FINANCIAL CONTROLLER CENTER

Guru Speak - THE NATION
By Yanyong Thammatucharee is a senior vice president for accounting and finance at Central Marketing Group. The views expressed herein are the author’s own.
Published on May 15, 2009

In the business world, it has been emphasised repeatedly that profit is a measurement of a company’s success or management’s performance.

But when the economy abruptly turns hostile, is there any good reason for companies to accept losses? Some may say “yes” but I believe many would say “no”.

Looking at the righthand side of the balance sheet of a strong and healthy company, we are likely to see a line item called “Retained earnings” under the shareholders’ equity heading.

A positive figure here shows the cumulative success that the company has achieved over the years less dividends paid to shareholders. This wealth indicator can be hit by losses from operations, which we see many companies are facing today.

Unfortunately, it is impossible for someone to confidently determine how much loss a company can bear for an unexpected economic crisis. However, management has to decide appropriate actions to be taken to save the company with minimal damage to its financial status.

One favourite course of action is reducing headcount. This is a quickfix solution for the short haul but at the expense of longterm success.

Without proper handling, the layoff process can cause the company an unanticipated weakness that costs even more than the expectation.

For example, a large electrical manufacturing company implemented an early retirement scheme for all employees with a target headcount reduction.

When the company announced this plan, many good people - skilled workers, capable supervisors and several senior back-office staff - applied for it. The company didn’t expect these people to leave but could not stop them either.

They were all gone with business knowledge and execution capability. On the other hand, low performing employees didn’t apply for this scheme and have to be kept with the company.

The company has to struggle to start building up a new team, which will certainly take time and expense.

In my opinion, a flaw of the current accounting system is that it cannot recognise and reflect certain nonfinancial assets of an organisation, namely employee knowledge, skills, expertise, creativity and leadership - the company’s goodwill is too rough in this case.

Once the company loses these assets by just letting them go out the door, heavy costs in the future will be unavoidable.

Worse than that, if these people happen to join competitors, this can become a huge loss that a longsighted company would not like to see.

So during tough times, companies may have to cut personnel costs dramatically for survival.

In the process, management could do better using cautious consideration and a wellplanned programme so that the company does not have to end up keeping unwanted people and losing talented staff to rivals.

Shouldn’t we identify the human assets of a company and try to keep them as long as possible even at additional cost in the short term so that the company can become successful from the longerterm point of view?

Guru Speak - THE NATION
By Yanyong Thammatucharee is a senior vice president for accounting and finance at Central Marketing Group. Views expressed here are the author’s own.
Published on April 29, 2009

I notice that the phrase “loss of profit” has been used more and more by top management and senior executives in various organisations.

Before it becomes an accepted excuse or justification for unfavourable financial figures, I would like to express my view on it from the accounting angle.

Businessmen are well aware that profit or loss can be determined by finding the difference between income and expenses of periodic business transactions based on the accounting policies applied by each company.

However there is another type of profit and loss that we should know before we can discuss further about the loss of profit.

It is called a realised or unrealised gain or loss - particularly in calculating the amount resulting from the difference in foreignexchange rates used.

This transaction occurs when assets or liabilities are denominated in a foreign currency at the recording date.

The realised exchange gain or loss is computed at the time of collection or settlement.

For example, a company imports a product at the total cost of US$100,000. On the goods received date, the exchange rate was Bt35.0 per dollar. The cost of this product was Bt3,500,000.

Two months later on the settlement date of this debt, if the exchange rate was Bt36.0, the company would have to pay an additional Bt100,000 due to the weakening of the baht.

This would cause a realised exchange loss in terms of the baht amount paid.

However, at the end of each month prior to the settlement month, the company may calculate the unrealised gain or loss by comparing the recorded baht amount to the calculated baht amount using the exchange rate prevailing at the end of the month.

The difference between these two amounts is called either an unrealised gain or loss depending on the impact to the company’s bottom line.

Generally, the profitability of a business can be affected by many factors, which cause changes to the income or expense lines in the profit and loss statement.

It’s important for a company to know the targets for income, expenses and profit in advance - from the original budget or the latest forecast numbers.

This target may be revised from time to time in order to reflect the most uptodate business environment.

The company has to apply its management system to ensure that the profit target will finally be met.

Actual profit might miss expectations because of a change in the sales mix, a drop in sales volume or higher than expected costs.

Management has to commit itself and thrive to achieve the profit target by using the best management practices possible.

Even though some uncontrollable factors can thwart the bottom line figures, management bears full responsibility to correct the situation in the fastest and most efficient manner to avoid any financial disaster.

The decisionmaking process is another crucial factor in evaluating management’s capability. When the operating results turn negative, it’s better for management to analyse and explain why income and expenses are out of control.

By doing so, the loss of profit would not be a valid statement to explain the poor results anymore. Instead, it’s actually the loss of performance, isn’t it?