Accounting For Performance Management

Accounting For Performance Management Summary of all Lectures Radboud University Nijmegen Yoël Guijt 1 / 3

Lecture 1 — Introduction

Accounting:

> The name for all calculative practices used to manage organization/optimize performance

> Within organizations: Management accounting.

> Large extent about money, but more about other aspects within organization and societies > Good administration is key for organization to function well!

Management:

> Optimizing performance:

> Financial vs Non-financial performance // Sustainability in short and long run // Performance for shareholders and stakeholders Why care about accounting for performance management?> Economic theories about organizations are crucial; important to link these theories to practice > Role of culture/leadership/learning/motivation is crucial; only effective if organization is healthy > Often based on financial information; using this without thinking will hurt culture/learning Accounting can support performance management, so you would better understand it: > Many organizations lack financial literacy and cost consciousness > Results in no attention for (hidden) costs + no accurate analysis for actual failings

Financial vs Management Accounting:

> Financial accounting:

> Prepare reports on past performance; External reporting + Past performance > Produce Financial Information for other departments in the business

> Management accounting:

> Collate information (revenue, costs, debts) to produce timely reports for day-to-day

management and decisions: Internal Reporting + Forward-looking

> Combine financial statements with non-financial info to paint complete picture of the

business: Financial & Non-Financial Information

Tasks of management accountants:

> Report to CFO // Administer internal and external accounting // Budget-planning // Internal consultant or business analyst >>> Balance between providing info to other managers for decision making against providing monitoring information used to control behavior of lower-leveled managers > They constantly make decisions about which option is best from other alternatives > Special orders, outsourcing, keep or drop, capacity expansion/contraction, pricing, etc > Relevant, accurate, and timely accounting information is crucial to assist those decisions

Management Accounting / Controlling Profession in NL:

> RC Title: Financial controller or Business controller

> Connector between different departments // Advising role // Digitalization //Role in sustainability > Cooperating together with a lot of departments within or outside the organization (ICT, HRM)

Role of Digitalization for Controllers:

> Digitalization of the primary processes, administration, financial processes > Collecting data to support decision-making

Role of Sustainability for Controllers:

> Demand for sustainability and function is affected by this > Part of strategy // Procurement // Investment criterion // Measured and reported external > Less important in SMEs than other organizations 2 / 3

Role of Uncertainty for Controllers:

> Current global circumstances are affecting controllers (not specifically financially) > Rather practically: Suppliers can’t always deliver // Much competition for personnel > Targets are being met, but less often than five years Lecture 2 — Organizational Architecture

1. Self-interested behavior:

> Fundamental assumption of economics:

> Individuals act on their own self-interest to maximize their utility + Opportunism (seeking self-interest with guile) + Bounded rationality, not fully rational

> Utility: Preferences for money, working conditions, leisure, etc

> Resource constraints: Time, Money, Knowledge, etc

> Opportunity set: Work for other employer, work on other projects, relaxing, etc

Team production:

> Individuals form teams because:

> They can produce more in teams + Generate larger opportunity set > Firm is defined as a ‘nexus of contracts’ among resource owners who contract with individual team members to benefit both the firm and the individuals > Firms in an economic sense include profit corporations, divisions within a corporation, non- profit corporation, and other entities

Firm as a ‘nexus of contracts’:

> Firm is a legal entity contracting with many parties and enforce these contracts in courts of law: > Labor contracts // Supply contracts // Customer contracts // Finance contracts > Some contracts are explicitly written, others implicitly oral agreements supported by reputation

Principal-Agent theory:

> Economic model of relations in a firm // Principals are owners/managers // Agents are employees or independent contractors // Agent performs for principal // Multiple relations exist > Agency costs: Reductions in firm value when agent pursues own interest (goal incongruence)

Agency problems:

• Free-rider: Agents have incentive to shirk because individual efforts aren’t directly observable

> Solution: Incentive contracts, monitoring, etc

• Horizon problem: Agents weigh short term consequences more heavily than long term

> Solution: Incentive contracts, monitoring, etc

3 Employee-theft: Employees take firm resources for unauthorized purposes

> Solution: Monitoring, Inventory control, etc

• Empire-building: Managers seek larger number of agents to increase their own job security

> Solution: Modify incentives, benchmarking, etc

Information Asymmetry Problems:

> Adverse selection = Prior to contracting (more info than principal); solution = pre- contract investigations, post-contract penalties " " !> Moral Hazard = After contracting (principal cannot observe deviations) hidden action or hidden information; solution = inspecting/monitoring

2. Decision rights and Rights system:

> Decision rights are restrictions on how economic assets of a firm can(not) be used > Management determines how decision rights are to be assigned to various agent in the firm

> Centralizing: Top management has a say in everything (micro-management)

> Decentralizing: Employee empowerment / or Lower-level managers

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