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Essay: How can management accounting help EasyJet

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  • Published: 7 October 2015*
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Introduction:
During this essay, I will be discussing Management Accounting Practices, talking about how Easy Jet could adapt to these methods within their business. In detail, I will be explaining the advantages of Management Accounting, and how I think it could contribute towards the success of Easy Jet. I will base my arguments around the information gathered during my research phase, from reliable and good quality sources.
Easy Jet Plc – A brief summary
Easy Jet is an airline based in London, at the Luton Airport. A man called Stelios Haji-Loannou founded Easy Jet in March 1995. They have over 700 routes and operate in over 32 countries.
According to an article posted on the EasyJet corporate site, 21st December 2014 was ‘set to be busiest day for EasyJet’s festive flying with more than 170,000 customers predicted to fly, and a record of over 1.5m passengers during the Christmas period’ (EasyJet Plc, 2014). On the same article it states that EasyJet carries over 62 Million passengers a year, and 12 Million of them are for business purposes. This outstanding figure speaks for itself and emphasises how huge the business is, at the same time highlighting how successful it is.
EasyJet has an eco-friendly approach in the way that they run their business, and I believe this is vital as it can attract customer loyalty, due to the nature of being a sustainable company. According to EasyJet, they ‘Emit 22% less carbon per passenger km than traditional airlines’ (EasyJet PLC, 2014). This makes us acknowledge that EasyJet are not like any other airline, and they care about both, their customers and the environment. This sends out a very positive vibe about the company, which I believe is essential in maintaining and expanding their customer base.
Moving on, the recent financial information of EasyJet informs us of how they are expanding each year. In order to find approximately how much EasyJet has grown in terms of revenue, I researched the financial statements of years 2005, and 2014 (the most recent). These financial statements were release and published on the EasyJet website. In 2005, the Revenue for EasyJet was ??1.3 Billion. Moving forward to 2014, the Revenue was ??4.52 Billion. Within the past 10 years, EasyJet have increased their revenue by fourfold. This figure is staggering, and really the volumes the success of the company. Finally, the share price for EasyJet (LON: EZJ) currently (26th January 2015) stands at 1,756.00 and is up by 1.21%.
Management Accounting – How can Management Accounting information aid the managers of EasyJet?
Management Accounting is about looking forward and making decisions which would benefit your business in the future. According to an article on the CIMA Global website, ‘Management accounting combines accounting, finance and management with the leading edge techniques needed to drive successful businesses.’ (CIMA Global, 2014). Management Accounting has its benefits, such as: Reducing expenses, improve their cash-flow and help make business decisions. However, in order to reap the benefits of Management Accounting, you need to have access to different types of information such as gearing ratio, which can show the long term financial position to the manager, as well as the funding being used within a business, and using this information, managers would be able to make a business decision.
In terms of EasyJet and Management Accounting, the Cash-flow statement would be a very useful piece of information which the Manager could use. Using the Cash-flow statement, the manager would be able to see the expenditures and revenue of the company, and use this as an aid when it comes to making decisions. An example of this would be maybe using the statement of cash flow to see if the expenditure is higher than the revenue. If this was the case, then the manager would be able to make a decision of perhaps increasing ticket prices, and lowering expenditures, such as amount of fuel per plane, in order to increase revenues.
As I mentioned earlier, Management Accounting Information can come in the form of financial ratios, such as gearing. The purpose of Gearing is to make a comparison between equity and debt of a company. High gearing ratio means there is more debt than equity, and a low gearing ratio would represent a low proportion of debt to equity. Using the gearing ratio would allow the manager of EasyJet to see whether he should lower or increase the gearing. In order to increase the gearing, he could issue more shares or repay the long term loans. On the other hand, to decrease, he could buy back the ordinary shares. In order to work out the gearing ratio, the manager would need to get hold of the figures of long term liabilities and the capital employed.
Like every business, EasyJet faces competition from rival businesses, such as Emirates or British Airways. In order to stay above the competitive rivals, EasyJet manager could use a forecast of sales document. The purpose of a sales forecast is to predict the future of the business, and what the revenue may potentially be a few years down the line. For example, if there is an average of 10% increase in revenue each year, the forecast of sales would assume that the trend would carry on, and increase by 10% each year. Using forecast of sales, the manager would be able to see the potential of the business and base his decisions around it.
Budgeting, Variance Analysis & Activity Based information
Budgeting is the process of creating a financial plan for your business and consists of Revenue and Costs that you will incur during the period. The benefits of budgeting is that it helps monitor the performance of your business and forecast your income and costs. I believe that budgeting would be a powerful tool that EasyJet could make use of, for the following reasons: EasyJet will have a huge variety of expenditures due to the nature of their company, for example, there will be the cost of fuel, the safety checks of an airplane and the pilot’s wages etc. So I think one of the major advantages of EasyJet using budgeting would be the fact that they are able to monitor all costs, and compare it to the expected revenue, and therefore would be able to determine how much profit/loss they would make. Another benefit budgeting could provide to EasyJet would be help in decision making. For example, if EasyJet decided they want to do an advertising campaign, they could refer to the budget and decide whether or not they have sufficient funds in order to do so.
According to an article on the website Accounting Tools, ‘Variance Analysis is the quantitative investigation of the difference between actual and planned behaviour’ (Bragg, 2014) Variance Analysis can be a powerful accounting tool, and I believe it could be vital to EasyJet. As I mentioned, Variance Analysis measures how much of a difference there is between planned costs and actual costs. For example, if we take Operating Expenses, EasyJet may assume a total figure of how much it would cost. However the actual Operating expense may be much higher or lower, depending on the economy. As the price of fuel may fluctuate (causing it to be a favourable), or increase, thus causing the actual cost to be higher (adverse). Moving onto revenue, a variance will occur if the budgeted revenue is higher/lower than the actual revenue. There may be a fall in the number of tickets sold by EasyJet. For example, a competition airline may start offering better prices, or world events such as the Malaysian Airplane disaster may put people off from travelling by plane again. This could potentially have a negative effect on the actual revenue. Using variance analysis, EasyJet would be identify any potential threats, and spot any trends or issues.
Finally, moving onto Activity Based Information. Innes (1999) argues that ‘The main use of ABI include cost control, production costing’ (Innes, 1999, pg.81). EasyJet could adopt the Activity Based Approach through the operations they undertake, for example they can use Activity Based Costing in order to allocate overhead costs. In order to allocate overheads, EasyJet would need to break down costs into different activities such as: Fuel/Oil, Airport Fees, On-Board passenger fees, flight crew and maintenance. Doing so would allow EasyJet to allocate how much is being cost in each area to run the service. I think this would be useful to EasyJet as they can determine which activities are inefficient, as well as being able to help narrow down which costs they can eliminate due to being unnecessary. For example, fuel costs could be eliminated if there was excess fuel left after the flight. Or, the manager may decide to cut down on some on-board services due to it not being efficient enough in terms of customer satisfaction, or the services simply not being used by passengers. Furthermore, if EasyJet were to use Activity Based Information, it would help them manage the company better due to having a more accurate budget and having better control over the costs.
Factors to consider before making Management Accounting decisions:
Before making a business decision, EasyJet would need to consider non-financial factors which could influence their business. For example, competitive airlines. They would need to consider how well their competitor is doing and whether or not they should go ahead with a decision, as it could be risky depending on how well their competitor is doing. Another factor they would consider is the climate, as weather can be a crucial factor in whether people decide to fly or not. And finally, another vital aspect would be ethics. As I mentioned in the summary, EasyJet are an eco-friendly organisation, and this is a key are due to the idea of people becoming more aware of the environment and the effects inflicted upon it. Therefore, an ethical and eco-friendly attitude would generate customer loyalty and satisfaction.
Conclusion
In conclusion, I strongly agree that Management Accounting would highly benefit EasyJet. If EasyJet were to adapt to the Management Accounting practices, it would aid the managers in making business decisions and help move the company forward. Furthermore, I think if EasyJet made use of the Management Accounting Information, and at the same time considered the non-financial factors, they would be able to increase revenue as well as stay on top of their competitors.
Bibliography:
1. INNES, J. (1999) The use of Activity Based Information: Managerial Perspective CIMA Publishing picks a topic. Pp. 80-81
2. KENNEDY, C. (2005) EasyJet PLC Annual report and accounts 2005. Pp. 02-03
3. BRAGG, S. (2014) What is Variance Analysis? Available at: [Online] [Accessed 2nd February 2015] http://www.accountingtools.com/questions-and-answers/what-is-variance-analysis.html
4. EasyJet PLC. (2014) EasyJet to break record for customers travelling home for Christmas available at: [Online] [Accessed: 26th January 2015] http://mediacentre.easyjet.com/stories/8893#sthash.xQPCpzj3.dpufhttp://mediacentre.easyjet.com/stories/8893
5. CIMA GLOBAL. What is Management Accounting? Available at [Online] [Accessed 27th January 2015] : http://www.cimaglobal.com/CIMA-in-business/What-is-management-accounting/
6. EasyJet PLC. (2014) For a greener future available at: [Online] [Accessed: 26th January 2015] http://corporate.easyjet.com/sustainability.aspx
7. KENNEDY, C. (2014) EasyJet PLC Annual report and accounts 2014. Pp. 20-21
Images used:
1. Cover page image ‘ (Nault. N, [No date] an image of EasyJet airplane [Online] [Accessed on: 26th January 2015] http://thestudyabroadblog.com/battle-of-the-low-cost-carriers/

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