Managing Your Cash Flow

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Natural selection in business

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Globalisation is something that is unavoidable – it’s unstoppable in our world today. From Tesco’s to McDonalds, big businesses are going international and accountancy has been a core facilitator in this move, as a single set of accounting principles gets applied across the world.

A single language for how numbers are reported has made it easier for investors to seek out other opportunities cross border, and for big businesses to get bigger. But this wasn’t a big bang development – moves were being made as early as the 1960s to get different countries on the same page, using the same principles for their accounting.

The EU has adopted a single set of accountancy rules for listed companies and started work on harmonisation as early as 1967. It now uses the standards of the International Accounting Standards Board and currently 69 countries are using these.

Changes to the kind of information companies produce, the way they present it and what they are actually saying with their accounting have been drivers to the opening up of capital markets across the world. Rather than investing in a possibly third rate company in their own countries, investors now have a wealth of options and can choose to put their money in first rate companies across borders – simply because they understand the figures better. Cannier investments are being made, there is more competition for investor’s money and this in turn drives out the third rate companies.

But don’t get sentimental about the disappearance of localised markets; this is a good thing. The International Financial Reporting Standards’ (IFRS) impact in opening up cross border trade and investment means that weaker companies that lose money are bought out by other companies and made more efficient. On the flip side, as big companies get bigger, they create new opportunities for the small, nimble guys who can provide specialist services to them cheaply.

So, we are set to see an increasing polarisation in the business world – sharks and minnows. It is the middle-sized companies that will lose out – they can’t compete with the big businesses, and they aren’t small or fast enough on their feet to be a supplier to them. Their disappearance leaves even more chances for the minnows to feed off the sharks – it’s a kind of natural selection, if you will.

Whether we like it or not, globalisation is happening, and it’s here to stay. In accounting terms, the world is getting smaller – and more uniform.

*Peter Walton is Professor of Accounting and Head of the Accounting and Finance Research Unit at the OU Business School

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