FINANCIAL CONTROLLER CENTER

It would be unsafe for users of financial information such as the balance sheet to presume the correctness of the figures shown under assets and liabilities of a company without deeper analysis. In general, it is the basic responsibility of the accounting department to ensure that financial statements will be presented with completeness and accuracy before being distributed to users. However, the ineffective process of accounting close may not disclose problem area that needs further analysis. When looking at the balance sheet, someone may have the following questions:
• Does the balance sheet present the true value of the company’s assets and liabilities?
• Can the company collect the money from outstanding amount of accounts receivable?
• Or can the entire inventories be sold out at the current prices?
Many people may cast doubts on answers to these questions. Companies that perform proper analysis of the balance sheet accounts regularly should be able to identify and correct the errors found. In order to achieve this, the aging analysis is an important tool that accountants and the management can use to get a clearer picture of asset quality. For example:

Accounts Receivable Aging
By reviewing an aging analysis report of each account receivable, the company can easily identify potential doubtful debt that requires immediate actions before it becomes bad debt. It is possible that accounts with long overdue balance indicate that particular debtors may have financial problem that impact the ability to settle the debt. More detailed investigation is needed to understand the root cause of the problem. Credit control should be tightened or closely monitoring should be employed to avoid further losses.
Aging report can also uncover mistakes and errors made from the accounting operation such as wrong settlement of an account receivable, unrecorded collection, requirement of credit note issuance, and so on.

Inventory Aging
The aging inventory report showing by inventory item the amount of inventory that may have been kept from 30 to 60 days, 61 to 90 days, 91 to 180 days, and 181 to 360 days, and over 360 days can be prepared to understand the inventory status of the company at any point of time. The amount shown over each period of time could tell the management regarding the problems such as:
• Slow-moving items – the raw materials or finished goods that are getting old can depreciate in value. This will definitely incur future loss from inventory scrap or high discount for finished products.
• Obsolete inventory – it’s possible for the very long aging items to be obsolete and can not be used either for production or sales purposes. These inventories are to be eliminated at the end.
• Discontinued inventory – a product ending its life cycle by the replacement of a new model or design. This can result in either discontinued raw materials or finished products. Companies need to have a good plan to ensure the smooth phase-out.

An aging analysis can also be applied to liability accounts so that clearer picture of the company’s obligations can be obtained. In the fast-moving business pressure today, an aging of non-financial transaction can be as important as the financial one. It’s interesting to see how many outstanding issues become overdue waiting for decisions and actions from responsible people of the organization?

By Yanyong Thammatucharee – Senior Vice President for Accounting and Finance at Central Marketing Group

The Nation Newspaper - GURU SPEAK Column on 29 July 2010

It would be unsafe for users of financial information such as the balance sheet to presume the correctness of the figures shown under assets and liabilities of a company without deeper analysis. In general, it is the basic responsibility of the accounting department to ensure that financial statements will be presented with completeness and accuracy before being distributed to users. However, the ineffective process of accounting close may not disclose problem area that needs further analysis. When looking at the balance sheet, someone may have the following questions:
• Does the balance sheet present the true value of the company’s assets and liabilities?
• Can the company collect the money from outstanding amount of accounts receivable?
• Or can the entire inventories be sold out at the current prices?
Many people may cast doubts on answers to these questions. Companies that perform proper analysis of the balance sheet accounts regularly should be able to identify and correct the errors found. In order to achieve this, the aging analysis is an important tool that accountants and the management can use to get a clearer picture of asset quality. For example:

Accounts Receivable Aging
By reviewing an aging analysis report of each account receivable, the company can easily identify potential doubtful debt that requires immediate actions before it becomes bad debt. It is possible that accounts with long overdue balance indicate that particular debtors may have financial problem that impact the ability to settle the debt. More detailed investigation is needed to understand the root cause of the problem. Credit control should be tightened or closely monitoring should be employed to avoid further losses.
Aging report can also uncover mistakes and errors made from the accounting operation such as wrong settlement of an account receivable, unrecorded collection, requirement of credit note issuance, and so on.

Inventory Aging
The aging inventory report showing by inventory item the amount of inventory that may have been kept from 30 to 60 days, 61 to 90 days, 91 to 180 days, and 181 to 360 days, and over 360 days can be prepared to understand the inventory status of the company at any point of time. The amount shown over each period of time could tell the management regarding the problems such as:
• Slow-moving items – the raw materials or finished goods that are getting old can depreciate in value. This will definitely incur future loss from inventory scrap or high discount for finished products.
• Obsolete inventory – it’s possible for the very long aging items to be obsolete and can not be used either for production or sales purposes. These inventories are to be eliminated at the end.
• Discontinued inventory – a product ending its life cycle by the replacement of a new model or design. This can result in either discontinued raw materials or finished products. Companies need to have a good plan to ensure the smooth phase-out.

An aging analysis can also be applied to liability accounts so that clearer picture of the company’s obligations can be obtained. In the fast-moving business pressure today, an aging of non-financial transaction can be as important as the financial one. It’s interesting to see how many outstanding issues become overdue waiting for decisions and actions from responsible people of the organization?

By Yanyong Thammatucharee – Senior Vice President for Accounting and Finance at Central Marketing Group

The Nation Newspaper - GURU SPEAK Column on 29 July 2010

Imagine that we are walking into a warehouse full of parts and finished goods, what would be the feeling? Even though these are part of the assets of the company, it would not mean anything unless they are salable. We don’t want to keep slow-moving or dead stock or obsolete parts in the warehouse. Ultimately we would like to keep the stock at the minimum as long as we can meet the sales forecast and keep the production running smoothly. The high inventory can have important implications:

 There may be over stock for raw materials or finished goods.
 The products being produced are not what the customers want.
 The purchasing department may order too much and may not plan to match the production schedule with the requirements.
 The production people may have met the productivity target but building the unwanted inventory.

One of the inventory valuation methods of accounting is the lower of cost or market. That means if the market price of the inventory become lower than the purchased cost, the company has to realize lost from adjusting the inventory value down.
The controller can help the management team by providing information about the inventory status and value change. This can be done by using the result of the physical inventory count performed. The inventory count process – cycle count or annual count – can uncover problem behind the inventory number such as inventory lost, unused raw materials, obsolete parts and so on.
With proper highlight and identification of the potential problems, the team can identify action plan necessary to be executed to correct the situation.

By Yanyong Thammatucharee
Email: yanyong.thammatucharee@gmail.com

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Generally, a company’’s assets consists of various types of assets as shown in the balance sheet format i.e. cash, accounts receivable, inventory, and fixed assets. It is the management’s responsibility to manage and utilize these assets efficiently, for example:

 Cash – It is important to make sure that company’s cash has been paid for expenses necessary for operate the business, and investment that will give good return back to the company. Cash may be put in the bank saving accounts with high interest rate. Excess cash may be used to invest in a profitable investment project.

 Accounts receivable – The responsible account receivable accountant has to make sure that the collection has been done and the statement of account is up to date. In case of doubtful account possibility, the responsible accountant needs to coordinate with the sales person to find out the solution for that, and reasonable amount of reserve should be made according to the accounting policy.

 Inventory – It is challenging for the company to manage the inventory effectively. Inventory has to be available with sufficient amount to serve the production and sales demand of the market. The movement of inventory must be controlled and can be audited to make sure that the relevant transactions has been checked and recorded properly. The errors and failure on the inventory control may be discovered through the process of physical count. This is done by comparing the physical numbers and the booked quantity. And the discrepancy may be found during the inventory reconciliation process done by the concerned parties.

 Fixed assets – In acquiring an asset item, it is essential for the responsible person to think about the cost versus benefits of the investment and consider the return that the asset can give. Important indicators used in project evaluation include ROI (Return on Investment), IRR (Internal Rate of Return), and Payback Period.

ROI (Return on Investment)

In the process of investment decision making, ROI is an indicator that tells us how much return can be obtained from the investment in terms of percentage to total investment. The calculation can be made by the following formula:

ROI = Profit / Investment

The profit is the return made from the operation of one year. When we divide this amount with total investment, we will get a percentage number telling us how much we can get from the project investment. In comparing several projects for the selection, the project that gives higher ROI is likely to be considered most favorable.

IRR (Internal Rate of Return)

If we put money in the bank, we will get the return in the form of interest which bears a percentage. In a project that gives return amount along a period of time, we can calculate the return rate where the future amount discounted will be equal to the investment amount, which is called IRR.
The calculation of the IRR can easily be done using EXCEL spreadsheet function. So if we want to find out the IRR for each project studied, we only need to know the stream of cash return in flow, and the investment amount at present. Then with the application of the function, the IRR will be generated automatically.
The project with high IRR is the project that gives high return. The highest IRR project is likely to be chosen using this technique.

Payback Period

The number of year that a project will return the money that is equal to the initial investment amount is called the payback period. For example, if an investment project used 1,000,000 USD, and can provide the net profit equal to the investment amount within 3 years. This project then has the 3 year payback period. The shorter the period of payback we get from, the better for the project in consideration.
So the formula used in the calculation can be demonstrated as follows:

Payback Period = Number of years that the accumulated return amount equals to the investment amount

By Yanyong Thammatucharee
Email: yanyong.thammatucharee@gmail.com

Suddenly a company gets into the cash strap where payment cannot be made to suppliers on time. The financial chief is working hard with the managing director to understand the situation. Additional loan is required. That’s true but the company has used up all the approved credit facilities.
From the financial statement perspective, income and expense amount did not fluctuate much between two year periods. Accounts receivable overdue is not much as well. But the inventory balance jumps a lot higher than before. This is where the cash flow has been hurt. It is extremely critical to reduce the inventory down as soon as possible. Based on the calculation made, the average inventory holding day is 250 days or 8 months. This calculation is made by using the following formula:

Inventory Holding Days = (Inventory Balance / Cost of Goods Sold) * number of days for the sales period used

The result clearly points to the root cause of the cash shortage problem which is the high inventory level. The company needs to keep the inventory for 8 months to make sales. As the credit term of the accounts receivable and payable is around 45 days, it is almost impossible for the company to survive without additional cash injection from non-operating sources.

What tools can be used in detecting the inventory problem at an early stage?

The slow-moving inventory report can be one source of information that needs attention from concerned people. The report should be used to review for any unusual trends such as inventory items that do not move for a long time such as 60 days, 90 days, 120 days, and so on. An inventory meeting should be called at least every month after the account close to discuss on measures that need to be set up by concerned parties such as production, sales, and accounting.

The reasons for high inventory may include the following items:

• Purchasing quantity does not match with the requirement.
• Ineffective control over the purchase order placing.
• Inventory movement is not based on first-in first-out basis.
• Bad warehouse management and control.
• Inefficient material planning.
• No slow-moving and obsolete inventory review.

Working capital can be improved dramatically if the company can control inventory at the reasonable level.

By Yanyong Thammatucharee
Email: yanyong.thammatucharee@gmail.com