Financials
“Business Wisdom” is a contribution by Mr. Anil Laud, former MD of Siemens. He has several years of experience in the corporate world and wanted to share his experience and learnings with Professionals. Keep visiting this area regularly for the new articles.
1. No Turnover without Profit and no Profit without Cash.
Don’t run after only the Growth (Top line) – pursue only the Healthy growth which will yield profits. Your product should be innovative (USP wrt competitors’ offerings); reduced Product Cost could also be an innovation.
Cashless Profits would also be useless. The Cost of Finance keeps on ballooning. Growing bad debt / receivables are the indicators. There is no sense in doing even profitable business if it doesn’t result in timely Cash in hand. It is only Profits on paper.
2. Cash flow
The best way to control Business is by maintaining a positive Cash flow. No doubt the Cash flow would take a dip in case of a new CAPEX, which is a must in the growth mode. However one should have internal controls to ensure that investments in CAPEX are well leveraged and not just to be with the Joneses.
3. Risk and Opportunities Review
Such a Review should be primarily done by the Project Manager. He is supposed to be most qualified in identifying the Risks and Opportunities. He should also recommend the risk mitigation strategies.
The Review Board could point out if there are any Risks not identified
or if any mitigation strategies don’t jell. The Project Manager then would then agree / disagree, based on which the Review Board gives the Go / no-Go decision.
Under no circumstances would the responsibility for the success of the Project be shared by the Project Manager with the Review Board.
However there is no good business with out the accompanying risks. The trick lies in putting in place the Risk Mitigation strategies and a flawless execution.
Opportunities look bigger while going away than while coming in. It needs a visionary to spot opportunities. Most people tend to rely on their General Management skills, and have no clue on how to tap opportunities. It results in -ve growth and that leads to lower profits. Instead of taking appropriate risks to force the growth
4. Pricing
Should be based on Market conditions like
*Value to customer
*Competitive pricing
Should not be based on costing since there are a lot of costs which are dependant on volumes and you aren’t very sure if your costs are optimized.
On the long run though, the Prices should cover the costs.
At times the costs could be higher than the prices. Let this be by design and not a surprise. It could be a well thought out move to Buy in to the market or be a Predatory pricing, usually adopted to unseat the incumbent.
5. Costing
Difficult part –
A Project costing vs. Product costing
B Costing of multi-year Projects
C Activity based costing
Costing would be virtually impossible without the proper automated tool. The Processes of costing should be frozen. The model chosen should be as per International standards. Most often there is change of personnel
in Finance during the progress of the Project (particularly the multi-year ones), resulting in misunderstanding of models and wrong booking. Cure is – all in Project Accounting should follow strict discipline and timeliness. No maverick / cowboy styles accepted.
Cost Accountability
Direct Cost Accountability is very important for effective cost control. The indirect cost assignment – based on agreed keys, should be minimal (less than 10%)
6. Budgeting
Budgets are a must and are usually drawn in the beginning of year. In large organizations, budgets are taken as ‘license to kill’, when it comes to deployment of resources.
On the other hand, stock taking of the Performance is done Quarter to Quarter at least, if not month to month, but budgets are rarely touched. Budgets are treated sacrosanct (holy cows).
Budgets are primarily Plans, and have only academic value. They need to be reviewed after taking stock of the actual.
It is necessary to communicate the Budgets to the troops, primarily to set the direction.
Often Budgets are the cause of missed opportunities.
Bottom line – Budgets should be dynamic and responsive to the actual.