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Does this winner only go out at night?

Imagine the scene. You want to go to a music Festival but the tickets are expensive.

What do you do?

I know. Why don’t you pay for the tickets with blood rather than money?

Now whilst this statement may sound a bit weird, some creative minds behind the Untold music festival in Romania have come up with an excellent idea which is a classic win – win situation.

In fact, rather than a win – win situation it’s more of a win – win – win situation.

So who are the three winners in this situation?

The organisers of the festival identified the fact that Romania has one of the lowest percentages of people who donate blood (Romania ranks second to last in Europe regarding the number of blood donors with only 1.7% of the population donating blood) and came up with a novel way of helping to increase the amount of blood donations.

They offered free tickets and discounts to people who donated blood.

It was reported that up to 500 people donated blood so all in all a very successful project.

The Blood Transfusion Service was a winner as it received more blood and importantly raised awareness of the need for more blood.

The organisers of the festival were winners as this was a very slick piece of PR for a first-time festival and despite having top DJs such as Avicii and David Guetta headlining the event it was great to have national and global publicity as a result of this.

The third winner were the individuals who gave blood and obtained free tickets.

Mysteriously though, was there a fourth winner?

It hasn’t gone unnoticed that the festival took place in Transylvania which is the home of Bram Stoker’s legendary Dracula.
Dracula survives by drinking fresh human blood.

Was this in fact a ploy to build up the stocks of blood for the mysterious Count Dracula…

Royal Navy seize inelastic items.

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A joint operation by the British and Australian navies last month resulted in the largest ever haul of heroin at sea. The drugs weighing 1,032 kilogrammes had an estimated British street value of more than £140 million and were found on a boat 30 miles off the coast of East Africa near Kenya and Tanzania.

This is great news for the authorities but what link does this have with the exams?

HMS EdinburghPrice elasticity of demand (PED) is a core area of pricing theory. PED measures the sensitivity of customer demand to a change in prices and is calculated as

PED  =    % change in demand
% change in price

There is usually an inverse relationship: when price goes up, demand goes down (and vice versa).

Addictive drugs such as the heroin seized by the British and Australian navies however are an inelastic product and in fact are approaching perfect inelasticity. A perfectly inelastic product is a situation where price goes up but the quantity demanded stays the same. In the case of addictive drugs, the drug addicts will still need their “fix” so the quantity demanded by them is largely unaffected by price increases.

If you have enough wine you’ll look even more beautiful…

Although it’s difficult to pinpoint the exact time when wine was first made, it is commonly thought to originate from many thousands of years ago.

Since then people have drunk it, enjoyed it and on occasions no doubt regretted it following an almighty hangover the following day.

face_maskOver the years the methods involved in making wine have stayed fairly consistent. Grapes are crushed, the wine is fermented, stored and then drunk.

In management accounting terms the grape skins left over from the crushed grapes are considered to be a by-product.

In other words, the crushed grape skins that are removed during the wine making process have a limited value and are basically thrown away.

Spanish wine maker Matarromera has recently identified a novel use for the grape skins that are left over from the wine-making process.

The left over grape skins are rich in antioxidants and Matarromera has now launched a cosmetics brand called Esdor which mixes these grape skins with other natural products to produce cosmetics including nourishing creams, eye contours and moisturisers. The company claims that their products can help with anti-aging and anti-wrinkling.

Moving back to management accounting terms and given the success of the cosmetics line then the grapes will result in joint products – namely, the wine and the cosmetics.

There’s a saying in English that if someone has had too much to drink then they are “off their face”. Maybe with this wine it will be “on their face” as well.

Man’s best friend as well as a money processor.

The bond between man and dog can be pretty strong. It’s difficult to be precise about when the relationship first started but common thought is that the grey wolf was domesticated 20 to 30 thousand years ago. Since then the relationship has strengthened.

dog eats moneyWhilst dogs can provide a range of working support to humans (e.g. guide dogs for the blind, search and rescue support, etc) the majority of dogs are simply loved by their owners for being their pet and a cherished member of the family.

Sundance, a 12 year old Golden Retriever, provided his owner with a unique challenge though and no doubt pushed the boundaries of love between man and his dog.

Wayne Klinel from Montana in America left Sundance alone in his car whilst he grabbed some lunch with his wife.

When he returned to the car he found that Sundance had also had lunch. Sundance’s lunch though was more expensive than his owners as the dogs lunch took the form of five $100 notes that Mr Klinel had left hidden in the car.

Alas for poor Wayne all that was left of the notes were small pieces of some $100 notes.

The U.S. Department of Treasury’s does in fact have a Mutilated Currency Division where people can apply to have mutilated currency replaced.

Now this would be an extremely easy “get rich quick” scheme if you could simply write to the Mutilated Currency Division and say that your dog had eaten some money and to request some replacement money.

Instead, you need some form of evidence to support your claim.

So, your dog has just eaten $500 and you need evidence. What would you do?

Well Mr Klinel decided to follow Sundance around and collect his, how can we say it but, collect his little “dog logs”.

Yes, in true dedication to the task, Mr Klinel collected the droppings of Sundance and using an old metal mining screen and a hose he separated out the bits of dollar notes from the rest of the matter.

After cleaning the bits of notes he assembled them as best he could and sent them off to the Mutilated Currency Division.

Despite no doubt being somewhat surprised by the unusual aroma coming from the envelope that the bits of dollar bills were sent back in, the Mutilated Currency Division did the honourable thing and sent Mr Klinel a cheque for the mutilated money.

Does it matter if the swimmers are naked or not?

During the summer holidays at university I was lucky enough to have a temporary job as a life guard at the local swimming pool. Thankfully there were no emergencies and the most exciting thing that happened was when a locker became jammed.

businessman-in-poolI graduated from university and now I’m an accountant. My job now involves looking at figures on spreadsheets rather than figures in the pool.

In Austria, the management of Vienna’s public swimming pools carried out a survey and found that bathers were consuming on average 5,000 litres of chlorinated pool water a day.

5,000 litres of water a day is a significant amount of water. Looking at this from a finance point of view this in turn means that this is a significant amount of cost in replacing the water. In addition, the authorities have to spend £20 per day to replace the chlorine that disappears with the water.

How come so much water is being lost? Surely the swimmers are not drinking the water and it would take an awful lot of splashing to lose that amount of water.

The answer is that apparently a lot of water gets removed from the pool via the material of the swim wear. When a person wearing Boardshorts for example leaves the pool 2.5 litres of chlorinated water is trapped in the material and is removed from the pool.

So, picture the scene. You’re an accountant at a sports complex and are attending a meeting to discuss cost saving initiatives for the year ahead.

Given the above findings then would a cost saving solution be to suggest that swimwear should be banned?

Now whilst this would save the cost of chlorinated water being replaced I think the number of swimmers would decline dramatically.

Importantly though I think they would save on the cost of your salary as you probably wouldn’t be in the job for much longer after that suggestion.

London cab drivers, “the knowledge” and mixed costs…

I think that London taxi drivers are brilliant. There’s never a dull moment and if you want a conversation you’ll certainly get one when you’re in a black cab. To be honest, half the time if you don’t want a conversation you’ll still get one.

london-taxiLondon cab drivers have to pass rigorous tests before they are licensed to drive a black cab. “The knowledge” is a term used for the exams that the drivers have to pass and ensures that they know their way around the streets of London without having to refer to satnav systems or maps.

My own personal view though is that “the knowledge” also refers to the fact that the drivers generally have a strong opinion on most things and seem to know everything about everything! To be fair I was quite impressed with the driver of the cab I was in last night. When he found out that I taught finance he went on to point out that the taxi fare I was about to pay him was classified as a “mixed cost” as it was partly a fixed cost (the minimum fare) and partly variable (the charge per mile traveled).

I’ll give him credit where it’s due as he was absolutely right. Fortunately for him though the journey came to an end before I could test him on other costing methods…

Fancy nipping down the pub for a quick pint and maybe grab a latte and a croissant?

When I was in my teenage years, pubs in England were a very distinctive place; dark, smoky, slightly smelly, overwhelmingly male and mostly shut.

A legacy of previous societal norms meant that women rarely went into pubs unless they were with men.

A legacy of World War One legislation meant that drinks could not be served after 10.30pm or 11pm.  This generally meant a few hours of seriously intensive binging from about 8pm to 11pm, mostly on two nights per week.

croissantThis state of affairs was not great for earning a commercial return.  Pubs often occupy prime sites at expensive rental.  Trying to recover the operating costs of a business when the assets are only utilised for 10% of the time is a challenge and a half.

The first marketing innovation was to make pubs far more female friendly.

Curtains over windows were abolished in favour of plate glass windows.  Pubs started to sell a choice of wines.  The smoking ban came in.

Women were far now more likely to go to a bar with friends because the environment seemed less intimidating.  Unsurprisingly, where groups of young women went, groups of young men followed.

Doctors worried about the effects of all this on the nation’s health, but the tills kept ringing.

Laws governing opening hours were relaxed a few years ago, with some predictable, but probably transitional, issues of overindulgence, as a nation used to nanny closing the bar at 11pm now continued to serve, as people continued to drink at the, erm, efficient rate the previous law had dictated.

JD Wetherspoon runs a chain of bars in the UK, mostly in sites that previously were not bars. Car showrooms are a particular favourite choice of location because of the big windows that attract passing impulse customers.

They have started to open their city centre bars early in the morning, in an attempt to attract an extra crowd.

Some chains have slightly different staff uniforms in daytime and the evening; pseudo-Parisian coffee bar by day; unfussy drinking den by night.

The result is that JD Wetherspoon claims to sell 400,000 breakfasts per week (only McDonalds are bigger, with 600,000).

A recessionary environment means that customers have become open to the idea of hanging out in Wetherspoons with a cheap latte instead of a more expensive option in Starbucks.  It has achieved this growth remarkably quickly, as it only started to open for breakfast last year.

It’s a wonderful example of innovative business change, asset utilisation and absorption costing.

So, what’s this all about? Are things changing? Is it a load of bear or a load of bull?

The major stock markets around the world have been bear markets for the last couple of years but with the end of the recession looking like it’s here we should soon see a switch to a bull market.

Analysts around the world will be arguing one way or another on the timing of the recovery but where do the terms “bear market” and “bull market” come from?

There are two main views on the origin of these terms.

The first view is based on the methods with which the two animals attack.  A bear for example will swipe downwards on its target whilst a bull will thrust upwards with its horns. A bear market therefore is a downwards market with declining prices whilst a bull market is the opposite with rising prices.

The second view on the origin is based around the “short selling” of bearskins several hundred years ago by traders. Traders would sell bearskins before they actually owned them in the hope that the prices would fall by the time they bought them from the hunters and then transferred them to their customers. These traders became known as bears and the term stuck for a downwards market. Due to the once-popular blood sport of bull and bear fights, a bull was considered to be the opposite of a bear so the term bull market was born.

Whatever the actual origin of the terms though I’m sure most people will be relieved when we return to a bull market.

Who earns the most out of the Top Gear presenters?

BBC Worldwide has just published its latest annual report and for any fans of the TV programme Top Gear there are some interesting figures.

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Top Gear is an incredibly successful TV programme. The programme which is so loved by car addicts around the world is the world’s most widely watched factual television programme and is shown in 174 territories. That’s pretty impressive and shows what a global success the programme has become.

It stars Jeremy Clarkson, Richard Hammond (the Hamster) and James May (Captain Slow) but who earns the most out of the 3 presenters?

It will probably come as no real surprise to find out that Jeremy Clarkson received the most last year.

Interestingly though the majority wasn’t from his salary but rather from dividends and a sale of shares.

5 years ago a company called Bedder 6 was set up with the aim to exploit the commercial opportunities of the Top Gear brand.

Top Gear Magazines, live shows and DVDs followed.

So who were the original shareholders of Bedder 6 when it was set up?

Well, the BBC was a 50% shareholder whilst Top Gear executive producer Andy Wilman had a 20% stake and Jeremy Clarkson had a 30% shareholding.

Alas for poor Hamster and Captain Slow the other 2 presenters didn’t hold any shares.

The recently released BBC accounts show that the BBC bought out the shareholdings of Clarkson and Wilman.

How much did Clarkson receive in total from the BBC last year?

He received a salary of £1 million, dividends of £4.86 million from Bedder 6 and £8.4 million for selling his shares in Bedder 6 to the BBC.

In total, he received £14 million from the BBC.

That’s not a bad amount is it?

To be fair to the guy though he’s been instrumental in building the Top Gear brand into a global success with millions of viewers around the world so arguably he deserves the financial rewards that go with it.

With that amount of money hitting his bank account in the last year though one thing he can definitely do is to buy any car that he wants.

Would you have ridden this wave differently?

I’ve got a couple of friends who are keen surfers. If you speak to them they will tell you that successful surfing is all down to getting the timing right and catching the wave at the right moment.

billabongIt looks like timing is also an important issue if you happen to hold shares in one of the world’s largest surfing brands.

Billabong is Australia’s largest surfwear company and is currently the target of a takeover bid.

Billabong was set up by Gordon Merchant in 1973 when he started making surf shorts on his kitchen table and selling them to local shops.

The company rode the waves of success over the following 35 years and developed a strong following amongst fashionable surfers (as well as a strong following amongst people who had never been near the sea!)

Back in 2007 the company was valued at A$3.8 billion (approximately £2.5 billion at today’s exchange rate) but unfortunately for the shareholders the global recession bit and faced with increased competition from other fashion brands the sales of Billabong products fell dramatically.

Last February the shareholders turned down an offer of A$842 million (£560 million) to buy the company.

Earlier this year the company reported their largest ever loss after writing off most of the value of its main brand.

It’s not exactly smooth water for the company and they are currently in sale discussions with a consortium made up of a former director and a private equity company. The value of the offer on the table at the moment is A$287 million (£190 million).

£2,500 million to £560 million to £190 million.

As they say in the surfing community, it’s all in the timing.

You’ve heard of the iPhone but what about iMerica?

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$75,876,000,000 is a lot of cash. But who does it belong to?

We blogged recently about Apple’s latest set of successful results but if you look into the figures you’ll see a staggering amount of cash that they hold.

Cashflow is a key factor for most businesses but by anyone’s reckoning $76 billion of cash is a hefty amount that will cover most eventualities.

Apple are reportedly holding onto the money for potential big ticket acquisitions but if you look at the latest market capitalisations of some well known companies on the London Stock Exchange then you can see what Apple could buy with their cash of $76 billion (£47 billion).

For example, they could purchase ALL of the following household names with cash:

BSB (Sky TV) (market cap = £14.8bn)

Burberry (£6.2bn)

Sainsbury (£6.1bn)

Marks & Spencers (£5.7bn)

Ryan Air (£4.7bn)

Next (£4.2bn)

Pfizer (£4.1bn)

Easy Jet (£1.5bn)

So, without taking out any loans or raising any additional funds Apple could buy all of the above.

These are phenomenal amounts of cash that they are holding.

They even have so much cash that they currently have more cash at hand than the US government!

According to the US Treasury, the total operating balance (in effect the amount of money the US government can spend before it hits their debt ceiling) was $74 billion. This is $2 billion less than the cash that Apple has at hand.

So, Apple has more cash than the US government. Will we shortly be seeing a picture of Steve Jobs on the one dollar bill?

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Should you get married if you’re a finance person?

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Marriage – that traditional bond between man and woman where they share their journey through life. Joining in together with the good times and the bad times but above all being a symbol of ultimate love between a man and a woman.

That’s all very nice but forget about all that romantic stuff, if you’re a finance person is now the right time to get married?

One of the cornerstones of a marriage is the gold wedding ring and they are likely to be getting more expensive in the near future as yesterday the price of gold hit a new all time high record price of $1,610 an ounce.

Why has the price suddenly shot up? Is it because the world has suddenly got all romantic and there has been a surge in demand for gold wedding rings?

The answer has nothing to do with weddings but rather the case that gold is seen as a “safe haven” for investments during times of global economic uncertainly.

With the current economic problems in Greece and thoughts that high debt countries such as Italy and Spain may get drawn into the crisis, investors are avoiding shares and government bonds and instead investing in gold.

So, looking on the bright side for those of you that are about to get married, although your wedding ring is likely to become more expensive to buy, not only will your “emotional wealth” hopefully grow after you get married but so will the value of the gold investment on your finger.

Then again, whether you’ll ever be looking to sell your wedding ring at any stage in the future is another discussion altogether…

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Would you criticise me if I spent ALL of YOUR bonus on alcohol?

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One of the ways that governments around the world have tried to kick start the economy during the recent recession has been through the reduction of interest rates.

10 years ago the Bank of England base rate was 11.38%.

Today, the current rate is 0.5%.

If individuals have variable rate loans or mortgages on their home and the interest rate falls, their interest payments will also fall.

As a result these people will have more money in their bank account and in theory this additional money should make them feel more relaxed about buying goods. If these additional goods are purchased then the economy is stimulated.

Lower interest rates may also encourage individuals and organisations to take out new loans. This money can then in turn be used to buy products which again should stimulate the economy.

Now, whilst low interest rates are good for people that are borrowing money, they are not so good for people who are investing money and looking to receive interest on the cash they’ve invested.

Certain parts of the population are more reliant on interest received as part of their income than others. Pensioners for example, who are no longer working can be hit particularly hard as they often rely on interest income.

I’ve just had a quick look at the internet bank Egg.

Egg was established in 1998 and 4 years ago was bought by Citigroup (Citi). It’s one of the top internet banks around and offers good interest rates when compared to some of their competitors.

But what sort of interest rate do you get?

The Egg site today includes the following text:

“Egg Savings Account – watch your money GROW.

Get 0.60% gross pa/AER variable and watch your savings grow.

Includes a fixed 12 month introductory bonus rate of 0.10% gross pa/AER from the date your account is opened on balances from £1 to £1 million.”

The accountant in me likes to play with figures so let’s just think about this for a moment.

If you open an account with Egg with a £1,000 deposit, after the first year you’ll receive a bonus of £1.

Yes, a whole £1.

My favourite drink is London Pride beer and a pint will set me back £3.50.

Just think, in one year’s time if I invested £1,000 in the Egg savings account I could blow the bonus on just over a quarter of a pint of beer.

Then again, I couldn’t actually buy a quarter of a pint as I’d have to pay tax on the £1 bonus received…

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You can raise your profile on LinkedIn but will LinkedIn raise $175 million?

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The professional networking site LinkedIn yesterday announced plans to raise up to $175 million (£110 million) by way of a public offering.

Many of you may well be members of LinkedIn and in terms of registered users it has been very successful since it started back in 2002.

Financial information about the company though has historically been difficult to obtain as such information was kept away from the public domain.

The IPO document released yesterday however provides some interesting figures.

For example, LinkedIn gains a new member every second and now has more than 90 million total members worldwide.

Although the majority of LinkedIn users are subscribers that sign up for the free version the company does generate significant income. It was able to double its 2009 revenues to $161 million in the first nine months of 2010. The $161 million can be broken down as follows:

  • Hiring solutions (job listings): $66 million (41% of revenue)
  • Marketing solutions (advertising): $51 million (32% of revenue)
  • Premium subscriptions: $44 million (27% of revenue)

2010 was the first year that LinkedIn was profitable with a net income after tax of $10 million.

Cash at hand as at 30 September 2010 was $90 million whilst total assets were $197 million.

The IPO document also has to provide details of shareholders with more than a 5% stake.

The founder and chairman, Reid Hoffman owns 21.4% of the company together with his wife whilst 3 venture capital firms own approximately 39% between them.

The shareholders should do very well out of the IPO and indeed Mr Hoffman is no stranger to successful e-businesses having previously been an executive at PayPal.

If you’ve got a relaxed day at the office and a love of detail then the full document submitted to the US Securities and Exchange Commission can be found here.

How many sandwiches can a stockbroker in Hong Kong eat in 2 hours?

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What did you have for lunch today? Did you manage to get out of the office or did you grab a quick sandwich at your desk?

If you’re a stockbroker working at the Hong Kong stock exchange then the chances are you had a rather nice long lunch.

The Hong Kong stock exchange has one of the shortest “opening hours” out of the major stock exchanges.

It is open for business 4 hours a day and also enjoys a rather pleasant 2 hour lunch break.

It also does fairly well when looking at the opening hours of the other major stock exchanges around the world:

  • London, Paris and Frankfurt – 8.5 hours
  • New York – 6.5 hours
  • Australia – 6 hours
  • Tokyo – 4.5 hours

For anyone that has lived or worked in Hong Kong this may come as a bit of a surprise as it’s one of the busiest most frenetic cities in the world.

Alas, it seems that their 2 hour lunch break is now under threat.

A consultation paper has recently been issued and it is raises the proposal of:

  1. Starting half an hour earlier at 9.30am (surely it’s virtually impossible to have a nice breakfast if you have to be in the office at 9.30?)
  2. Reducing the lunch break from 2 hours to an almost impossible to fit in a 3 course meal and a bottle of wine timescale of 1 hour.
  3. Luckily there are no plans to change the closing time of 4pm so the brokers will at least have a reasonable time to get ready for dinner.

The arguments in favour of adjusting the opening hours are to enable it to tie in with the mainland Shanghai exchange opening hours.

In what can only be described as “hardly the surprise of the century” it was reported that 70% of the Hong Kong Securities Professionals Association members that were asked their opinion on the proposals felt that the 2 hour lunch break should remain.

Closing for lunch isn’t something that you find in the majority of stock exchanges elsewhere around the world.

If for example you wanted to get the views of somebody from London who had actually experienced the London stock exchange closing for lunch you’d have to find a very elderly broker. The London Stock exchange last closed for lunch 60 years ago in 1950.

A bank run? Don’t worry, it’s only a bit of fun…

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It hardly seems possible that the bank run on the UK bank Northern Rock happened over 3 years ago but last week some people thought that there was a similar run on the Spanish bank BBVA.

A bank run occurs when a large number of people with deposits at a particular bank head to branches of the bank to get their money out as quick as possible.

It often follows a rumour about problems with the bank and can lead to a self fulfilling prophecy.

Large numbers of people withdraw money. This can cause liquidity problems at the bank which in turn causes more concern which leads to more people rushing to withdraw their money which leads to liquidity problems with leads to….. and so on until a vicious circle develops.

A bank makes its money from lending.

If it just keeps depositors money without using the deposits to generate revenue by for example lending to borrowers then the bank is in effect just a safe deposit box for the deposits.

In the great depression of the 1930s sudden withdrawals by panicky depositors caused liquidity problems to such an extent that a number of healthy banks were forced to close.

Nowadays, as long as the bank is solvent, any short term liquidity problems should be resolved by borrowing cash from its central bank as a “lender of last resort”.

Bank runs can still happen though and last week the queues of people outside of BBVA bank in Madrid caused rumours that resulted in the share price falling sharply.

It took a while for the markets to identify what was going on and it wasn’t so much a bank run that was causing the queues but rather a “fun run”

There was a 10km fun run sponsored by BBVA and joggers were queuing up to get their race numbers and t-shirts from the bank for the run on the Sunday.

Unfortunately rumours quickly spread around the financial markets that there were large queues outside the bank and in the jittery post financial crisis atmosphere the share price plummeted by nearly 4%.

Luckily a hour or so later the markets realised that the bank withdrawals were race t-shirts rather than cash and the share price recovered.

Finally, to test your knowledge of the financial markets there are two pictures in this blog entry. One shows a bank run whilst the other shows a fun run. Can you tell the difference…

Don’t worry about the £117 million you can’t find. Instead, just go on a nice long holiday…

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Paul Bowtell, the CFO of Europe’s largest travel company TUI Travel will soon be able to go on a very long holiday.

TUI recently announced that Mr Bowtell will leave the company at the end of the year.

Why is this I hear you ask?

Put bluntly, the reason is that he messed things up in a big way when he was in charge of the finances of the company.

TUI stated that they would be writing off £117 million of “irrecoverable balances” and restating their prior year financial results.

£117 million is a significant write off in anyone’s books. The share price of TUI fell by over 10% as a result.

It also highlights one of the challenges faced by organisations that merge.

The write down originates from “failures to reconcile balances adequately in legacy systems in the retail and tour operator businesses in TUI UK”. In other words, back in 2007 when TUI merged with First Choice Holidays they had to integrate different systems and simply didn’t manage it.

Questions have got to be asked as to why they couldn’t reconcile the systems. After all, given there’s been a recession on for a few years there must have been a few IT consultants available to work on the reconciliation of the systems and who would have charged a lot less than £117 million.

Mergers often have problems with integrating areas such as the culture of the companies but it’s clear now that the integration of these IT systems has also been far from easy. Being unable to reconcile £117 million makes for a spectacular suspense account.

Publicity around mergers tend to focus on their advantages, real or perceived, but the behind-the-scenes work that has to be done can be substantial.

It no doubt proved to be a real headache for Mr Bowtell. For his sake we hope that this will prove to be the biggest write off he has to oversee in his career.

Was it a good bet or not? 10 years and £1.4 billion later and the answer seems to be…

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Although people have been gambling for a long time, the profile of the betting industry has changed dramatically over recent years.

The bookmakers that were seen on many a high street seem to be gradually disappearing.

People are still gambling though but the delivery method of the industry is switching to internet based gambling rather than placing bets at a physical bookmakers.

Ten years ago former professional gambler Andrew Black and former JP Morgan trader Edward Wray started up a betting business that addressed matters in a new novel way.

For years the typical approach to gambling had been where a bookmaker set the odds and it was up to the individual gambler whether or not he or she accepted these odds and placed the bet.

Betfair pioneered the concept of person to person betting whereby individuals bet against each other rather than the bookmaker. Betfair provide the platform for the betting and take a commission on each transaction.

A gambler will say that they want to bet on a certain event happening (or not happening) and if another gambler wants to accept the bet then the transaction goes ahead. Betfair provide the mechanism for this to happen.

This is known as a betting exchange and is a great example of where first mover advantage really counts.

In order for the business model to work there has to be a critical mass of gamblers that are willing to offer and accept bets. Without this critical mass the business simply would not work.

Another example of where first mover advantage has been critical to business success is in online auctions. After all, who are the main competitors to eBay?

Back to Betfair though and it certainly is a good business model. Risk for example, is nicely reduced as the company is not standing to lose on the bet but instead takes a nice commission on each transaction.

So how well has it done over the last 10 years?

The answer to this can be found last Friday when 15% of the company was floated on the London stock market and the company was valued at £1.4bn.

Betfair’s advisors were some of the biggest names in the business and included Goldman Sachs, Morgan Stanley and Barclays Capital to name a few.

Amongst other things their job was to identify the price range of the proposed offer. Initial indications were that it would be between £11 to £14. The final initial public offering (IPO) price was set at £13.

With some of the top investment bankers involved and Betfair being in the gambling industry (which is not necessarily renowned for being generous to gamblers) it was something of a surprise to some people to see the share price rise by nearly 20% in the first day of initial trading after the IPO. After all, this could imply that the IPO was undervalued if there was such an initial jump in price.

I wonder what odds you would have got from Betfair that the IPO share price would rise by 20% on the first day of trading?

Get out your sketch pad if you want to overcome a barrier…

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If an organisation can create a successful barrier to entry then it will have a great competitive advantage.

In simple terms, a barrier to entry can prevent competitors entering the market.

We’ve blogged before about a good example of a barrier in the Indian telecommunication market but a recent attempt to create a barrier by Southampton Football Club in the UK was met by a truly artistic response.

Southampton FC decided that they would try to boost their income by preventing any non Southampton FC photographers from taking photos of their match with Plymouth Argyle.

This barrier meant that the only photographers present were official Southampton FC photographers and hence any photos of the match would have to be purchased from the official agency. A nice revenue source for the club.

Ignoring the rights and wrongs of this in terms of impact on other clubs and setting a precedent, this is indeed a pretty tough barrier to overcome.

Understandably upset at having to pay for photos of their local team, the Plymouth Herald newspaper approached well known local artist Chris Robinson.

Chris watched the match on television and then drew “comic strip style” pictures of the football action which were then published in the paper instead of photos.

As you can see, the results were pretty impressive.

It also resulted in a pretty unusual answer to the question of “How do you overcome a barrier to entry”.

The answer now includes, “Draw some cartoons”.

How much does it cost to buy your loyalty?

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Last week one of the top policemen in the UK admitted to getting discounted flights for his family by using air miles obtained on tax payer funded flights.

John Yates, who is the Assistant Commissioner of the Metropolitan Police (i.e. the  Greater London Police), is entitled to fly business class on official trips abroad. This enables him to amass significant amounts of air miles which can then be used for free flights in the future.

With a nice corporate governance angle the rules of the Metropolitan Police say that these air miles must be used for future work related flights and not personal ones. In what he claimed was an oversight, Mr Yates however used these air miles for a number of personal flights.

I’m sure it was the last thing on Mr Yates mind but from the Airline’s point of view, the provision of air miles can involve big figures.

The IFRS Interpretation Committee (formerly known as IFRIC) didn’t make many friends when they wrote IFRIC 13: Loyalty Programmes.

Broadly, IFRIC 13 says that when you are given loyalty programme points by a business, they have to recognise a proportion of the total sale to you as a sale of loyalty points.  In other words, they are buying your loyalty, rather than rewarding it.

This means that each sale has to be unbundled into two components – a sale of loyalty points at the value to the customer (which is likely to be very much higher than the cost of delivering the promised service) and the underlying sale itself.

As the loyalty points are used up or expire, the deferred revenue from loyalty points sold is recognised as revenue.

Previously, the accounting policy of most companies had been to recognise loyalty costs as a provision at the expected marginal cost of delivering the service.

This can be a fairly significant figure.  By “fairly significant”, we naturally mean “completely massive”.  Have a guess what the effect was on shareholders’ equity in the restated 2008 accounts of British Airways for implementation of IFRIC 13.

The answer is £206 million.  Nope, that’s not a typo; getting towards a quarter of a billion British Pounds.  Ouch.

We at ExP travel fairly a lot for work and we’ve noticed that airline loyalty programmes have become a little less generous of late.  Maybe the new accounting rules are something to do with this?

Do you own a iPhone or is it a Hiphone, an Ephone or a Ciphone?

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On Saturday Apple officially launched the iPhone 4 in China. They also opened up two new flagship stores in Shanghai and Beijing.

China is the world’s largest mobile market with more than 800 million subscribers so it would seem to make sense that Apple sell their products there.

Why has is taken them so long to launch the iPhone 4 in China though? After all, the iPhone 4 was originally launched in the US back in June and in countries such as Australia, Netherlands and Singapore in July.

The handsets themselves are manufactured in China so it’s not as though they haven’t had any experience of doing business in the country.

There are various reasons why companies have phased product roll outs in different countries. The sheer scale of a “global launch” for a company like Apple would be extremely challenging. Having sufficient inventory in stock on global launch day would not only be a logistical nightmare but would probably be physically impossible.

An additional challenge for Apple is that they need to agree matters with their strategic communication service providers in each territory (in other words, the mobile phone operator they will be partnering with in each particular country). This also takes time.

Anyway, from now onwards we’ll be seeing the iPhone 4 in China but anyone that has been to China recently though could be forgiven for thinking that the iPhone 4 has already been in the country for a while.

A significant issue for Apple is the increase in the number of iPhone clone companies.

As well as clone companies that produce illegal fake copies of the phone there are also businesses that produce reasonable quality phones which are very similar to the iPhone. They are designed so that they try not to break any patent protection that Apple has set up. I’m sure though that Apple’s patent lawyers are monitoring these products very closely!

A quick search on the internet for example shows websites selling products such as the HiPhone, the Ephone and the Ciphone. With prices starting at less than $100 there will be a significant number of people opting for these items.

Oh, and in case you were wondering the photo above is of the Hiphone.

Is this your shopping list: bread, milk, eggs and Viagra?

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Monday could be a big day for a lot of people.

Tesco, one of the leading UK supermarkets, will commence selling the erectile dysfunction drug Viagra.

Viagra has been a huge success for Pfizer. It’s one of their blockbuster drugs and millions of the little blue tablets have been sold over the last 10 years.

One of the drawbacks though for a lot of men that want the drug is where to get hold of it from. In the UK you generally need either a doctors prescription or to risk buying it from potentially suspect internet sites.

Tesco are one of the most successful supermarket chains in the world. In strategic Ansoff’s Matrix terminology they have done very well with market development (4,811 stores in 14 countries with an amazing 2,482 stores in the UK alone) together with product development (an estimated 40,000 product lines ranging from pizza to petrol to perfume).

Tesco are about to add another product line to their offerings and from next Monday shoppers will be able to pick up Viagra from over 300 Tesco stores.

As finance people we know all about the challenge of getting pricing decisions right.

Tesco are not the first mainstream chain of stores to stock Viagra. Last year, the high street chemist Boots became the first store in the UK to sell Viagra without a prescription. You can currently buy 4 of the blue pills from Boots for £55.

A price skimming or premium pricing strategy for Tesco wouldn’t really work as the Viagra market is a mature market. Tesco has instead undertaken a classic penetration pricing strategy whereby they price the product at an attractive price with the aim of growing its market share.

From Monday, you will be able to buy 8 of the blue pills at Tesco for £52.

Whilst the per tablet charge at Tesco is a lot lower than what can be found at Boots, £52 is still a significant amount of money. There’s a recession on and times are hard for a lot of people. Only time will tell whether Tesco made the correct pricing decision.

Forget the great Polish and Russian vodkas, the best vodka in the world is officially English. Now, go and open a packet of crisps to celebrate.

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At this year’s San Francisco World Spirits Competition the best Vodka in the world award was won by a small distillery based in rural England in Herefordshire. Chase Vodka beat off 115 other entries to win.

This is a superb achievement by them.

I’ve been lucky enough to try some of the vodka. It’s certainly very nice and I have to say I think their award was thoroughly deserved. I hasten to add though that I haven’t tasted the other 115 vodkas so can’t really give an unbiased view!

Chase vodka has got a rather unusual background. It was founded by local potato farmer William Chase. Now William certainly knows a thing or two about potatos. He was the person that founded the upmarket potato crisp company Tyrrells.

Tyrrell’s crisps were only launched 8 years ago in 2002. In classic strategy terminology they were very much promoted on the differentiated manner as being of a better class of crisp, being hand crafted and a top quality product. His passion for potatos paid off and in 2008 he sold 75% of the crisp brand for a rather tasty £40 million.

Not content with sailing the world on his personal yacht or buying a private island to retire to he built on his core competencies and developed his love of potatos into another upmarket brand but this time to be enjoyed by adults only.

Again, using strategy speak the chase vodka business is nicely vertically integrated with the potatos being grown on the farm as well as the distillery and the bottling process being in the same location.

It’s not cheap – retailing at £32.95 it is over 3 times as expensive as the supermarket own brands but it’s hand crafted by a small team of workers and each bottle is reportedly made out of 250 top quality potatos. Comparing this with the mass market vodkas made out of left over grain then you can see why the pricing is different.

Using Ansoff’s matrix terminology they have also undertaken rather nice product development and launched a limited edition Marmalade Vodka.

Now, for me a lovely breakfast is a fresh pot of tea with some nice toast and marmalade. Should I be rethinking things though so that I opt for Marmalade Vodka instead?

“There’s no such thing as a free lunch” but will there be such a thing as a free drink or cheap drink in the future?

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Binge drinking in the UK is a major problem. City centres at the weekend can be full of people that are literally trying to drink as much as possible in as short a period of time. Violence and health issues often ensue.

As well as the disturbances to local residents there are also the costs both health-wise to the drinkers and financially to police forces, hospitals and society at large arising as a result of this binge drinking.

As a potential solution to this problem, the government is currently investigating whether to ban free or cheap drink promotions. One of the ideas being discussed is whether to make it illegal to sell alcohol below cost price. In other words to prevent businesses offering “loss leaders” on drinks so as to encourage higher spending at a later date.

If you’re an accountant, and assuming you’re not reading this in the middle of an actual binge drinking session yourself, this raises an interesting discussion on what exactly is meant by “below cost” and in particular the term “cost”.

The major alcoholic drinks manufacturers produce a range of drinks. Diageo for example produce drinks as varied as Smirnoff vodka, Johnnie Walker whisky and the famous Irish stout Guinness.

Identifying the cost of each particular drink would be challenging exercise. Whilst they no doubt have sophisticated management accounts which allocate overheads and indirect costs in certain ways, there would be a clear debate as to which was the “correct” allocation of these costs.

Apportioning overheads such as head office costs, R&D and marketing to individual products would result in a certain amount of flexibility in terms of identifying the cost figure to use for “below cost” purposes.

One solution to this inherent problem of identifying the cost of individual products has been proposed and that is setting the minimum cost of the drinks as equivalent to the duty and VAT that needs to be paid on the particular drinks.

So, the next time you’re out having a quiet drink with some non finance friends feel free to start a discussion about how much each of your drinks cost to make. You can then explain about the various possible methods of allocating indirect costs. Then again, talking about management accounting cost allocation whilst out with your friends may result in your  non finance friends starting a binge drinking session themselves…

If you’re going to buy shares in Skype then watch out as the Sky could be the limit.

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The internet telephone company Skype is planning on raising $100 million via an IPO (Initial Public Offering) on New York’s NASDAQ later this year.

Skype is probably the best known “internet telephone company” and users can make free Skype-to-Skype calls. Paid for calls to mobiles or landlines can also be made.

$100 million however is a significant figure and the filing documents submitted on Monday show that in 4 of the last 5 years the company lost money. In addition, the proportion of Skype’s customers that use the paid for services is also relatively small (8 million out of total registered Skype accounts of 560 million) so arguably there’s a real risk that it may be a significant time before the company is well into profit making territory.

The IPO submission documents must also show any identified risks and there is an interesting one present with Skype.

If you look at page 30 of the IPO submission document it was revealed that BSkyB, the owner of Sky TV in the UK, is in a long running dispute with Skype over the use of various trademarks. There is a view that Sky and Skype could be confusing for certain individuals especially given that BSkyB are promoting their telephone services alongside their Sky TV services.

It’s a case of watch this space to see what happens next.

Of course, free phone calls are one thing but if Skype ever started showing free television programmes then that’s when things would get really exciting.

Forget the sunshine, the beaches and the fantastic food – if you live in Australia sell your house and move to America…

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Asset valuation is a tricky business.  It is, however, a skill that accountants are often commissioned to use.  It’s also a useful one to have when making personal decisions, such as whether to buy a home or not.

Some people would argue that a major driver of the current economic slump in many countries is the collapse of house prices.

In a number of countries, house price bubbles were enormous.  There are lots of motivations for buying a home; principally as a place to live, a store of value for the future; certainty come retirement (when the mortgage is paid off so housing costs drop only to be maintenance).

Another motive has been speculation.  In my opinion, speculation in house prices is a bad thing, since it drives up house prices.  This means that new houses are not affordable for the young.  The more that house prices go up, the greater the transfer of wealth from the economically active young to the less economically active old.

Unsustainably high house prices cause uncertainty in an economy and when a crash eventually happens, it can cause people to be locked into homes with loans greater than the value of the asset (negative equity).  As well as a source of human misery, negative equity reduces labour mobility, which is bad for the economy as whole.

The Economist newspaper tracks house prices in different countries, using a method based on rental yields.  The assumption here is that rental markets react more readily to underlying supply and demand conditions.  If one had $500,000 to invest, would one use it to buy a house which could then be rented out, or buy other investments such as bonds?  If the rental yield (rent / initial value x 100) is less than the yield on bonds, then the house price is overvalued.  It’s a simple enough methodology that can give some revealing results.

A couple of years ago, this analysis suggested that UK property prices were 35% overvalued.  A crash followed.  There have been property crashes and recession in many countries where speculation is a big motive to buy property.  The alarming thing is that a recent analysis (Economist 10 July, page 75) revealed that properties are under and overvalued in certain countries:

UK: 33.8% overvalued (following a hard-to-explain recovery in house prices)
USA: 6.5% undervalued
Spain: 50.4% overvalued
Australia: 61.1% overvalued
Germany: 14.5% undervalued
Ireland: 15.7% overvalued.

This may be poor news indeed for the economy of countries with very overvalued property.  With these sorts of valuations, mortgages may become unaffordable the moment that interest rates rise to above the rock bottom levels we have at the moment.  This could release very big downward forces in the economy and dampen out any economic recovery.

On the plus side, the USA looks to have reacted quickly, albeit brutally, to the changed economic circumstances and it might be a good time to sell your home in Australia (cash out your investment while it’s arguably overvalued) and buy somewhere in America.  If you can get a visa.  Oh, and a mortgage!

How much do condoms cost to buy? Well, I guess anywhere from £1 to £2.5bn…

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Reckitt Benckiser, the Anglo – Dutch consumer products group, has agreed to buy the maker of Durex condoms for £2.5bn.

Last week the board of SSL recommended that the shareholders accept the offer from Reckitt which was at an effective 33% premium on the share price.

In addition to Durex condoms SSL also make Scholl shoes but £2.5bn is a lot of money and a 33% premium is pretty good in today’s environment. Should the shareholders therefore grab this opportunity with both hands?

Students of business strategy will be aware that there are both pros and cons of acquisitions. The general view amongst analysts in this situation though appears to be that it represents a good fit for the Reckitt business.

Firstly, Reckitt will strengthen their health and personal care division which is currently their fastest growing area. Health and personal care is considered by many to be a key area for businesses going forward (this is a nice link to PESTEL within the syllabus).

Secondly, SSL has a larger presence in a number of emerging markets. In particular SSL are in a strong position in China, a country where Reckitt are relatively weak compared to their competitors.

Cost savings from synergies of course can never be ignored. If the deal goes ahead there could be reported savings of £100m a year in terms of removing duplicate jobs, combining distribution channels, etc.

Marketing synergies are also important. Reckitt for example produce the headache tablet Nurofen.

Is this the real Willy Wonka? After all he bought enough chocolate on Friday to make over 5 billion bars of chocolate.

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Anthony Ward, a British financier who set up hedge fund Armajaro Holdings, bought a huge chunk of chocolate on Friday.

To be precise, he spent over £650 million buying 241,000 tonnes of cocoa beans.

This was the highest single purchase of cocoa for nearly 15 years and happened as cocoa bean prices rose to their highest level for 23 years. On news of the purchase cocoa futures for July delivery jumped by 1.5%.

The trade took place on Liffe (the London International Financial Futures and Options Exchange), a market which trades contracts in commodities such as sugar, coffee and cocoa.

As well as the sheer size of the transaction the strange thing about it was that Mr. Ward’s company has actually taken delivery of the cocoa. This is very unusual as the vast majority of cocoa transactions normally involve traders exchanging option or futures contracts without actually taking possession of the beans.

So why has he purchased so much chocolate?

He’s a very astute and wealthy businessman who reportedly lives in a £10 million house in Mayfair, London.

The speculation is that he is stockpiling huge volumes of cocoa in order to be in a strong negotiating position. Harvests in the cocoa heartlands of Ghana and Ivory Coast have recently been weak and there is an increase in demand for chocolate in the Chinese and Indian markets.

It looks like chocolate prices are on the rise so what better excuse for me to stock up on some chocolate before the price rises. Somehow though I don’t think my stockpile will be anywhere near Mr. Wards…

What will make Ernst & Young different from the rest of the Big 4? Will it be an Executive Decision or…

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According to reports this week, Ernst & Young will be the first of the Big 4 to appoint non-executive directors to its global advisory council.

This is a major move for the accountancy profession.

The profession has been under increasing regulatory pressure for a while now and the decision to appoint non-execs is reportedly in response to the new audit firm governance code that was published earlier this year.

The revised Ernst & Young advisory council structure will in broad terms mean that Ernst & Young will have a board structure which is similar to the multi-national companies that are their clients. Their remit will include monitoring strategy and risk.

Their global advisory council currently includes 36 senior partners. These partners will soon be joined by 4 non-executive directors drawn from the business and regulatory world.

The names of these non-execs will be disclosed later this year and although I’m not a betting man I’d probably have a wager that their CVs will not include the names of Deloitte, KPMG or PricewaterhouseCoopers.

You know you’ve had too much to drink when your eyesight goes blurry, you slur your words and you spend half a billion dollars…

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Steven Perkins, a 34 year old commodity broker, attended a company golfing weekend, had a bit too much to drink over the weekend and then took the Monday off of work.

This in itself didn’t justify being fined £72,000 earlier this week by the Financial Services Authority (FSA) and being identified as “an extreme risk to the market when drunk”.

It was what he did on the Monday evening that caused all the excitement.

After the golfing weekend, Mr. Perkins felt the need to carry on drinking and started drinking again on the Monday lunchtime. Late that night in a drunken stupor he bought 7 million barrels of oil using $520 million dollars belonging to his then employers PVM Oil Futures.

Because the purchases took place in the middle of the night other traders around the world thought that there was something major happening in the oil market and as a result the price of oil shot up by $1.50 a barrel in less than 30 minutes. Through the alcoholic haze Mr. Perkins gradually increased his bidding price each time to push the price up until at one stage he was responsible for nearly 70% of the global market volume.

He tried to gradually sell down his position in the morning but no doubt with a very dry mouth eventually admitted everything to his employer.

His drunken night time purchases resulted in PVM losing £6million, him being fined £72,000 and banned from the industry for five years. Plus of course, an almighty hangover.

Should Michael Jackson have had more of a bond with David Bowie?

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It’s one year since Michael Jackson died.  In the year since his death, his estate has made earnings of £670 million.

Given that he was allegedly in serious financial trouble at the time of his death, this must be the source of a certain amount of posthumous frustration to Mr Jackson.  His ability to spend the money has been significantly impaired in the period since the money started to roll in, on the grounds of his no longer being alive.

This is a quandary well known to many pop stars.  The murder of John Lennon in 1980 sparked a sudden and deep revival of his career.

I can’t help but wonder why none of Michael Jackson’s advisors pointed him in the direction of the Bowie Bond.

David Bowie issued bonds in 1990 that were secured on the future income to be earned from songs that he had written up until that date.  This is a simplification of course, but that’s the big picture.  By doing this, David Bowie was able to get the benefit of some of his post death earnings while he was still alive.  He is a smart business operator as well as enormously popular song writer, it seems.

The Bowie bond has been influential in business since it was issued.  In practice, I personally used it as the backbone of market data to help in the divorce settlement of another well known musician.

Its influence amongst accountants is significant, though less so with the pubic at large. Rock stars probably don’t shout about it because valuation and securitisation of intellectual property isn’t really very rock and roll.

How much would you charge for an hour of your time? £900,000 would probably be ok as long as lunch was included….

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It’s tough to qualify as an accountant. The exams are difficult and it’s hard work. The rewards, both financial and non financial however, can justify all of this hard work.

If you work for a firm of accountants then the fee income of the company is largely based on the hourly charge out rates of the employees. I’ve got a feeling though that no matter what your position is within your company you won’t be able to command a charge out rate of £900,000 per hour!

On Friday however a mystery individual paid $2.6 million (approximately £1.8m) for lunch with Warren Buffett, the 79 year old billionaire head of investment giant Berkshire Hathaway and world’s 3rd richest man.

Arguably the most famous and respected investor in the world, Mr. Buffett auctioned his time in aid of the Glide Foundation, a San Francisco charity . Assuming a 2 hour lunch the winning bid of £1.8m results in an impressive hourly equivalent of £900,000.

The winning bidder can take seven of his or her friends along to the New York steakhouse, Smith & Wollensky and are free to ask anything although Mr. Buffett will not be disclosing what he is buying or selling.

Of course, I’m also assuming that someone will make the reservation for the meal rather than risk turning up and not being able to find a table for 8 people as the restaurant is fully booked…

It’s a pretty good interest rate and it tastes a lot better than all the others…

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One of my weaknesses is that I just love chocolate.

Hotel Chocolat is a top end chocolate company with nearly 50 stores in the UK, the US and the Middle East. I must admit that I probably spend a bit too much time in their shops than I should but everyone has got their weakness.

As an accountant with a love of chocolate I was pleased to see Hotel Chocolat take a rather unusual approach to raising money to fund their expansion.  They are looking to raise cash to increase the number of Hotel Chocolat stores as well as invest in their plantation in St Lucia.

They are raising money by way of issuing bonds. This in itself doesn’t sound particularly unusual but what is different about this bond issue is that whilst they are genuine bonds with interest being paid on them, the actual interest paid is in the form of chocolate rather than money.

Two values of Chocolate Bonds will be issued. Holders of the £2,000 bonds will receive six chocolate tasting boxes with a value of £107 which represents a gross interest rate of 6.72% whilst holders of the £4,000 bonds will receive a higher interest rate of 7.29% via chocolates to the value of £233.

The bonds are fully redeemable after 3 years and on every anniversary after that so lovers of chocolate will be able to recover their full investment whilst at the same time enjoying some fantastic chocolates.

The interest rates on the chocolate bonds are pretty impressive when compared to what you would receive on a typical bank account so I’m sure that there will be many chocolate loving investors that will literally be licking their lips in anticipation of the interest that will be received (and eaten pretty soon afterwards….)

But surely getting a grade B+ is good. Isn’t it?

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The world uses Standard & Poor’s ratings fluently. But they’re not always as good as they sound.

In the days of getting grades for exam work, I was always happy with a B.  A grade C was generally considered to be a pass and passing with a bigger margin than necessary has always struck me as a bit of a waste of effort!

So I’m personally “hard wired” to think of a B as good news.  This means that when I hear that bonds issued by the Greek government have been graded to BBB-, my instinct is to think that this all sounds rather good, all things considered.

To quote from the Standard and Poor’s website, these are the definitions that they use:

‘AAA’  Extremely strong capacity to meet financial commitments. Highest Rating.

‘AA’  Very strong capacity to meet financial commitments.

‘A’  Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.

‘BBB’  Adequate capacity to meet financial commitments, but more subject to adverse economic conditions.

‘BBB-‘  Considered lowest investment grade by market participants.

‘BB+’  Considered highest speculative grade by market participants.

‘BB’  Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.

‘B’  More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.

‘CCC’  Currently vulnerable and dependent on favourable business, financial and economic conditions to meet financial commitments.

‘CC’  Currently highly vulnerable.

‘C’  Currently highly vulnerable obligations and other defined circumstances.

‘D’  Payment default on financial commitments.

Of course, the higher the risk, the greater the return.  This means that investing in Greek bonds at the moment can bring considerable returns.  Of course, it does so at considerable risk also.  It may feel that governments will never default on their borrowings, but remember Iceland.

There’s no generally agreed definition of what constitutes investment grade, but it’s generally seen as BBB.  This means that when S&P graded Greek bonds to BBB-, it was a quasi-official statement that the Greek government was in serious trouble.  The result is that yields on these bonds jumped to 15%.  There’s money to be made from holding Greek government bonds, but only if you’re willing to take some risk of losing it.

Can a “fat finger” really cost USD 800 billion?

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It happened so fast, you may have missed it: On 6 May the Dow (stock exchange) index lost 999 points in 15 minutes, the largest intra-day drop in the market’s history. USD 800 billion in share value was wiped out before recovering (in the next 15 minutes) by USD 600 billion.

So what happened? One trader suggested that the decline may have been triggered by a so-called “fat finger” trade, meaning that a transaction may have been entered incorrectly by human input. It was suggested that a “billion” may have been keyed in instead of “million”, with the result that some “big-name” companies, such as Procter & Gamble and 3M, experienced big (but temporary) falls in their share prices.

Whatever started the selloff, it was intensified by automated computer trading, which led to a cascade of “sell” orders. The authorities are checking whether exchange “circuit-breakers” worked properly (these are procedures to halt trading temporarily if prices drop too sharply). System safeguards may have to be tightened in order to protect markets which are already very nervous because of the Greek debt crisis.

So was it simply “human” error? A case of “operational” risk? Whatever the conclusions, it is clear that this event will prompt a re-examination of the markets from financial, regulatory and technological points of view.

£1 million for two weeks work? Not bad, but what about exchange rates and discrimination?

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One of the highlights of the summer as far as I’m concerned is the Wimbledon tennis tournament that takes place in London in June.  The atmosphere, the skills of the players and the event itself are fantastic.

Whilst tennis clearly gets priority, running the Wimbledon event is very much a business.

Earlier this week the All England Club (the organisation that runs Wimbledon) announced increases in the prize money for the 2010 championship.

The total prize money for the event will be £13.725 million. Both the men’s and ladies’ champions will each receive £1m, an increase of £150,000 over last year.

The increases over recent years emphasise that tennis is now big business. Roger Federer, the 2009 men’s champion, for example, was born in 1981. In 1981 the prize money was nowhere near £1million being only £21,600.

Tim Phillips, Chairman of the All England Club was quoted as saying “Wimbledon exists in a highly competitive global marketplace ….  it is important that we offer a level of prize money which is both appropriate to the prestige of the event and which gives the players full and fair reward.”

It certainly is a global marketplace with players and spectators coming from all over the world and TV rights being sold to many countries.

It was also reported that there were pressures to increase the value of the prize in sterling terms due to sterling weakening against the dollar and euro over the last year. It remains to be seen though if they would decrease the value of the prize in future years if sterling strengthens!

As well as currency issues there’s also an interesting debate to be had concerning discrimination between the men’s and ladies’ championship. Up until 2007 the men’s champion was paid more than the ladies’ champion. This was then changed to avoid discrimination but as every tennis fan knows the men’s game is played over 5 sets whilst the ladies’ is over 3. Does this mean that the men are being paid proportionately less?

An interesting debate but I’m sure that when it comes to the finals this year the players will be more concerned with winning the championship than discussing discrimination issues!

Ready to go to the movies? Don’t forget your drink, your popcorn and your derivatives…

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Students are probably aware of what currency futures are. To quote our ExPress notes:

“These are contracts, transacted over an exchange, representing a standard amount of currency which can be bought or sold with a specified future settlement (delivery) date, at a rate expressed in another currency. Settlement is guaranteed by the exchange, which acts as counterparty.”

Currency futures, interest rate futures and even relatively obscure items such as soya bean futures are all currently traded.

Last week however an application was made to the US futures regulator to create a contracts market for film futures. If the application is successful this will mean that there will be a “movie derivatives” exchange.

In simple terms this will enable people to “bet” on whether a movie makes money or is a financial failure. Traders will be able to buy and sell contracts speculating on how much money a movie will make at the box office.

As an example of how movie futures could work, a futures contract could be bought by a trader valued at say $1 for every $1m in expected ticket sales during the first month. Therefore, if the market believes a movie would make $100m, traders would be able to buy a futures contract for $100.

If box office estimates were to rise to say $150m because of positive movie critic reviews in the run up to the movie launch, holders of existing contracts would be able to resell them for $150. This would result in a profit of $50.

Of course, if the reviews aren’t very good then the box office estimates would decrease and the value of the contracts would go the other way and there would be a loss!

There are two opposing views to this.

Some people say that this offers a new, novel way for movie producers to manage their financial risk.

Last week however, the Motion Picture Association of America (MPAA) joined forces with producers and cinema owners to oppose the move on the basis that it would encourage speculation, financial irresponsibility and could be harmful to film releases.

To be honest though as an ACCA P4 tutor I find all this so interesting that I personally think they should make a film out of it – surely it would be a box office hit?

Despite the recession, one food product is now 35% more expensive than last year. You’d be bananas not to know the reason.

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I had dinner with a group of friends earlier in the week and there was a nice mix around the table between finance people and marketeers.

When the dessert menu was brought out and one of the group decided to go for the “banana split” dessert an interesting discussion started.

According to the marketeers around the table, bananas are considered to be “known value items” by the large supermarkets. These items are considered by the supermarkets to be products where the average customer has a reasonable knowledge of how much they should cost. These include items such as bread and milk (and bananas!).

They are therefore always priced competitively by the supermarkets as it is the price of these products that customers most commonly compare between the supermarkets. If the supermarkets can attract customers to their shops with attractive pricing of these “known goods” then they can maybe be more relaxed with the pricing of other goods!

According to a recent report in the trade magazine, the Grocer, banana prices are heading towards the critical point of £1 per kilo. This is approximately 35% higher than the price one year ago. This is a huge increase in percentage terms and customers are noticing.

And the reason for the increase in prices?

Well, this was where the finance people around the table suddenly came into their own.   Apparently, there are two main reasons for the increase in prices.

Firstly, the increase in oil prices. Shipping companies that transport the fruit over to Europe have been hit by the increase in their shipping fuel costs as a result of the increase in oil prices.

Secondly, banana importers have been hit by the weakness of sterling. As a dinner companion put it succinctly, “the bananas are more expensive as it’s simply costing the importers more pounds to buy the same amount of bananas they were buying for less pounds last year”.

Luckily for my dinner companions though, just as I was about to start talking about exchange rate risk and hedging facilities the desserts arrived and we suddenly forgot all about the price of bananas!

$25 billion – was the gate strong enough?

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Our blog post last Wednesday concerning leveraged buy outs (LBO) and Manchester United received some emails from students with a number of them asking how popular LBOs are today.

The big picture answer is that they are not particularly popular nowadays for a number of reasons, not least of which is that debt funding at the moment isn’t easy to come by. Given all the turmoil in the financial system over the last couple of years banks are much more risk averse than they used to be.

The 1980s was the heyday in terms of LBOs and a good book to read is “Barbarians at the Gate: The Fall of RJR Nabisco”. It’s a well written book which tells the story of the $25 billion battle for RJR Nabisco. Although the event took place over 20 years ago it’s a great read which explains in a very reader friendly way the issues behind LBOs.

The book is one of the best read business books of all time and if I’m honest, when I read it it felt more like a thriller than a real life account of corporate America in the 1980s. All in all, a book that I would highly recommend.

Of course, if you’re studying for your exams then you may not have a lot of spare time for reading but you can always read it after you qualify!

Manchester Utd and Leveraged Buy Outs. What’s all the interest about?

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There was a meeting yesterday attended by various financial heavy hitters including renowned deal maker Keith Harris and Goldman Sachs chief economist Jim O’Neill.

What were they meeting for? Well, if press reports are anything to go by they were meeting to discuss proposals to buy one of the most famous football clubs in the world, Manchester United.

Back in 2005 Manchester United was a public company. The Glazer family then used a Leveraged Buy Out (LBO) to take the football club private (i.e. move it from a public company which was quoted on the stock exchange to become a private company).

There has been a lot of bad feeling amongst the Manchester United fans who feel that following the LBO the clubs finances are now causing real problems. Before the LBO the finances were healthy whereas now there is a huge debt obligation to fund which some feel is preventing them from buying players on the transfer market. The meeting yesterday was in connection with acquiring the club from the Glazers and restructuring the finances.

An LBO is something which some students find hard to grasp as it involves a company changing ownership with the funding mainly being secured on the assets of the company being acquired.

In simple terms it involves the acquiring company using significant amounts of borrowed money to fund the acquisition. In most cases the assets of the company being acquired are used as guarantees for the loans. This enables acquiring companies to fund the acquisition by way of debt as opposed to equity. The real problem though lies in the fact that interest has to be paid on these loans and on a number of occasions the interest payments on these loans have been so large that the company could not meet the payment obligations.

Whilst the workings of LBOs are interesting to students studying for their professional exams, I’m sure that the focus of most Manchester United supporters is getting ownership of their club back into the hands of what they consider to be real supporters of the club.

The figures though are quite staggering. For example, in the last three years Manchester United have paid £130 million in interest payments which to put it in perspective is more than five times what they sold David Beckham to Real Madrid for.

Perpetual bonds, the mexican restaurant and two crazy people?

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I had a lovely dinner last night at a nice Mexican restaurant with a good friend who is also an accountant. We’ve known each other for years and unfortunately always have a habit of talking about finance and business together. This is fine when we are by ourselves but if our “other halves” are with us then it can get a bit boring for them.

Last night we were determined not to keep on talking about finance and all was going well until some nice tortillas arrived. Within a couple of minutes the talk had switched to perpetual bonds.

Were we crazy or was it a logical step to go from tortillas arriving to perpetual bonds?

Well, in our defense the logic behind the switch was that Gruma, Mexico’s leading tortilla maker issued some perpetual bonds a few years ago. Some students have to think hard about whether a bond without a maturity (redemption) date has a (market) value. To remove any doubt, Gruma issued USD 300 million worth of perpetual bonds.

The appetite for perpetuals is starting to spread to Asia, especially among investors in search of high-yield investments.  Last year for example, the Union Bank of India (UBI) announced an issuance of such an instrument.

Back to my point of whether we were crazy or it was a logical step to go from tortillas to perpetual bonds. At the table last night two of us thought it was logical whilst the other two thought we were crazy…

So what have football players’ contracts got to do with the exams?

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Over the years contracts for professional football players have developed significantly but what’s the link to the exam syllabus?

Agency theory (included in papers such as ACCA F9) occurs when one party (the principal), employs another party (the agent), to perform a task or tasks on their behalf. Within this theory there is always a danger that the objectives of the two parties may not coincide and there may be problems with what is known as goal congruence.

Typically agency theory would apply to the relationship between shareholders and management. However, there is an argument that a form of agency theory could apply between management as the principal and an employee as the agent.

I’m a keen follower of football (soccer) and the contracts of professional players are becoming ever more complicated. In the “old days” the contracts would be very simple affairs with a monthly salary, a time limit to the contracts and maybe a team bonus if the team won a competition.

Nowadays football is big business. For example, Cristiano Ronaldo’s move last year from Manchester United to Real Madrid was for a new world record in terms of transfer fees (£80m) and his annual remuneration from Real Madrid alone will be in the region of £11m per year.

I’ve no idea what Ronaldo’s contract is like but my guess is that most professional football contracts have various measures built in to ensure that there is goal congruence.

Ideas for items that could be included within football contracts to help goal congruence include:

– Bonuses based on number of games played (i.e. the player will only get these if he is performing well and is in the team),

– Bonuses based on international appearances (this is independent confirmation that he is performing well)

– Penalty provisions for undertaking activities that could cause injuries (e.g. bungee jumping or extreme sports).

All of the above would help in ensuring goal congruence.

Always keep an eye open in real life for any situations where goal congruence is present. If you can link real life situations you come across with the exam syllabus it will help you retain the knowledge needed for exam success.

Remember the short term and long term

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One item that people should be aware of is that management accounting and financial management are similar to the extent that they are both concerned with resource usage. But there are differences.

I was lucky enough to have recently flown on the new Airbus A380 super jumbo and that got me thinking about some of the financial management issues that Airbus face. Designing and producing the A380 must have been a phenomenal exercise and a real testament to man’s engineering skills. It’s capable of carrying over 800 passengers and has a range of nearly 15,000 km. It’s a fantastic machine.

But what has this all got to do with the difference between management accounting and financial management? One difference is that management accounting tends to deal in short-term timescales whereas financial management is generally more concerned with the longer term. Whilst the longer term is generally considered to be more than one year be aware that certain industries and companies have a distinctly longer “long-term”.

From inception to delivery the A380 took nearly 10 years and the long term view taken by Airbus is certainly longer than some businesses in for example the IT or fashion industries. Some of the businesses in these industries have distinctly shorter “long-terms”.

Anyway, despite the millions spent on design and development of the A380 there was one disappointing thing about my flight and that was I fell asleep during the film and missed the ending…

Are Go-GO Hamsters skimming into my Christmas shopping?

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My 9 year old niece is a lovely girl and has some great characteristics. One of my favourites is that she’s a determined little girl who knows exactly what she wants! Christmas is fast approaching and top of her Christmas present list this year is a “Go-Go Hamster”.

For those of you outside of the UK you may not have heard of these toys. They are small battery operated hamsters with a retail price of £10. They are the latest must have toys for Christmas. I was determined not to leave Christmas shopping until the last minute this year and went off in search of some Go Go Hamsters. A slight problem however in that the shops have sold out of them! The big chains such as Toys R Us have sold out and even exclusive Hamleys in London has sold out.

A quick look on certain websites such as E-bay however shows that it is in fact possible to buy Go Go Hamsters. Some are being sold for more than £50 which when comparing to their retail price is a hefty mark up.

Anyway, back to ACCA Paper F5 and CIMA P2 and what exactly does my Christmas shopping list have to do with these papers? Students should be aware that Price skimming is where prices are set at a high price to catch customers willing and able to pay the price. Are we seeing an unofficial price skimming approach by individuals selling Go Go Hamsters?? Some may argue that it is simply individuals taking advantage of supply and demand and selling at a profit. The important thing for paper F5 though is to be aware of the concept of price skimming as well as all the other pricing strategies that a company can adopt (if you’ve forgotten then have a quick look at pages 14 and 15 of our ExPress notes).

In conclusion, I won’t tell you whether I actually bought a Go Go Hamster or not in case a certain 9 year old niece is studying F5 at an early age….

Anyone got a spare £9.8bn ?

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Mergers & Acquisitions (M&A) are an important part of the ACCA P4 syllabus and are also featured in CIMA F3. Those of you that have read our free ExPress notes (/expand/17-p4_advanced_financial_management.html) will be aware that to minimize the risk of failure in the M&A process, acquiring companies should follow a systematic series of steps prior to launching a bid.

Namely:

1. Clarify strategic reasons for wanting to acquire a company;
2. Draw up a short list of possible takeover targets and select the preferred one;
3. Value the target based on publicly available information and to establish an opening bid;
4. Identify financing options for the transaction

There has been a lot of coverage recently about the attempt by the American food producer Kraft to acquire the British chocolate maker Cadbury.  After Kraft announced their intention to acquire Cadbury, another company (Hersey) announced their interest in acquiring Cadbury.

The sums of money involved are significant. Identifying financing options for the acquisition (point 4 above) is therefore going to be key. Kraft’s bid is £9.8bn and press reports indicate that a syndicate of 8 banks has been brought together to finance the approach. The interesting thing though is that it is reported that these 8 banks have been tied into a non-compete agreement. This means that Hersey cannot approach the same banks to finance their approach. As a result it is going to be more difficult for Hersey to raise such amounts of funds.

Whatever happens over the next few weeks this will be an interesting story to follow.

Do you know your cost of capital?

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The other day I was talking to a few local business owners and I asked them if they knew what their cost of capital was. I got a few blank stares.

When we discussed the issue further, people started to warm up to the idea that the cost of capital can be viewed in terms of opportunity costs:

1. One owner said his cost of capital was the interest rate on his bank loans. I suppose he was 100% debt financed and probably not planning to refinance any time soon! Good luck to him!

2. A second owner said he took out all his savings from the bank and put it into his business. Since the bank deposit rate was so low, he figured his opportunity cost was pretty low as well. He has a point, though he must realize that he has moved into a higher risk category by withdrawing his money from the bank and investing it in a start-up business.

3. Another business owner said he started his company by borrowing from his relatives. Since they haven’t asked for it back he assumes its cost is zero. But he does pay a price, I suppose: at family gatherings he gets dirty looks from his relatives and his wife gives him constant grief. He suspects that the relatives complain about him to his wife.

Since all three owners want to expand their businesses, they asked me if I could recommend new sources of finance. I thought of sending them to our P4 candidates (after the exam!).

Cider and spreadsheets

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Cider drinks and spreadsheets – what’s the link?

Cider is an alcoholic drink made out of apples and has become more popular in recent years in the UK. One of the most popular brands of cider in the UK is Magners cider, the brand owned by the C&C Group.

We all know that there are lots of benefits of using spreadsheets such as Excel (e.g. speed of use, quantity of data that can be analyzed, etc) but we should all be aware that mistakes do happen with spreadsheet.

Earlier this summer shares in the C&C Group fell approximately 15% after the group said that revenue in the 4 months to the end of June had fallen by 5% rather than the 3% increase that had been reported a week earlier!

The group’s Finance Director said that the error in the earlier announcement occurred after data was incorrectly transferred from an accounting system to a spreadsheet used to produce the trading statement. Quite an embarrassing mistake and a valuable lesson in that even if spreadsheets are extremely powerful tools in business if the wrong data is inputted you will receive misleading results.

Also, it should be stated that consuming excessive amounts of cider when using excel could result in unpredictable results…

My 85kg and ratio analysis…

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I weigh 85kg (approx 13.5 stone or 187lbs).

So, how am I doing weight wise? More to the point, what has this got to do with the exams?

Ratio analysis is an important area of the syllabus and one overriding principle to remember when looking at ratio analysis is that a ratio is irrelevant when looked at in isolation. Ratios must be looked at against comparatives or benchmarks in order to interpret them and then to look at the underlying causes.

So, back to my weight of 85kg. How am I doing? Is my weight ok?

85kg by itself is irrelevant. We need to look at comparatives for somebody who is my gender and my height. For example, 85kg for an adult male with a height of 1.90m (6 foot, 3 inches) is a healthy weight. 85kg for an adult female with a height of 1.60m (5 foot, 3 inches) is an unhealthy weight with the person being classified as obese.

Using my example of 85kg, by comparing it with people who are the same height as me is in effect comparing it with “industry standards”.

What about my performance over time? Is my weight increasing, decreasing or remaining static when compared to last year and the year before. Comparing movements within this personal ratio analysis unfortunately reveals that my weight has increased.

Now onto the important issue behind ratio analysis and that is of looking at the underlying cause of the movement in the ratio. Unfortunately, it looks like the cake I have with my afternoon tea could be on the way out…

Not-for-profit organisations face several challenges.

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I had to recently go into hospital for a minor operation on my knee. The nurses and doctors were fantastic there and thankfully everything is now fine with my knee.

The hospital I was in was a classic not-for-profit (NFP) organization and during my time there it really made me appreciate the challenges that NFPs face when setting objectives.

Hospitals have a significant number of stakeholders with a high level of interest. Patients like me are stakeholders with an obvious high level of interest in matters. Other local individuals who are not patients are also interested in case at some stage they need to use the hospital. The doctors, nurses and admin staff are also stakeholders with a keen interest in the activities and the government is another stakeholder interested in the hospital.

In summary, NFPs are different from most other organizations when it comes to stakeholders in that there tends to be a wider range of stakeholders with a high interest in a NFP organization than compared with other organizations.

Another issue that occurred to me during my stay was that there are a number of objectives that the hospital needs to balance. Two obvious ones are the quality of care given to a patient when he’s in the hospital versus treating more patients.

A final area I thought about was the classic finance term of Cost Benefit Analysis. Costs within hospitals are easy to measure but the benefits can be inherently difficult to measure. For example, how would they measure the benefit of reducing the waiting time for a knee operation by one month or 6 months?

You are not necessarily expected to be able to provide all the answers to the challenges of running a hospital in the exam but it is important to have an understanding of the challenges that a NFP organization faces when running its business.