Page 4: Adding value
In the current low growth economic climate, many organisations are finding that growth and profitability will not be achieved through sales growth in their traditional markets. Some are looking to new markets but most are looking to increase the efficiency of their operations and to focus on higher value activities, products, customers and delivery channels.
A key role for management accountants is to analyse processes and suggest where efficiencies can be made to improve performance, both financial and non-financial. Such ‘lean’ approaches divide processes into three types:
- waste, which should be minimised
- those that are essential but don’t add value
- those that add value.
Financial and non-financial data
Management accountants use both financial and non-financial data when assessing methods of adding value. Non-financial data includes both human and environmental implications. Decisions will weigh-up the likely benefits and problems to the business of taking certain actions, including any ethical factors. CIMA fellow Paul Walsh is the CEO at drinks maker Diageo. To operate the company’s distillery in Fife (Scotland) costs £5 million in energy bills and uses 1.8 billion litres of water annually. An unpredictable energy market and ambitious sustainability targets created a challenge for Diageo. A new strategy was required to ensure the company could achieve its sustainability targets. Sustainability involves minimising negative impact on the environment whilst also ensuring that future generations can prosper.
Diageo executives created a team of senior employees to plan possible solutions to the challenges the company was facing. The team behind the investment project included CIMA finance professionals, senior managers, engineers and process chemists. To demonstrate the investment that would be required for each possible strategy the team used cost scenario planning. The result of the planning was a £65 million investment in an environmentally-focused approach to the plant’s processes. The investment in innovative ‘green’ technologies includes a waste water treatment plant, a biomass boiler and steam and electrical generation plant, leading to a plant that recycles 31% of its water and 85% of its steam and electrical power.
The fact that the most ambitious plan was chosen by the board of directors demonstrates their confidence in the team's environmental planning and financial projections. Paul Walsh commented that the strategy: ‘demonstrates the need for holistic management; you cannot just look at the P&L, you cannot just look at your margins, you have got to have a far broader view’. Paul Walsh and the CIMA professionals within the team used their expertise to create an investment plan that will add value in the long-term. Their ethical decision making supports the company’s environmentally-focused strategy.