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IBM’s Management Accounting & Financial Practices

Introduction

International Business Machines abbreviated as IBM is considered the undisputable champion in the field of technology (Buck 1986, pp 2). It deals with both computer hardware and software. Lately; it has taken a direction that is geared towards sharpening its focus on software development. IBM is a hot company that controls a huge market. It has been ranked among the best brands in the world of business with some viewing it as the leading while others think Coca Cola is the leader followed by IBM.

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Financial History of IBM

The strength of a corporation is measured by its financial position. A company cannot be considered strong if its finances are not sound. Sound finances refer to assets being more than liabilities. It also refers to the ability of a corporation to make profits out of its business endeavors (Kaplan & Bruns 1987, pp 2-4).IBM has a long financial history. This is true given that it has been in existence for a long time. The reason as to why this corporation has been able to stand the test of time while other companies such as Enron, the energy giant have risen and fallen is due to the ability of its leadership to manage the finances of the company with wisdom.

The financial tradition at IBM is that those who are charged with the responsibility to handle finances do that. The company has also maintained a long tradition of extensive internal information sharing on financial matters as a way of ensuring that the relevant financial concerns are deal with before they land the company in trouble. Would this be the reason the company has been around for such a long time?

Accounting At IBM and the Role It Plays

Accounting is an important part of IBM as a corporation. It exists as an independent department with a highly qualified staff that generates the required information that has made it possible for the company to not only outshine its competitors but put smiles on the faces of its investors. The accounting department forms the financial backbone of the company and therefore forms a central strand of its existence. Decisions that are made in terms of budgeting are done with the help of the accounting department. It is divided into two parts. There is financial accounting and managerial accounting.

Financial Accounting and Management Accounting at IBM

Managerial and financial accounting are crucial areas within the company. Together, they assist in the customer relations endeavor through the provision of accurate financial information for interested members of the public as well as other interested parties, they assist in laying the foundation for future financial frameworks for the various company sectors, and generate the required financial information for internal decision making. But on separate terms, these two sections of the accounting segment have unique functions.

Financial Accounting

Like in any other company, the financial accountants at IBM are the ones who prepare the financial communication instruments or statements. These statements include the balance sheet of the company, the income statement and the cash flow statement. These statements have specific functions such as the ability to enable creditors predict and therefore know how to deal with uncertainties associated with company cash flows, showing how appropriate the management of the company is discharging its duties, examining the asset base of the corporation and if there are any claims to the assets, serving as a guide for investors and availing the history of expenditure of the corporation.

From the above, we can therefore say that financial accounting deals with information that has already been generated and therefore internally examined by the company. The data in financial accounting records is based on what has already happened and not what is about to happen. This happens to be one of the key differences between managerial accounting and financial accounting. The data in balance sheets shows the money that has been already earned by the company, the assets the company has already obtained and the liabilities it has already incurred.

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Managerial accounting

Managerial accounting is perhaps the most significant financial wing of any company. At IBM, managerial accounting holds an extremely significant position in the financial decision making process. This wing of accounting deals with raw information instead of historical data that is handled by financial accounting as mentioned above. The information that is dealt with at the managerial accounting level is not only internal but also classified. It is made available to the management for purposes of making crucial budget decisions. Capital budgeting is carried out by the use of information that is made available through management accounting. Other details that form part of the management accounting data bank may include planned mergers if any, reports on expected levels of income from sales, plans to explore new fields of marketing for company products, and expected down turns in the sales (Atrill & McLaney 2009, pp 2-7). Other predictions that will have an impact on the health of the corporation can also feature in management accounting reports.

What Guides Accounting?

There are numerous sets of rules that govern accounting. Financial accounting has to be carried out under these rules. An example of these sets of rules are the Generally Acceptable Accounting Principles (GAAP) and the financial personnel handling financial documents such as balance sheets must comply with these rules if they are to be on the right side of the law. But when it comes to Managerial accounting, the existence of formal rules is not an issue. The managers are free to alter the rules and meet the requirements of the corporation as far as its financial position is concerned provided that no rule is broken. This is the case with IBM.The managerial accountancy at IBM is always carried out on a situation specific basis as a way of ensuring that the solutions generated for problems are the right ones. Times when this rule has not been followed have resulted in problems (Paul1993, pp 49).

Financial Accounting And Managerial Accounting: Separate Or Combined?

IBM is a company that believes in the principle of synergy. The various departments are connected as a way of ensuring that each and every sector of the company has the information that it needs in its operations so that decisions are made in the light of the right information (Zimmerman1997, pp 98-103). This is why managerial and financial accounting have been allowed a considerable amount of cooperation. The logic behind this is that the financial information that is used in capital budgeting by managerial accountants has its roots in what is presented in the financial statements prepared by the financial accountants (Horngren, Sundem, & Stratton 2002, pp 9). But it should not be forgotten that before this information goes out to the public through the work of the financial accounts, the managerial accountants have access to it. This again proves that the managerial accounting wing of accounting is pretty independent. Thus the cooperation at IBM is a matter of convenience and not out of necessity. Does this mean a total union of the two areas of accounting?

The cooperation implied above does not mean total marriage between the financial accounting department and the managerial accounting wing. The two sectors have their independence and the leadership has always stressed the significance of independence of not only these two sectors but all the other departments at IBM.The necessary principled business cooperation that is necessary for the smooth and successful running of the company is what is promoted (Scapens 2006, pp 3). The leaders of the various departments are always advised to make independent decisions based on the situations that they face and not what the chief executive wants.

When the Managers Meet the Accountants at IBM

The management and the accounting department meet from time to time as a routine practice for the company. These times include; budgeting, at the end of a financial year when the accountants are required to release the financial statements of the company, when the management are planning to open a new branch for the company, when IBM is buying another company or during mergers. The accountants also meet the management in times of renumeration evaluation. In all these situations, the aim is to ensure that the management is able to make decisions that do not go beyond the financial potential of the company.

The Budgeting Process at IBM

Budgeting is the process of making a forecast of revenue to be collected and the expenditure to be made.IBM engages in budgeting, just like most firms as a way of ensuring that its finances are in order. Other benefits of budgeting include the ability to meet goals since a company is bale to know what it expects to collect as revenue and the ability to avoid spending resources where they are not supposed to be spent. This is due to the fact that the budget that is produced states what resources are to be spent where.IBM has the tradition of carrying out its budgeting on a regular basis. Interruptions in its budgeting process come in when new business ventures are being pursued, a case that is flexibly handled through the creation of situation specific and well documented financial records.

How the Budgeting Works and the Budgets Generated

Steps that are followed in the Preparation of a budget

IBM makes use of a number of resources in its budgeting. The major ones include the historical financial data which refers to the budgets that have been produced over the years, the opinions of the various departmental heads, the value of available assets, the value of liabilities, and market size. Market size is an important aspect in budgeting because the revenue of IBM is pegged on the amount of sales the company is able to make during each fiscal year.

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Budgeting at IBM is a group activity. It is not a monopoly affair for the chief financial officer or the chairman (Gerstner 2002, pp 95). The various departmental heads are given the powers to have a say on what their departments need in terms of finances and this is incorporated into the master budget. This is what we can describe as participative or participatory budgeting. Another practice that is common in IBM is variance analysis. This is carried out for both materials and labor. The elements of income, profits, expenditure, and liabilities are al used in their estimated and actual numbers come up with variances. A number of budgets are generated within the IBM family.

The Master Budget

This is the most common budget, and it has huge figures that sum up the financial information on expected income and expenditure for a fiscal year. All the other budgets fairly fit into the master budget although not all the time. For IBM to come up with the master budget, the cost estimates and returns on investments of each department has to be taken into account. This is then balanced and used to come up with the master budget.

Cash Budget

IBM prepares cash budgets too. This type of budget provides room for the recording of the inflow and outflow of cash.

Operating Budget

This is the most significant budget after the master budget at IBM.The operating budget shows the amount of money that is going to be spent in providing services such as consultancy in the field of technology and availing its computer software and hardware to the market. The financial resources that go into the technology laboratories that develop software are covered in the operational budget of IBM

The IBM Fixed Budget

This budget is not very popular with the IBM establishment. It is prepared for departments that have displayed a level of stability in their operations. This means that this type of budget provides a cap that shows the highest possible expenditure for a particular department. For a company that is aggressively exploring the market, it is not focused on putting caps on any one department. The argument for this is that it may end up limiting the room for growth.

Financial Budget

This is an equally important budget for IBM.It shows the provides crucial information that shows the assets of the company, the liabilities the company has and the share value of the shares held by the people who have invested in the company. Since it was allowed into the New York Stock Exchange in 1916, IBM has been producing financial budgets.

Management Accounting Information System

IBM understands the significance of information that is handled by managerial accounting. The functions, that have been identified elsewhere in this term paper show that managerial accounting information breathes life to the company (Langfield-Smith 2008, pp 213-214). This information is therefore properly disseminated to every wing of the company that is responsible for decision making that affects the company as a way of ensuring that no financial decision is made out of ignorance since this can hurt the company. The company uses Distributors’ Management Accounting Systems (DMAS) which is its own product.

As a way of ensuring that information is shared by all relevant personnel in the company, there is an information acquisition policy that requires all the managers to ensure that they make it their duty to access all the necessary information for their departments. This is in line with the practical leadership concept that is being promoted in a number of companies around the globe.

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Costing Process at IBM

Costing is not an easy process for any company.IBM uses the activity based costing for which it developed Cognos, its attendant software. It is currently marketing Cognos and advocating for its use in federal offices that are employing the activity based costing.IBM also carries out the break even analysis as a means of avoiding non-lucrative investments. The costs that IBM considers include direct costs, fixed costs, sunk costs, contingent costs, and variable costs. The type of costs that IBM has earmarked as fixed costs are the salaries of the employees which are standard as a financial undertaking but not in terms of the amount of money each employee is to be paid as this is revised from time to time and the software and hardware development costs. Other fixed costs include the money spent by the company in maintaining its New York offices as well as its other offices around the globe.

Variable costs are such commitments as contributions to charity, promotional undertakings upon the launch of new software or hardware, and other company centered events that are organized from time to time depending on the occasion. All these costs guide the financial decision making process at IBM.Contingent costs cater for risks and other unforeseen occurrences that may affect the company. It is not always easy to determine extent of the resources to be used to cover contingent costs.

The basic philosophy behind the activity based costing is that the number of actions that is associated with the provision of a service or product is used as the basis for assigning cost to that product or service. This is then used as a guide by the management in determining areas of concentration of resources for maximum gain or profit. At the end of the day, expensive undertakings that have little profit margins for the company are avoided and the cheaply produced commodities whose returns are reasonable are given priority. Care is however taken so that quality is never compromised in the process. This is where the department of quality control comes into play as a watchdog for maintenance of company standards. The quality control at IBM is strong and this explains the continued market domination by the company.

Capital Acquisition and Structure

The capital base of IBM is heavily dependent on share equity. The resources that shareholders have invested in the company are a crucial part of the company’s capital. The other way in which the company finances its capital budget is through ploughed back profits. The profits that the company makes are partially converted into capital and used to run the company. The profitability of the company has not been uniform but in the last ten years IBM has registered positive growth (Slater 1999, pp 79). Depending on the amount of items already produced in terms of computer hardware and software and the level of profitability of the IBM, capital rationing is a situational tool. The corporation has used it in the past when it has faced tough financial times.

IBM has also utilized the practice of borrowing as a way of strengthening its working capital. This has been done during moments of financial crises when circumstances have forced the management to look outwards for a financial injection in a bid to give the company the liquidity that is necessary to take it back to profitability.

Conclusion

IBM is a well organized company that produces computer hardware and software. Its accounting practices are integrated whereby managerial accounting and financial accounting sectors share information. Managerial accounting produces information that is needed for internal decision making while financial accounting produces information that is based on what has already been done by the company. It employs the activity based costing and generates financial budgets, operational budgets, master budgets and fixed budgets. It also produces cash budgets. The budget process at IBM is participatory with all the major decision makers having a say. The company is profitable and the profits form part of capital budget financing. Share equity is another source of the company’s capital base.

References

Atrill, P. & McLaney, E. 2009. Management Accounting For Decision Makers. 6th ed. Harlow: Financial Times/Prentice Hall.

Buck, R. 1986. The IBM Way New York: Harper & Row Publishers.

Gerstner.V. L.Jr. 2002. Who Says Elephants can’t Dance? New York: Harper Collins.

Horngren, C. Sundem, G & Stratton, W. 2002.Introduction to Management Accounting. New York: Prentice Hall.

Kaplan, R. S. & Bruns, W. 1987.Accounting and Management: A Field Study Perspective New York: Harvard Business School Press.

Langfield-Smith, K. 2008 ‘Strategic Management Accounting: How Far Have We Come In 25 Years?’ Accounting, Auditing and Accountability Journal, 21 (2), pp. 204–228.

Paul, C. 1993. Big Blues: The Unmaking of IBM.New York: Crown Publishers

Scapens, R.W. 2006 ‘Understanding Management Accounting Practices: A Personal Journey’, The British Accounting Review, 38 (1), pp. 1–30.

Slater, R. 1999. Saving Big Blue: IBM’s Lou Gerstner. New York: McGraw Hill

Zimmerman, J.L. 1997 ‘EVA and Divisional Performance Measurement: Capturing Synergies and Other Issues’, Bank of America Journal of Applied Corporate Finance, 10 (2), pp. 98–109.

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StudyCorgi. (2021, December 17). IBM’s Management Accounting & Financial Practices. Retrieved from https://studycorgi.com/ibms-management-accounting-and-amp-financial-practices/

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