ACCA P3 Business Analysis - 2010 - Study text

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Chapter 14: Project management

- the project manager

- the project team members.

It should also specify the formal reporting procedures, the methods to be used

for monitoring and controlling the project, and the decision-making

responsibilities.

For example, the quality plan may specify that the progress on the project

should be monitored by a project assurance team (with named members) which

should meet regularly to consider progress reports from the project manager.

 Project requirements. This section of the project quality plan specifies the

requirements for the project, in terms of what must be delivered. The project

work may be divided into phases, with each phase ending when a recognisable

‘milestone’ is achieved. Target dates will be set for reaching each milestone. (The

new project may be introduced in stages.)

The project specifications might include performance specifications for the new

system or process, security specifications, the required standards and any legal

specifications.

The completed project will be tested against these specifications, to make sure

that they have been met successfully.

 Project development. This section of the quality plan specifies the methods to be

used to develop the new system, and the testing requirements. The different

phases of the development work should be identified, with target completion

dates for each phase.

 Quality assurance. This section of the plan specifies how the work on the project

should be reviewed as it progresses, to ensure that it is being performed to the

required standards and specifications. The methods that will be used to carry

out quality assurance checks should be specified.

 Change control management. This is concerned with requests for changes to the

detailed specifications for the IS/IT system as the project progresses. When

changes are requested, there should be a formal system for documenting the

requests – including the reason why the change is needed and why it is

desirable. There should be a system for approving requests for changes, and for

ensuring that they are made correctly (with suitable changes to all system

specifications and programming documentation, and suitable testing to make

sure that the change has been made correctly).

 Testing methods. The quality plan should specify the testing methods to be

used on the new system or process before it is implemented.

 Documentation standards. A section of the quality plan should specify the

documentation that should be produced for the new system or process. For

example, the requirements specification for a project might be drawn up using a

standard format in order to ensure that nothing is omitted from the statement of

requirements and that the requirements should be comprehensible.

 Procurement. A section in the quality plan should specify quality standards for

the procurement of materials (and in the case of IS/IT development projects)

hardware and any off-the-shelf software. For example, the quality plan should

state that a specified Invitation to Tender procedure must be followed for the

procurement of major hardware items such as computer equipment and

communications link rentals.

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 The work performance of sub-contractors must also be subject to specified

performance quality standards.

 Risk management. The project quality plan should also specify requirements for

risk management for the project. For example, the plan might specify that there

should be a review of risks at each stage of the project (by the project team or

project assurance team), and that significant risks should be recorded, together

with details of the measures taken to eliminate or mitigate the risks.

3.8 Project risk management

Project risks have been described earlier. The project manager is responsible for

monitoring risks. A record should be kept of the significant project risks that have

been identified, and the measures that have been taken to reduce or control them.

Risk register

A risk register can be used as a record of identified risks and control action.

A risk register lists all significant identified risks and the results the evaluation of

the risks by the project team. Information on the current status of the risk is also

recorded. The risk register should be continuously updated and reviewed

throughout the course of a project.

A risk register should contain the following information:

 Category of risk

 Individual who identified the risk

 Date the risk was identified

 Date the register was most recently updated for this risk

 Description of the risk

 Probability that an adverse event will occur

 Expected impact if an adverse event does occur

 Measures taken to deal with the risk

 Current status of the risk/control measures.

3.9 Requests for changes

With large projects that take a long time to complete, it is common for the project

sponsor to ask for changes to the project specifications. Changes might arise

because:

 the project sponsor realises that the original project specifications were incorrect,

and wants to change them so that they specify requirements correctly

 there might be changes in the business environment that alter the strategic

situation, and the project sponsor’s requirements are changed by these

developments

Chapter 14: Project management

 the project sponsor keeps thinking of extra requirements that would be ‘useful’

or ‘desirable’. (This is a form of ‘scope creep’.)

The project manager must react to requests for changes in an appropriate way.

 The first step should be to consider the changes that have been requested, and

decide whether they are feasible.

 If the requested changes are feasible, an estimate should be made of the effect on

time to completion of the project and the project’s cost. The project sponsor

should be informed about the expected effects of cost and completion time.

 The project sponsor should be asked to agree to the delay to completion and the

additional cost. (The project sponsor might be reluctant to agree.)

 The request for the change should be documented. ‘Unofficial’ or ‘uncontrolled’

changes to specifications should be avoided, because the individual or group

responsible for changing the specifications should be formally identified. This

individual or group should then be responsible for the consequences of the

changed specification (for example, for any delay or extra cost, or reduction in

process/system quality).

 The new project specification should be analysed, and amendments should be

made to the project design, scheduling, budget, resource requirements, and so

on.

3.10 Project completion

There should be formal procedures for the conclusion of a project. On completion of

a project, the ‘end result’ is handed over to the project sponsor or project client for

implementation. The ‘end result’ might be a new process or a new IS/IT system.

The procedures in project completion should include the following:

 Acceptance testing by the project ‘client’. Before a new process is implemented

or a new IS/IT system is introduced, thorough tests should be carried out to

ensure that the outputs from the project meet:

- the project specifications and

- the requirements of the project client.

At this stage, the project client might identify problems with using the new

process or system, and changes might be requested at this late stage to improve

the process quality or system performance.

 On successful completion of acceptance testing, the process or system is handed

over to the project client for implementation. The project manager might prepare

a project completion report for the project sponsor.

 The project team is disbanded.

 There should be a post-completion audit of the new process or system, some

time after its implementation.

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Post-completion audit (post-implementation review)

The purpose of a post-completion audit of a new process or system is to assess the

success (or failure) of the project in meeting its intended objectives.

The audit or review should be carried out by a person or a team that is considered

‘independent’. Members of the project team and the project client should not be the

auditors.

The review should assess the project in terms of:

 whether the objectives of the project have been achieved, and the re-designed

process or new system has achieved the expected benefits, and

 in terms of quality, time and cost.

Review of the benefits achieved from the project

Projects are usually undertaken to introduce changes into an organisation, and the

purpose of a project is therefore to implement business strategy. If the project has

failed to achieve the benefits that were expected, the implications for the entity’s

business strategy should be assessed. A failure in one project to achieve the

expected benefits could mean that the business strategy must be reviewed, and new

initiatives must be considered.

The assessments from the post-completion audit of projects should be included

within the next general strategic review and position analysis.

Review of cost, time and quality

A post-completion audit should also review the cost of the project, the time it took

to complete and the quality of the output from the project – the new process or

system.

For example, a post-completion audit of a new IS/IT system should assess:

 whether the project client is satisfied with the new process or system

 whether the system is easy to use or the new process is trouble-free

 the problems that have occurred with the implementation of the process or

system, why they happened and whether they have been resolved

 the ability of the process or system to handle the actual volume of transactions,

and whether it will be able to handle the expected growth in transaction volume.

The post-completion audit might find that lessons can be learned for the future, so

that mistakes that were made with the project are not made again with future

projects.

Metrics for post-completion review

The assessment of a project in a post-completion review should ideally be based on

quantified measures of performance or achievement (‘metrics’). Actual measured

Chapter 14: Project management

performance should be compared against targets or objectives that were established

in the feasibility study for the project.

For example, the feasibility study should include specific measures for the expected

benefits from the project, and the expected costs of developing the project and

operating the new system or process. The actual benefits and costs should be

assessed in the post-audit, and compared with the expected benefits and costs.

Quantified measurements of performance should help management to assess

whether the financial objectives of the project have been achieved, as well as the

strategic objectives.

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Paper P3

Business analysis

CHAPTER

Finance and

business strategy

Contents

1 The link between finance and business strategy

2 Financial analysis for business strategy

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The link between finance and business strategy

 Role of the accountant in business strategy

 Financial objective

 Funding strategy

1 The link between finance and business strategy

This is a short chapter, but financial aspects of business strategy are an important

aspect of the examination syllabus for Business Strategy.

The reason why this chapter is short is that you should already have acquired a

technical understanding of financial issues from your earlier studies. In the

examination, you might be required to apply your understanding of finance and

accounting to the development and analysis of business and corporate strategy.

Finance issues are relevant to strategic planning in three ways.

 A finance objective is normally the main corporate objective of a business entity.

Even for a not-for-profit entity, its main objective will be limited by the

availability of finance.

 An entity must have a financing strategy. It must be able to finance its planned

strategies. If it does not expect to have enough financial resources to pay for its

planned product-market strategies, it must develop strategies for how it should

obtain the additional finance required.

 Accountants should be able to provide valuable management information to

management about business strategy, to help management to make strategic

decisions.

1.1 Role of the accountant in business strategy

Accountants and the accounting function have some role in business strategy, but

the extent of their involvement will depend to some extent on the attitude of the

accountants within a business organisation to strategy development and business

growth.

 Traditionally, accountants have been associated with a culture of taking the safe

option and avoiding risk, whereas successful business strategy depends on

being entrepreneurial and taking risks.

 Traditionally, accountants have been associated with judging the merits of any

investment on the basis of financial return and (often) short-term profitability

and cash flow, without taking non-financial factors into consideration. If

accountants are to be involved in business strategy, they need to accept the long-

term nature of many strategic decisions, and the difficulty of making reliable

financial assessments.

 Accountants are often reluctant to innovate themselves. Their reporting systems

are often based on analysing profits of products, services and business sectors.

For the purpose of business strategy, reporting systems are needed for analysing

Chapter 15: Finance and business strategy

customer profitability and the profitability of distribution channels, and for

measuring the effectiveness of marketing strategy. Accountants will not be

closely involved in the management of business strategy unless they are able to

be innovative with their financial reporting systems, and work closely with

colleagues in other disciplines, especially marketing.

The role of the accounting function in corporate strategy will include:

 Providing systems for recording financial transactions and preparing annual

financial reports and accounts.

 Providing management information systems and procedures for decision-

making (budgets and budgetary control, capital investment appraisal and DCF

analysis, and so on).

The role of the accounting function in corporate strategy might also include (and

ideally should include):

 Assisting colleagues in R&D and marketing with new product screening, and

decisions about whether to develop and market a product.

 Strategic investment appraisal, which involves a strategic assessment as well as a

financial assessment of proposed new investment projects.

 Providing a reporting system for the marketing function, by providing

management information on customer profitability and channel of distribution

profitability, as well as product profitability.

 Working with marketing colleagues to assess the effectiveness of marketing

initiatives and the marketing mix.

 Helping colleagues to identify and measure added value throughout the value

chain.

1.2 Financial objective

It is important to remember that a business entity has a financial objective, which

might be stated in terms of providing a return to the shareholders. In selecting and

implementing its product-market strategies, an entity should not lose sight of its

financial aims.

In preparing a business plan, senior management should assess the expected return

for shareholders, in both the short term and the long term, from the planned

corporate and business strategies.

The financial objectives might be measured in terms of annual profit growth or

return on shareholder capital over the period of the business plan. Other

measurements of financial return might be used.

Example

UK company William Hill is a listed company specialising in gambling, with a chain

of betting shops and a business for on-line betting through the Internet.

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A UK government policy was announced indicating that a large number of

gambling casinos would be allowed to open up and operate. William Hill decided

that it should follow a strategy of concentric diversification by entering into this

new area of operations. Its intention was to expand into casino operations by means

of an acquisition, and it began to accumulate cash to finance it.

However, the UK government changed its policy and chose to restrict the number of

casinos it would allow in the country. This change of policy dramatically altered the

strategic outlook for William Hill, which now saw ‘fewer synergies’ between betting

and casino operators.

Instead of using its cash to fund other acquisitions, the company recognised its

primary objective, to provide a return to its shareholders, and in 2005 it announced

an additional dividend of over £450 million.

Having a strong cash position, and no longer expecting to make a takeover bid, it

felt that it could support a much higher level of debt finance if necessary, and had

no need for the cash to finance growth.

The company still intended to pursue strategies for growth, but these were now

expected to be:

 Increasing the number of point-of-sale machines in its betting shops

 Buying and opening more betting shops

 Expanding its on-line betting business.

1.3 Funding strategy

The main objective of a company is to achieve a financial return for its shareholders.

In addition, a company should have finance strategies that support the overall

business objectives.

An important aspect of finance strategy is funding. An entity needs to plan its

funding requirements in advance, so that it is able to obtain the funding required:

 when it is needed

 at an acceptable cost and

 without exposing the entity to unacceptable financial risks.

The funding gap

The major source of additional funding for companies is retained profits. The

amount of funding available to a company from retained profits depends on:

 profits after tax, and

 dividend payment policy.

Estimates can be made about the expected profits that will be made each year over

the business planning period, and the amount of dividends that the company

ACCA P3 Business Analysis - 2010 - Study text - Emile Woolf Publishing

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