S.D. modelling in support of Winery Management
Accounting System
Habib Sedehi Federica Boscolo Nicola Vaccaro
E-mail sedehi@help.it | E-mail boscolo@help.it E-mail vaccaro@help.it
HELP S.p.A. Via Antonio D'Achiardi, 31 00158 Rome (ITALY )
Tel. +39 06 41733360/ Fax +39 06 41733406
ABSTRACT
DAMAS (DAshboard MAnager System) is a large European Commission-financed
research project involving four European development - consultancy organisations
(HELP S.p.A. as the project co-ordinator and System Dynamics module developer,
AVR Consulting Services Ltd. as System Dynamics module developer, K-Net S.A. as
Business Object Architecture module developer and CEFRIEL as User Interface and
task assistance module developer). and two Wineries (Casa Vinicola di Duca di
Salaparuta - CORVO and John Boutari & Son S.A.) as user partners over which the
project results are being experimented.
Although the project has a very larger objectives, the paper will mainly point out
results obtained in using DAMAS specifically for CORVO Management Accounting
area.
It will be discussed the development of the Economic and Finance model of the Wine
company, through the Management Accounting area view taking in to account
interactions with all main variables of other firm business areas (production,
distribution, marketing etc.). The modelling approach is developed with the aim of
defining a priori a number of “business tasks” from which the accounting manager
can select and run the one in which he/she is mainly interested.
The model is not yet deployed and presently is under validation phase, nevertheless its
development has already supplied the following results:
e Understanding the dynamics of winery accounting area,
e Changing the manager’s single business area view to “systemic” approach,
e Learning about other company business areas (production, marketing, etc.),
e Supporting the accounting manager in company budget definition.
In conclusion the paper will present preliminary use of the model with some task
oriented what-if analysis.
MODEL OVERVIEW
The accounting model represents the corporate company economic and financial
process in order to assist medium-top manager to work out effective policies able both
to keep the financial structure in equilibrium and to run efficiently corporate treasury
having under control all main variables of the other organisation key business areas.
The model has the aim to study the financial dynamics of all corporate costs and
revenue variables. Hence the first step of the economic and financial analysis consist
in the monetary quantification of physical quantities, derived from other business
areas, giving origin to costs and revenues.
In order to achieve this goal there have been faced two problems:
1) the difficulty to share some variables because of the different models time units;
2) the difficulty to implement a consistent and up to date exchange process between
different business area models.
With reference to the first one, we observed that in order to calculate for example the
grapes purchasing costs , “Monthly cost of grapes”, from the amount of grapes, it’s
necessary to define an extra variable, “Grapes delivery volume” as monthly variables
(see Figure 1):
Base Wine Production model
Novello_grape_delivery_volume
Novello_grape_delivery_day
No_of_Time_Unit_included_in_one_month
“Monthly other grapes
delivery volumes"
Monthly_Novello_grapeNdelivery_volume
Economic & Financial model a
Monthly_Cost_of_grape
Initial_Commercial_debts
oe
Commercial_debts
Monetary_outflow Purchaising_costs
Supplier_average_delay
Figure 1 - Interaction between base wine production and accounting model
The second problem can be solved through the creation of a “common variable base”
repository in which each specific model can place input or/and calculated common
data variables and these can be accessed and used by other business area models. The
repository can be referenced each time there is the necessity of exchanging data
between models (Figure 2).
Production Business Marketing Business | Accounting Business
Area Model Area Model | Area Model
]
-ASSuimplions/ou
results
SOO
pi &
on output results results —_
7 tnput ~~ a =
(constraints )
Constraints)
ens VARIABLE BASE -
Figure 2 — The use of variable base repository to exchange consistent data between
different business are models
The overall accounting model itself is divided into seven sections:
1) Credit Management;
2) Financial Sources Management;
3) Treasury Management;
4) Financial Assets Management;
5) Equipments (plants) & Depreciation;
6) Economic Results;
7) Ratios.
Figure 3 shows a general view of the overall model including the main interactions
between different sections.
Now, synthetically, we will describe each section of the model.
CREDIT MANAGEMENT
The section represents the corporate commercial credit management process.
The model developed allows both the analysis of the natural maturity process of
corporate commercial credits and the disinvestiment of these before their expiration,
having recourse to a factoring company. The factoring organisation will discount
corporate commercial credits and will pay back the net value.
The model also analyses the unpaid credit management. The difference between the
inflow, deriving from the cashing of the commercial credits, and the outflow, deriving
from the commercial debts payment, represents the “Commercial cash flow”.
nih "Ce Yeconomicfests OF
Economic Results
|
|
|
|
|
|
| =
|
Figure 3 — Overall accounting model structure
FINANCIAL SOURCES MANAGEMENT
This section describes the financial sources management. The model analyses the
following financial sources:
¢ own stock capital;
e debt capital:
- Short term debts;
- Long and Medium term debts.
If current financial requirements exceed available financial resources (short term
credit line + bank balance), user will be able to face up to the financial requirements
by means of three possible policies:
e increasing long/medium debts;
e increasing corporate stock capital;
¢ acombination of above policies.
The model also analyses the repayment process of debts, distinguishing between
capital share (which reduces the debt nominal value) and interest share (calculated on
the residual debt value).
TREASURY MANAGEMENT
The treasury management process section goal is to assure that corporate treasury to
be as much as possible equal to the desired level one (i.e. the level at which financial
requirements can be economically satisfied day by day).
In case the corporate treasury exceeds the desired level one, the surplus will be
deposit to the bank, otherwise (corporate treasury less than the desired level one) the
financial requirement will be satisfied by means of the bank borrowing (without
exceeding the short term credit line).
FINANCIAL ASSETS MANAGEMENT
Financial assets management section describes the investment process of financial
surplus in financial assets.
Indeed if monetary availability (cash + bank balance) exceeds the minimum threshold
to make new financial investments (minimum value for financial investment), the
surplus will be invested in new financial assets in order to gain interest.
The model allows to evaluate possible financial asset disinvestiment before the
maturity time, once treasury state needs financial resources.
EQUIPMENT & DEPRECIATION
The section represents both the equipment buying and selling process and the
depreciation of them.
This section also determines the financial requirements deriving from new
investments.
ECONOMIC RESULTS
This section shows the main mean economic results:
© Operating profit
It calculates the economic result deriving from the typical corporate
management process. It depends mainly on the difference between the total
general management revenues and the total general management costs
e Net profit
It calculates the corporate general economic result deriving both from typical
corporate management process and from other management process (such as
financial management). It depends on the sum of the operating profit and of the
result of the financial management .
RATIOS
The ratio section shows the main economic and financial indicators. In particular the
model includes the following ratios:
¢ Current ratio: it express the corporate solvency degree;
Quick ratio: it express the corporate liquidity degree;
Leverage: it express the percentage of stock capital compared to the debt capital;
Return on Sales: it express the percentage of operating profit due to the revenue
sales;
e Return on Investment (ROI): it express the rendering of the stock capital invested
in the typical corporate activity;
e Return on Equity (ROE): it express the general rendering of stock capital.
RESULTS
A typical situation which should be approached by accounting manager, with the use
of model, is when for example due to unfavourable weather forecast a bad grape
harvest is foresee. This presumes to deal with a decreasing sales volume for the year
coming and hence one of the manager tasks is to calibrate the corporate treasury level
in order to best manage the decreasing volume of incomes from wine selling.
Base condition
In Figure 4 it is presented the main economic and financial output when the model
works under normal input values. Let us focus only on the input variable that will be
changed in the following “what if analysis”.
e Monthly sales rate = 450.000 bottles;
e Treasury minimum level to evaluate new financial investments = 20.000.000
currency.
Commercial credits
aS ti
Commercial debts
8e9. 1
6e9.
_,— Commercial_Credits
4e9 1
—p Unpaid_credits
29.
2
2 2 2 ?
0+ &
0 5 10 15 20 25 30 35 40
Month
a)
General management cash flow
5e9
0.
-5e9.
-1e10-
Month
c)
Figure 4.1 Model results under base condition
3e10.
2e10.
te10
0+ + + + r + r 7
10 15 20 25 30 35 40
Month
b)
Bank balance
1e10.
Be!
6e!
4e!
2¢!
of
0 10 15 20 25 30 35 40
Month
d)
Long-medium term loan
Long-medium term financial assets
0.
-le1
-2e1
-3e1
-4e1
-5e1
0 5 10 15 20 25 30 35 40
Month
e)
Operating profit
1e10:
-1e10
-2e1
0 10 20 30 40 50 60
Month
8)
Figure 4.2 Model results under base condition
6e10:
5e10.
4e10.
3e10.
2e10.
1e10 y
ot + + + + + 1
0 10 20 30 40 50 60
Month
f)
Net Profit/Loss
4e10
2e10
Z
-2e10.
-4e10.
10 20 30 40 50 60
Month
h)
Reduced wine volume selling condition
Now let us take into account a typical accounting manager decisional “task”: what
should be the corporate ‘cash on hand’ once the sales forecast is decreasing ?
e Monthly sales rate = 220.000 bottles (this sales volume isn’t able to keep an
economic equilibrium);
e Treasury minimum level to evaluate new financial investments:
case 1) = 20.000.000 currency;
case 2) = 100.000.000 currency.
In the first case the accounting manager prefer to held a little treasury level to face up
to unforeseen financial requirements and to invest, as described in “Financial Assets
Management” section, the monetary surplus in financial assets. In the second case,
instead, the accounting manager is less inclined to risk and decides to held a higher
corporate financial treasury level, missing the financial gain deriving from potential
new investments.
In figure 5 the comparison of the following key variables, deriving from the two
different cases above, is presented:
— Long/Medium term loan;
— Long/Medium term financial assets;
— Net profit/Loss.
In contrary to what, at first glance, one can imagine the case 2 hypothesis is preferable
to case | because a low treasury level (case 1) aggravates the corporate economic
performance. This occurs because the financial requirements due to a sales decrease,
induce a growing borrowing in order to face up to daily payment, worsening the
economic results.
On the other hand a higher treasury level (case 2) allows to face up to the financial
requirements with company own financial resources, reducing the borrowing increase.
Long/Medium term loan
°
Long/Medium term financial assets
1°
12 1
2
2 2
-5e10 1 1 2 2
2
2
lett 1 1
1
-2e11
5 10 15 20 25 30 35 40
Month
a)
Net Profit/Loss
1 1
2 c ‘ e
2
1 2
-5e1
1
1
let
10 20 30 40 50 60
Month
c)
Figure 5 Model results under reduced wine volume selling condition
References
DAMAS Project EP-25441
Sedehi H., Barker C. (1998). A Wine Production System Dynamics Model. In
Proceeding of the Sixteenth International Conference of the System Dynamics Society,
Québec ’98.
Sedehi H., Boscolo F.. Un modello dinamico per il controllo di gestione in una
azienda vinicola. In Logistica, Trasporti e Qualita, AIRO annual conference 98
Solomon E. (1963). The Theory of Financial Management. Columbia University
Press, New York.
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