAL CHARGE FROM ACCOUNTING RETURN (NOPAT)
DEFICIENCIES IN ACCOUNTING BASED MEASUREMENT PG529
ACCOUNTING PROFITS INCLUDE ACCRUALS SUCH AS DEPRECIATION WHICH ARE NOT ECONIMIC MEASURES, BUT ARE BASED ON ASSUMPTIONS ABOUT LIMITED ASSET LIVES, CONSERVATISM IN ACCOUNTING ESTIMATES AND INEVITABLE DECLINE IN VALUE
IF ACCRUALS ARE RELIABLE OR ECONOMICALLY INVALID, THEN THE ASSET VALUES WITH WHICH THEY ARE ASSOCIATED ARE EQUALLY SO.
ASSET VALUES DO NOT TAKE INFLATION, OR THE DECLINE IN VALUE OF THE CURRENCY INTO ACCOUNT. PPE ACCOUNT INCLUDES ASSETS PURCHASED OVER A NUMBER OF YEARS WHEN THE CURRENCY HAD DIFFERENT PURCHASING POWER. YET THE VALUE OF THE ACCOUNT FAILS TO TAKE THIS INTO CONSIDERATION AND THE VALUES OF ASSETS ACQUIRED AT DIFFERENT TIMES ARE SIMPLY ADDED TOGETHER. THE RESULTING BALANCE IS TO SOME EXTENT, MEANINGLESS ASSET ACCOUNTS CAN BE ADJUSTED FOR INFLATIONARY EFFECTS, BUT THIS ADJUSTMENT IS SELDOM CONSIDERED NY ACCOUNTANTS
SENSITIVITY AND SCENARIO ANALYSIS PG530
2 KEY METHODS IN EVALAUTING RISK
SENSITIVITY ANALYSIS
CHANGES IN KEY PROJECTS ASSUMPTIONS ARE EVALUATED AGAINST FINANCIAL RETURNS : EG : EFFECT OF 1% INCREASE IN SALES GROWTH OR COST INCREASE
SCENARIO ANALYSIS
THE EFFECT OF CHANGING A GROUP OF ASSUMPTIONS IS EVALUATED - USUALLY INVOLVES BEST vs WORST SCENARIOS
ADVANTAGE : KEY RISKS AND CONTINGENCIES CAN BE PLANNED FOR WHICH REDUCES THE OVERALL RISK OF PROJECT THROUGH IMPROVED PROJECT PLANNING
FINANCIAL ANALYSIS - MULTIPLE PROJECTS PG 530
EQUIVALENT ANNUAL CASH FLOW (EQUIVALENT ANNUAL ANNUITY
TO COMPARE THE FINANCIAL RETURNS OF PROJECTS WITH DIFFERENT LIVES AND DIFFERENT RISK PROFILES
ACCOUNTS FOR TIME VALUE OF MONEY , DIFFERENCES IN PROJECT RISK, INCLUDES PAYBACK OF CAPITAL INVESTED
CONVERTS NPV INTO UNIFORM SERIES OF CASH FLOW ENABLING THE COMPARISON OF PROJECTS WITH DIFFERENT LIVES AND RISK PROFILES BASED ON THE ANNUAL VALUE ADDED
PROJECT WITH HIGHEST EAC WILL BE SELECTED