Management accounting, in simple terms, refers to the processing of financial data to evaluate company performances, in view of its profitability strengths and challenges. Not only does an effective management accounting system help with the conduct of a risk-averse strategic framework, but also assists in the identification and mitigation of transparency threat in the overall process. Early identification of financial risks, widening possibilities to profit maximization and better utilization of company resources are a few of the key advantages of using an effective management accounting framework (Adler, 2013).
Recently, the need for an effective management accounting system has evolved with immense broadness owing to its vitality in the strategic decision making process, which is followed by any company. Theorists have also argued the lack of effective management accounting system with adequate corporate governance transparency was the cause of failure of companies such as Enron, Tyco, Worldcom and HealthSouth (Agrawal and Cooper, 2017). These arguments have certainly led to greater appeal for the connection between auditing and management accounting concepts to explore deeper into the requisites of an effective strategic decision-making procedures to ensure success of modern organizations (Badolato, Donelson & Ege, 2014).
It is with the same notion that in this report, the financial performances of Honda Motors Ltd (Japan) will be assessed using the various concepts of management accounting along with the application of balanced scorecard. The objective of this particular report is therefore to assist the non-executive board members of the company through their decision-making process by serving them with the needed facts and information regarding the organization’s financial performances. Through these techniques, the report intends to emphasize the strategic and performance challenges that the company currently witness, besides developing conclusions and recommendations for its future operations.
This study uses empirical evidences available through the financial reports of Honda Motors Ltd (Japan) for the past five consecutive years i.e. 2013-2017. The intention behind collecting data using the financial annual reports from the company was to gain an insight to the organization’s profitability and competency aspects. These were then aligned with the external environmental risk factors as well as the developmental needs of the company from a broader perspective. In the process of analyzing the performance data for the company, both financial and non-financial success drivers were taken into consideration. From a general perspective, the financial performance indicators and success drivers of any company include profitability, leverage, forecasting and liquidity. Profitability depends on financial drivers such as Return on Equity (RoE) along with the Net and Gross Profit of the company. Correspondingly, leverage as an indicator can be associated with the drivers of Debt to Equity (Net Worth) ratio and the Revenue to Equity (Net Worth) ratio. The liquidity of the firm is often assessed using the current ratio and working capital turnover ratio for the organization (Bausman & CPC, 2008). While the financial success drivers’ help in quantifying the strengths and challenges for the company. On the other hand, the non-financial success drivers indicated the strategic issues that the company may be witnessing in its regular performances. In order to systematically relate these success drivers with the organization’s performances, the balanced scorecard framework was used in this report.
Conceptually, balanced scorecard can be described as a matrix based framework, which intends to correlate the financial metrics of a company. This includes the outcomes achieved through the use of its resources from the customers’ perceptive besides considering its internal process, learning and growth as well as the need for creating long term shareholder value (Kaplan, 2009). Since it was propounded, the framework has evolved through several phases, giving it the current shape of a sophisticated matrix structure. As can be observed from the below presented graphical illustration, the balanced scorecard model, which is to be used in this report, comprises five dimensions. This consists of the customer’s perspectives, internal business processes, learning & growth processes, financial perspective & the mission and vision strategies of the company, assuming an interrelation between these factors. The factors involved in the process are the strategic objectives of the company, strategic elements, targets and measures used by the company to assess its performances on periodic levels and strategic initiatives taken that reflects the Key Performance Indicators (KPIs) (Sainaghi, Phillips & Corti, 2013).
The term ‘profitability’ refers to the ability of a particular organization to yield profit to sustain over a long term period, or at least until the attainment of its objectives as decided. It can be measured using various indicators, although the most commonly used concepts includes of Return on Equity (RoE), Earnings per Share (EPS) and Net and Gross Profit (Leach, 2010). Considering the five years performance of Honda Motors, with respect to its RoE, it can be observed that the company has witnessed substantial fluctuations. To be noted in this regard, the company since 2014 has been following the IFRS standards, changing from US GAAP. This was due to the fact that it caused substantial reshuffle within the reporting standards as well as in the way equity was distributed to its shareholders. According to the IFRS standards the variable is denoted as ‘equity attributable to owners of the parent’, while in the case of US GAAP, it is defined as ‘shareholders’ equity’. Apparently, the financial restructuring of the firm indicated considerable fluctuations in its RoE, which implies considerable profitability issues for its future functioning (Honda, 2017; Kaaya, 2015). A better understanding of the fluctuation can be observed from the graphical representation in Appendix 1.
Another driver to profitability for Honda Motors is its EPS. As can be observed through the annual report of the company, the EPS has been observed to decline since the company started following IFRS standards in 2014. This implies that the profit sharing ratio has declined in the company, following the reduction in its profit earning capacity. In other words, the company has been facing a decline in its profitability over the past 3 years, after its financial restructuring (Honda, 2017). A clearer view to the observation can be obtained from the graphical presentation through Appendix 2.
The findings and observations obtained from the decline witnessed in the EPS trend for the company can be further confirmed by referring to its net and gross profit for the last five years. To be noted in this context, the gross profit margin of the company declined steeply until 2016, which has however recently gained its momentum. The effects are also apparent in the case of its net profit margin, which decreased from the year 2014 to 2016. It was only in 2017, that both its gross and net profits increased (refer to Appendix 3) (Honda, 2017). Although the increase denotes that the company has been able to regain its profitability following its restructuring process, it is yet subjected to the possibilities of high fluctuations in the near future, depending on its effectiveness in aligning its strategic directions with its changed reporting standards.
In management accounting, leverage implies the health of the capital structure of a firm on the basis of its equity leverage compared with its creditor’s debt. It therefore aims to measure the net worth of the company, with the use of debt-to-equity ratio and revenue-to-equity ratio. As can be observed from the Appendix 4 illustrated for the debt-to-equity ratio of Honda Motors over the past five years, debt financing in the company has remained substantially high. It therefore implies that the company might face issues concerning its cash inflow for meeting the overall debts in the short term period, thus indicating higher leverage risk (Honda, 2017; Honda, 2015).
Correspondingly, when considering the revenue-to-equity ratio, this particular finding can be substantiated owing to the fact that the company’s R-E ratio has been declining since 2016, as depicted in the Appendix 5. The decline implies that the company has been lagging in managing its shareholders’ equity efficiently, which may cause significant leverage issues in the future (Honda, 2017; Honda, 2015).
The liquidity aspects of any company refer to the ability to meet its short run obligations. As a financial KPI, this particular measuring tool helps in interpreting financial flexibility of the company’s capital structure, to adjust with the external market variances and changes. In other words, it indicates to the financial sustainability of the firm. The commonly applied tools to measure liquidity of a firm are current ratio and working capital turnover ratio (Bausman & CPC, 2008). Observing the diagrammatically represented liquidity ratios of Honda Motors for the last five years, the fluctuations can be interpreted as indications that the company is presently lacking stability (Appendix 6). For instance, with a highly fluctuating working capital turnover ratio, the company is facing issues related to the lack of financial flexibility. On the contrary, a comparatively stable trend of capital ratio indicates that the company has been efficient in preserving its ability to meet the short term obligations (Honda, 2017). Altogether, it implies that the company can make use of its ability to meet short term obligations to retain flexibility and hence, achieve a stable working capital turnover ratio.
Parallel to the financial KPIs, non-financial KPIs also play a substantial role in determining the company’s performances over a certain period of time. Although, having lesser relevance to qualitative attribute affects the generalisability of the application of non-financial KPIs in businesses, it is deemed highly crucial for reflecting on the company’s overall health (Morris & Dunne, 2008). The non-financial KPIs are also deemed essential to gauge findings obtained through financial assessment of the KPIs. Nonetheless, non-financial KPIs lack a proper fundamental list that would have otherwise helped in the precise assessment of the situation from a broader perspective (Somers, Cain & Jeffery, 2011). Considering that the list may vary from one industry to another. The KPIs selected for Honda Motors in Japan have been chosen, as its customer relationship measures, employee management strategies, operational strategies, quality management measures and its supply chain system.
Honda Motors deliver substantial importance to its customers’ satisfaction, emphasizing the need for a more personalized and direct relationship with the buyer group around the world. In doing so, the company concentrates on identifying the needs, expectations and motivations of the consumers prior to the designing of its production as well as marketing strategies. For instance, at the current scenario, the customers of the automobile sector are becoming increasingly aware of environmental protection requirements. Thus, Honda Motors have been focusing on designing and developing its products by targeting lower CO2 emission rates (Honda, 2017.a). The customer services operations conducted by the company is also widely diversified in order to ensure an intrinsic customer relationship framework that aligns to the various processes of company’s supply chain. This in turn assists to enhance the company’s capacity to align its customers’ interests with the organizational objectives throughout its operational cycle. Another feature of the company’s customer relationship management system is its immense significance to the regional diversity of the target market that demands a widely diversified communication system. With this concern, the Honda Motors take 3Ps into consideration, which include premises/processes, people and product in an intertwined relationship matrix. Appendix 7 represents diagram offering a better view to the customer relationship model used by the company (Honda, 2011).
The fundamental belief in Honda Motors defines its human resources or employees as the key to long run sustainability and performance of the company. Personnel management in the company therefore stands on three pillars, which are respect for initiatives taken by every individual to perform in respect with the company’s strategic objectives, maintaining equality within the employees and building trust within the workforce at large. Within the workforce, the company networks through intensive associate relations policies, determined on the basis of the three pillars of its human resource management system, as can be observed through Appendix 8 (Honda, 2017.a).
Another principle aspect considered by Honda Motors, when managing its employees’ productivity is they channelize the talents of the local human resources from the regional dimensions to the global plethora. It not only helps with better growth prospects of employees at the regional and global realms, but also increases diversity to empower the human resources according to their capacity and skills. This in turn ensures grater satisfaction amid the employees, reducing issues concerning absenteeism and retention, apparently observable through the rising number of its employees (Honda, 2017.a). It is with the same objective that the company emphasizes the need to train its human resources rigorously to align them with the organizational objectives, through shared vision and mission (Honda, 2017.a). The employee growth of Honda Motors can be depicted from the Appendix 9.
Honda Motors has developed a well-assorted operational framework to support its progress towards the achievement of the organizational objectives. In determining the operational strategies in Honda Motors, the corporate governance structure plays a crucial role. As similar to the human resource management strategies applied within the organizational context, the operational strategies in Honda Motors are based on the three principles of equality, trust and respect. Its operations are thus divided into three levels, which are regional operations, business operations and functional operations and are performed through its subsidiaries. Furthermore, in order to closely monitor transparency issues and efficiency, the company also has an independent auditing team that corresponds directly with the executive council and the Audit and Supervisory Committee involving 5 directors (Honda, 2017.a). On a positive note, this helps the company directors to have a close control on its operational efficiency. On the contrary the multi-dimensional approach indicates towards the possibilities of complexities along with the associated challenges in the operational process of the company. In addition, considering its huge dais of functioning, these complexities may impose long term effects on its productivity. Thus, it can make it vulnerable to risks in terms of market fluctuations and changes within its strategic dimensions.
Quality is the other attribute holding considerable significance to the long-term profitability of the company. In Honda Motors, quality is perceived as the key to customer satisfaction and company’s profitability, owing to which the company has focused on preserving creativity to its quality management strategies, using mass production technique. This assists the company with a cost effective process of production. As a quality management measure, the company has been practicing its Global Honda Quality Standard (G-HQS) in compliance with the criteria of ISO9001 regulations. Besides, the company also conducts periodic quality related meetings throughout its regional networks to ensure that customers are served with high standard of efficiency all around the globe. It also conducts rigorous training of its employees at basic and specialized levels to ensure that they are capable to understand and act according to the quality standards of the company (Honda, 2017.a). The various dimensions of Honda Motor’s quality cycle are highlighted in Appendix 10.
Supply chain management efficiency for Honda Motors is essential owing to two fundamental reasons. At the onset, it helps to ensure quality throughout its sourcing, production and distribution channels, besides making it a cost and time efficient process. This ensure better utilization of company resources and therefore, having a direct impression on its financial productivity at large. At the fundamental level, the supply chain system followed by Honda Motors is integrative in nature. As in the cases of the other companies in general, the supply chain network for Honda Motors begin with sourcing of raw materials and components needed for the production, followed by logistics and sales. The company also emphasizes recycling the used or disposed products for the optimum utilization of its resources. This significantly helps in reduction of the industrial wastes, offering advantage of cost effective production cycle. It altogether helps the company keep its prices low for the global customers, without inhibiting its quality standards. Equipped with the mass production process, its cost effective supply chain system helps in retaining and building a loyal customer base, which in turn contributes to the overall profitability of the company. So in this context, the supply chain of the Honda Motors can be depicted from Appendix 11 (Honda, 2017.a).
Depending on the findings obtained through the assessment of the financial and non-financial KPIs for Honda Motors for the last five years, the balanced scorecard for the company has been developed in this section of the report. According to the generic model of balanced scorecard, the strategic dimensions of company’s progress can be diversified into four realms. These include the financial, internal business process, learning and growth and customer dimensions. Correspondingly, considering the general framework of producing a balanced scorecard, the objectives, measures, targets and initiatives for all these four dimensions have been presented in this section. This is associated with the findings obtained by assessing the KPIs in the previous section.
The current challenges and strengths that Honda Motors have been witnessed in its financial dimension. This involves high fluctuations and lack of flexibility in its short tern performance owing to the recent change in its reporting standards. As already mentioned, the company has recently started following IFRS instead of US GAAP, leading to its capital restructuring. In lieu, the following objectives, measures, targets and initiatives can be taken into consideration.
Concerning the internal business processes of the company, Honda at present faces problems of business market fluctuations, shifting towards cost efficient and environmentally responsible product lines. Hence, the objectives and the corresponding measures, targets and initiatives of the company in this dimension have been elaborated as below.
The company has been taking rigorous initiatives to train and empower its workforce throughout its regional chain of functioning. However, a critical review to its training process reveals that the company needs to deliver greater emphasis to retain flexibility and creativity of its resource pool. This will not only help in ensuring long run sustainability of the company, but will also contribute to its financial and internal business efficiency to develop a cost efficient and highly profitable operational process.
Customers play an unparallel role in driving success of Honda Motors. It is thus that the company offers immense significance to align with its customers’ expectations and develop strong long term relationship with them. However, at the global scale, the process becomes complex and hence, undermines the company’s efforts by a substantial extent. In accordance thus, the below listed the objectives, measures, targets and initiatives have been developed.
Conclusions and Recommendations
Conclusions
This report entails an elaborated description of the financial and non-financial challenges that Honda Motors has witnessed in its current performances. The findings, thus obtained through the assessment method used in this report revealed that although, Honda Motors have been quite efficient in preserving its brand positioning and market competitiveness advantages, yet it face financial challenges. For instance, following its capital restructuring recently, the company has witnessed a decline in its flexibility, profitability aspects, in addition to increased short term obligations and weakened ability to meet those debts. Furthermore, the company has also been lacking financial and non-financial flexibilities, which is deemed crucial in the present business context to overcome the issues of market fluctuations.
To address these developmental needs, the company must essentially focus on rebuilding its brand positioning in a more transparent manner. This would assist Honda Motors to reduce unnecessary costs, build reserves to meet its short term obligations and increase change acceptance within its workforce. It also needs to emphasize organizational capacity to innovate and bring creative adjustments within its supply chain procedures. The company also needs to focus on localization, with due consideration to the increasingly fragmented nature of the automotive industry in the present context. Based on the balanced scorecard developed for the company, the below illustrated action plan has been structured.
|
Action Steps What Will Be Done? |
Responsibilities Who Will Do It? |
Timeline By When? (Day/Month) |
Resources A. Resources Available B. Resources Needed (financial, human, political & other) |
Potential Barriers A. What individuals or organizations might resist? B. How? |
Communications Plan Who is involved? What methods? How often? |
|
Step 1: Conduct internal survey to identify the key limitations with regards to the success drivers of the company |
To be conducted under the supervision of the Compliance Committee |
3 months |
A. Well trained and cooperative regional staff B. Inter-departmental coordination to include all staff members of the organization |
A. Ability of the staff to invest time to contribute in the survey process B. As the process will be time intensive, employees might restrain from shifting their focus from their actual domain |
Every department of the company will be involved in the process to be conducted on a one-to-one basis with the regional heads twice a year |
|
Step 2: Conduct market survey in all major regional centers of the company |
To be performed by the regional heads of the company around the world |
3 months |
A. Customer relationship management department B. Financial and human resources will be needed to complete the process |
A. Reluctance of human resources to perform the activity with transparency B. Unwillingness to take the extra responsibilities |
Customers and customer relationship teams will be involved in distributing the questionnaires to the buyers. The process can be implemented continuously for every buyer rather than being conducted periodically |
|
Step 3: Align market trends and competitive forces with the strategic initiatives of the company to identify gaps |
This step will involve the Executive Council |
1 month |
A. Well trained human resources of the company B. Understanding of the business environment of the decision makers |
Barriers are unlikely at this stage |
Executive decision makers will be involved in the processing of data, both qualitatively and quantitatively twice a year |
|
Step 4: Take restructuring initiatives within its capital framework as well as in its marketing processes |
Board of Directors will be responsible of taking decisions in this step |
2 months |
A. Information about company’s current status and future challenges/risks B. Cooperation from other department heads |
Barriers are unlikely at this stage |
Once the decision is taken by the Board of Directors, it will be communicated throughout the chain of command in the company |
|
Step 5: Develop and re-evaluate the efficiency of the change model at periodic intervals |
This step will involve the Executive Council and the Compliance Committee |
1 month |
A. Reports of the entire change management process B. Human resources |
Barriers are unlikely at this stage |
This step will involve the Executive Council, the Compliance Committee and the Board of Directors |
References
Adler, R, W, 2013, Management Accounting, Routledge, New York.
Agrawal, A, & Cooper, T, 2017, ‘Corporate governance consequences of accounting scandals: Evidence from top management, CFO and auditor turnover’, Quarterly Journal of Finance, vol. 7, no. 01, pp. 1-43.
Badolato, P, G, Donelson, D, C, & Ege, M, 2014, ‘Audit committee financial expertise and earnings management: The role of status’, Journal of Accounting and Economics, vol. 58, no. 2, pp. 208-230.
Bausman, D, C, & CPC, A, 2008, ‘Key Financial Indicators and the drivers for success: Best practices’, Clemson University, pp. 1-11.
Honda, 2011, Honda sustainability report 2011, Sustainability, viewed 22 September 2017, <https://world.honda.com/sustainability/report/pdf/2011/2011-10.pdf>.
Honda, 2015, Annual report 2015, Honda Motor Co., Ltd, viewed 22 September 2017, <https://world.honda.com/content/dam/site/world/investors/cq_img/library/annual_report/FY201503_annual_report_e_02.pdf>.
Honda, 2017, Annual report 2017, Honda Motor Co., Ltd, viewed 22 September 2017, <https://world.honda.com/content/dam/site/world/investors/cq_img/library/annual_report/FY201703_annual_report_e.pdf>.
Honda, 2017(a), Honda sustainability report 2017, Sustainability, viewed 22 September 2017, <https://world.honda.com/sustainability/report/pdf/2017/Honda-SR-2017-en-all.pdf>.
Kaaya, I, D, 2015, ‘The Impact of International Financial Reporting Standards (IFRS) on Earnings Management: A Review of Empirical Evidence’, Journal of Finance, vol. 3, no. 3, pp. 57-65.
Kaplan, R, S, 2009, ‘Conceptual foundations of the balanced scorecard’, Handbooks of management accounting research, vol. 3, pp. 1253-1269.
Leach, R, 2010, Ratios Made Simple: A Beginner’s Guide to the Key Financial Ratios, Harriman House Limited, Great Britain.
Morris, G, D, & Dunne, P, 2008, Non-Executive Director’s Handbook, Butterworth-Heinemann, USA.
Sainaghi, R, Phillips, P, & Corti, V, 2013, ‘Measuring hotel performance: Using a balanced scorecard perspectives’ approach’, International Journal of Hospitality Management, vol. 34, pp. 150-159.
Somers, G, Cain, J, & Jeffery, M, 2011, Essential VCE Business Management Units 1 and 2, Cambridge University Press, Australia.
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