Relationship between accounting/finance and engineering

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Introduction

"Engineering is the application of scientific and mathematical principles to practical ends such as the design, manufacture and operation of efficiency and economical structures, machines, processes and systems." [1]

"Accounting is the collection, analysis and communication of financial information that is useful for those who need to make decisions and plans about organisations, and for those who need to control those organisations." [2]

"Finance is the management of money, banking, investments and credit." [3]

Accounting was invented by engineers in order to make their jobs more profitable as well as less time-consuming.

When applied, the ideal combination of the above can provide the foundations for a thriving and much-admired organisation or company. On the contrary if such combination is dealt with carelessness and unprofessionalism, the results can be catastrophic.

Case Study

The DeLorean Motor Company is a prime example to demonstrate the accounting/ financial issues which might arise during the fulfilment of an engineering ambition.

John DeLorean was a talented chief engineer and the youngest vice president of General Motors. By 1973 he decided to leave GM and create his own company, DMC (DeLorean Motor Company). John DeLorean's dream was to build a stainless steel eco friendly sports car with stunning design and a price tag of approximately $12,000. Billing this car however was not going to be cheap. He had little money but by taking advantage of his reputation and business connections he approached old friends and car dealers for financial support and soon he collected $8, 000000. Alas, this amount was just a small portion of what was actually needed.

Rather than setting-up his business in a country with tradition in car manufacturing, he opted to exploit places with high unemployment rate. After rejecting various investors he ended up in the village of Dunmurry near Belfast, Northern Ireland. The labour government was ecstatic, offering £53, 000000 tax money and grants as well as low interest loans and land in which to build a space-aged factory. DeLorean's guarantee was to build the car.

John DeLorean's dream was becoming a reality. He acquired the land, secured the money and had the people to work for him. In order to give vision to his dream he approached one of the most acclaimed car designers in the world; Giorgetto Giugiaro. Giugiaro penned a striking shape with gull-wing doors that was to be made out of stainless steel. The only thing missing was technical expertise. For this matter, DeLorean approached another great name in automotive industry, this time an Englishman. Colin Chapman and his esteemed motor company Lotus, were set to address this issue. Chapman promised to get the car into the showroom in 18 months time. However due to Lotus' lack of experience in mass-production and the fact that only 3 engineers were available for the project, this was an epic task to complete. Unfortunately the initial plan could not be fulfilled so the finished product was based on a modified Lotus Esprit platform. It was named the DMC-12.

Putting the design in production started causing problems. Time was running out and DeLorean had to compromise on his original vision. Instead of a $12,000 novel sport car he now ended up with a modified Lotus Esprit costing more than twice the original price. And this was only the beginning. In order to speed up production, parts were sourced from other manufacturers such as Volkswagen, Ford, and Vauxhall. Power came from a 2.8 litre PRV V6 (a joint product of Peugeot, Renault and Volvo, hence the name) but due to the car's weight, performance and acceleration were poor with a 0-60mph time of 10.5 seconds.

Unit production was scheduled to begin in 1979 but because of engineering delays and budget overruns the assembly line started in early 1981. The first 400 cars leaving the production line had to be rebuilt due to appalling built quality. This caused problems to the production time and instead of the initial target of 12000 cars only 7000 were built of which 3000 were sold.

But his troubles were far from over. In February 1982 DMC was out of money and the automotive pioneer was again in search of investors. This time he applied for a loan of £40,000000 but he was rejected by the British government. This was the beginning of downturns and 1100 workers were laid off. The company was in financial meltdown and DeLorean tried everything in order to keep the factory running. In his desperate need to raise money and keep the factory floating John DeLorean even considered the option of drug trafficking. This raised a conflict between the British government, the FBI, the drug enforcement administration, the US court system, DeLorean himself and his investors. However, two years later he was found not guilty but this incident ruined his career and at the same time his company was closing down. Finally, in November 1985 the company shut down and John faced fraud charges.

After investing the staggering amount of $175, 000000 DeLorean failed to succeed. He built an under-powered, overpriced car that was not selling. The car was developed for the US market but for financial reasons it was built in the UK. The most disastrous financial decision he made was to speed up production of the car so as to increase royalty payments and project an image of success. The silver lining in this story is that the DMC-12 gained worldwide reputation after appearing in the Back to the Future trilogy which was a great commercial success.

Conclusion

The DMC-12 is considered to be one of the biggest financial disasters in automotive history as well as one of the boldest industrial gambles. John DeLorean did not seem to apply the principles of accounting, finance and engineering harmonically and as a result, after a great number of incorrect and rushed decisions the company's income turned out to be significantly lower than its expenses. Inevitably, the company was forced to file for bankruptcy. From the case study above one can easily notice that accounting /finance and engineering are strongly related in a way that each department failure can lead to a disaster of the business as a whole.

References

  1. http://www.thefreedictionary.com/engineering
  2. Lecture notes
  3. http://www.thefreedictionary.com/finance
  4. http://eightiesclub.tripod.com/id305.htm
  5. http://www.delorean.com/
  6. http://www.bbc.co.uk/bbcfour/documentaries/features/delorean.shtml

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