In this article, I provide some warning signs that may indicate the presence of fraud risk. In general, examples include:
1. Absence of an anti-fraud culture
2. Failure of management to implement a sound system of internal controls
3. Lack of financial management expertise and professionalism in key accounting principles, the review of management reports and the review of significant cost estimates
4. A history of legal or regulatory violations or claims alleging violations
5. Strained relationships between management and internal or external auditors
6. Lack of supervision of staff
7. Inadequate recruitment processes
8. Redundancies
9. Dissatisfied employees with access to desirable assets
10. Unusual staff behaviour
11. Personal financial pressures on key staff
12. Discrepancy between earnings and lifestyle/expensive lifestyle
13. Low salary levels of key staff
14. Employees working unsocial hours unsupervised
15. Employees not taking annual leave entitlements
16. Lack of job segregation and independent checking of key transactions
17. Lack of identification of assets
18. Poor management accountability and reporting
19. Alteration of documents and records
20. Photocopies of documents replacing originals
21. Missing authorisations
22. Poor physical security of assets
23. Poor access controls to physical assets and IT security systems
24. Inadequacy of internal controls
25. Poor documentation of internal controls
26. Poor documentary support for transactions, especially credit notes
27. Large cash transactions
28. Management compensation highly dependent on meeting aggressive performance targets
29. Significant pressure on management to obtain additional finance
30. Extensive use of tax havens without clear business justification
31. Complex transactions
32. Complex legal ownership and/or organisational structure
33. Rapid changes in profitability
34. Existence of personal or corporate guarantees
35. Highly competitive market conditions and decreasing profitability levels within the organisation
36. The organisation operating in a declining business sector and facing possible business failures
37. Rapid technological change which may increase potential for product obsolescence
38. New accounting or regulatory requirements which could significantly alter reported results.
To be more specific, I will now focus on purchasing and selling process.
Examples of indicators of purchasing/ordering fraud include:
1. Disqualification of suitable tenderer
2. Unchanging list of preferred suppliers
3. Constant use of single source contracts
4. Contracts that include specifications that only one supplier can satisfy
5. Personal relationships between staff and suppliers
6. Withdrawal of lower bid without explanation
7. Acceptance of late bids
8. Changes to specifications after bids have been opened
9. Poor documentation of contract award process
10. Consistent favouring of one firm over another
11. Unexplained changes to contract after its award
12. Contract awarded to supplier with poor performance record
Examples of indicators of fraud in the selling process include:
1. Overcharging from an approved price list
2. Short-changing by not delivering the correct quantity or quality
3. Diversion of orders to a competitor or associate
4. Bribery of a customer by sales representative
5. Bribery of customer by a competitor
6. Insider information by knowing competitor's prices
7. Warranty claims that are false
8. Over-selling of goods or services that are not necessary
9. Free samples that are not necessary
Any of the above happen would mean a possibility of fraud. Internal control system should be set with keeping the above issues in mind.
Sunday, November 7, 2010
Tuesday, October 19, 2010
Fraud - Prevention
Fraud risk arises out of errors or events in transaction processing or other business operations. It is not easy to prevent fraud as the controls installed by people can be overcame by people. Fraud might be prevented through anti-fraud culture, risk awareness, whistle blowing and sound internal control systems.
Anti-fraud culture - Where minor unethical practices are overlooked, for example, expenses or time recording, this may lead to a culture in which larger frauds occur. High ethical standards bring long-term benefits as customers, suppliers, employees and the community realise they are dealing with a trustworthy organisation. Guiding principles could include:
1. Not acting in a way that could bring the organisation into disrepute.
2. Acting with integrity towards colleagues, customers, suppliers and the public.
3. Ensuring that business objectives are clearly stated and communicated.
4. Ensuring that benefits (whether to shareholders, customers or employees) are distributed fairly and impartially.
5. Safeguarding the confidentiality of personal data.
6. Complying with legal requirements.
Risk awareness - Fraud should never be discounted, and there should be awareness among all staff that there is always the possibility that fraud is taking place. It is important to raise awareness through training programmes. Particular attention should be given to training and awareness among those people involved in receiving cash, purchasing and paying suppliers, for example accountant, sales team and so on. Publicity can also be given to fraud that has been exposed. This serves as a reminder to those who may be tempted to commit fraud and a warning to those responsible for the management of controls.
Whistle blowing - Fraud may be suspected by those who are not personally involved. People must be encouraged to raise the alarm about fraud. An anti-fraud culture will be important in reinforcing the need for employees to express their concerns. However, management must realise that loyalties among workers, fear of the consequences and having unsubstantiated suspicions will prevent people from coming forward.
Sound internal control system - Sound systems of internal control should monitor fraud by identifying risks and then putting into place procedures to monitor and report on those risks. Here are some guidance on what is the quality of sound internal control system, the mnemonic SPAM SOAP would be useful:
Segregation of duties - Executive tasks should be separated from control tasks. One of the prime means of control is the separation of those responsibilities or duties which would, if combined, enable one individual to record and process a complete transaction. Segregation of duties reduces the risk of intentional manipulation or error and increases the element of checking. Some functions should be separated whenever possible. For example, authorisation, execution and custody. An example of segregation of duties concerns the receipt, recording and banking of cash. It is not a good idea for the person who opens the post to be the person responsible for recording that the cash has arrived. It would be even poorer practice for that person to be responsible for taking that cash to the bank. If these duties are not segregated, there is always the chance that the person misappropriate or steal the cash and no one would know.
Physical controls - These are concerned with the custody of assets and records and are also concerned with ensuring that access to assets and records is only permitted to authorised personnel. Procedures and security measures are needed to ensure that access to assets is limited to authorised personnel. Such controls include locks, safes, CCTV and entry codes.
Authorisation and approval - All transactions should be authorised or approved by an appropriate responsible person. The limits for these authorisations should be specified. For example, in a purchasing system there should be authority limits, where purchases of amounts exceeding those limits require higher authority.
Management controls - Management controls are exercised by management outside the day-to-day routine of the system. These include the following: overall supervisory controls, review of management accounts and comparison with budgets, internal audit function and special review procedures.
Supervisory controls - Any system of internal control should include the supervision by responsible officials of day-to-day transactions and the recording of them. Remember that supervisor acts as an important role in internal control process.
Organisation as a control - Enterprises should have a plan of their organisation, defining and allocating responsibilities and identifying lines of reporting for all aspects of the enterprise's operations, including the controls. There must be a well-defined organisational structure showing how responsibility and authority are delegated. An effective plan would require:
1. separation of a company's operations into appropriate divisions and sub-divisions.
2. appointment of person to assume responsibility.
3. establishment of clear lines of responsibility between each division and sub-division and the board of directors.
4. Overall coordination of the company's activities.
This will help to prevent friction so that staffs work together well. It also means that no duties go unperformed or unchecked.
Arithmetical and accounting controls - These controls are within the recording function and check that the transactions to be recorded and processed have been authorised, that they are included and that they are correctly recorded and accurately processed. This includes: checking the arithmetical accuracy of the records, the maintenance and checking of totals, reconciliations, control accounts, trial balances and accounting for documents.
Personnel controls - These are procedures to ensure that personnel have capabilities appropriate to their responsibilities, since the proper functioning of any system depends on the competence and integrity of those operating it. The qualifications, selection and training of the personnel involved are important features to be considered in setting up any control system. For example, a company accountant should be suitably qualified.
This article about prevention of fraud ends here, in next article I will write about the indication of fraud.
Anti-fraud culture - Where minor unethical practices are overlooked, for example, expenses or time recording, this may lead to a culture in which larger frauds occur. High ethical standards bring long-term benefits as customers, suppliers, employees and the community realise they are dealing with a trustworthy organisation. Guiding principles could include:
1. Not acting in a way that could bring the organisation into disrepute.
2. Acting with integrity towards colleagues, customers, suppliers and the public.
3. Ensuring that business objectives are clearly stated and communicated.
4. Ensuring that benefits (whether to shareholders, customers or employees) are distributed fairly and impartially.
5. Safeguarding the confidentiality of personal data.
6. Complying with legal requirements.
Risk awareness - Fraud should never be discounted, and there should be awareness among all staff that there is always the possibility that fraud is taking place. It is important to raise awareness through training programmes. Particular attention should be given to training and awareness among those people involved in receiving cash, purchasing and paying suppliers, for example accountant, sales team and so on. Publicity can also be given to fraud that has been exposed. This serves as a reminder to those who may be tempted to commit fraud and a warning to those responsible for the management of controls.
Whistle blowing - Fraud may be suspected by those who are not personally involved. People must be encouraged to raise the alarm about fraud. An anti-fraud culture will be important in reinforcing the need for employees to express their concerns. However, management must realise that loyalties among workers, fear of the consequences and having unsubstantiated suspicions will prevent people from coming forward.
Sound internal control system - Sound systems of internal control should monitor fraud by identifying risks and then putting into place procedures to monitor and report on those risks. Here are some guidance on what is the quality of sound internal control system, the mnemonic SPAM SOAP would be useful:
Segregation of duties - Executive tasks should be separated from control tasks. One of the prime means of control is the separation of those responsibilities or duties which would, if combined, enable one individual to record and process a complete transaction. Segregation of duties reduces the risk of intentional manipulation or error and increases the element of checking. Some functions should be separated whenever possible. For example, authorisation, execution and custody. An example of segregation of duties concerns the receipt, recording and banking of cash. It is not a good idea for the person who opens the post to be the person responsible for recording that the cash has arrived. It would be even poorer practice for that person to be responsible for taking that cash to the bank. If these duties are not segregated, there is always the chance that the person misappropriate or steal the cash and no one would know.
Physical controls - These are concerned with the custody of assets and records and are also concerned with ensuring that access to assets and records is only permitted to authorised personnel. Procedures and security measures are needed to ensure that access to assets is limited to authorised personnel. Such controls include locks, safes, CCTV and entry codes.
Authorisation and approval - All transactions should be authorised or approved by an appropriate responsible person. The limits for these authorisations should be specified. For example, in a purchasing system there should be authority limits, where purchases of amounts exceeding those limits require higher authority.
Management controls - Management controls are exercised by management outside the day-to-day routine of the system. These include the following: overall supervisory controls, review of management accounts and comparison with budgets, internal audit function and special review procedures.
Supervisory controls - Any system of internal control should include the supervision by responsible officials of day-to-day transactions and the recording of them. Remember that supervisor acts as an important role in internal control process.
Organisation as a control - Enterprises should have a plan of their organisation, defining and allocating responsibilities and identifying lines of reporting for all aspects of the enterprise's operations, including the controls. There must be a well-defined organisational structure showing how responsibility and authority are delegated. An effective plan would require:
1. separation of a company's operations into appropriate divisions and sub-divisions.
2. appointment of person to assume responsibility.
3. establishment of clear lines of responsibility between each division and sub-division and the board of directors.
4. Overall coordination of the company's activities.
This will help to prevent friction so that staffs work together well. It also means that no duties go unperformed or unchecked.
Arithmetical and accounting controls - These controls are within the recording function and check that the transactions to be recorded and processed have been authorised, that they are included and that they are correctly recorded and accurately processed. This includes: checking the arithmetical accuracy of the records, the maintenance and checking of totals, reconciliations, control accounts, trial balances and accounting for documents.
Personnel controls - These are procedures to ensure that personnel have capabilities appropriate to their responsibilities, since the proper functioning of any system depends on the competence and integrity of those operating it. The qualifications, selection and training of the personnel involved are important features to be considered in setting up any control system. For example, a company accountant should be suitably qualified.
This article about prevention of fraud ends here, in next article I will write about the indication of fraud.
Friday, October 15, 2010
Fraud - Introduction
There are a lot of definitions for fraud. Fraud may be generally defined as "deprivation by deceit". Another better definition would be dishonestly obtaining an advantage, avoiding an obligation or causing a loss to another party. Some of the examples of fraud are as follow:
1. Crime against customers and clients (for example, misrepresenting the quality of goods, pyramid trading schemes).
2. Employee fraud against employers (for example, payroll fraud, falsifying expense claims, theft of cash, theft of stocks, disposal of assets to employees, collusion with customers).
3. Crimes by small business against customers and employees (for example, selling counterfeit goods, not paying over tax and national insurance contributions).
4. Crimes against financial institutions (for example, using lost or stolen credit cards, fraudulent insurance claims).
5. Crimes by individuals against government (for example, social security benefit claims fraud, tax evasion).
6. Crimes by professional criminals against major organisations (for example, counterfeiting, money laundering, advance fee fraud).
Those committing fraud may be managers, employees or third parties (sometimes customers or suppliers). A major reason why people commit fraud is because they are allowed to do so. The likelihood that fraud will be committed will be decreased if the potential fraudster (person who commit fraud) believes that the rewards will be modest, that they will be detected or that the potential punishment will be unacceptably high. Therefore, a comprehensive system of control is needed to reduce the opportunity for fraud and increase the likelihood of detection. (Prevention of fraud in detailed will be discussed in next article)
People commit fraud because of:
1. The perceived suitability of targets for fraud
2. The incapability of potential fraud victims to look after their interests
3. The motivation of potential offenders
As for most property-related crimes, there are three prerequisites for fraud to occur and controls for each of the three prerequisites will be discussed here as well:
1. Dishonesty - Dishonesty is generally defined as an individual's pre-disposition or tendency to act in ways that contravene accepted ethical, social, organisational and legal norms for fair and honest trading. Dishonesty can be dealt with by pre-employment checks on all new staff (especially references), careful srunity of staff by supervision and lifestyles that are not supported by salaries, severe discipline for offenders and effective moral leadership.
2. Motivation - In addition to a general disposition or willingness to act dishonestly, an individual will still need a specific motivation to do so. This is likely to involve a calculation of whether a given action is worthwhile. This will take into account the potential rewards in relation to the potential sanctions or negative consequences of the action, the likelihood of being caught and the likely punishment if caught. The individual's motivation for fraudulent behaviour may be financial need (in case of theft or fraud for monetary gain), a desire to exercise negative power over those in authority or a desire to avoid punishment (for example, in the case of cover up or manipulation). Often, the motivation is simply dissatisfaction, based on being passed over for promotion, poor pay or a feeling of carrying more than a fair workload. So for this prerequisite, it can be dealt by having good employment conditions, instant dismissals where necessary and have a sympathetic complaints procedure.
3. Opportunity - Even if a person is willing to act dishonestly, and has a motive of doing so, he/she must still find an opportunity or an opening to do so. This can be a "loophole" in the law or control system that allows for fraudulent activity to go undetected or makes the risk of detection acceptable, given the rewards potentially available. This prerequisite seems the most important one, for example, when a person is in a room alone with a $1000 cheque of someone being left in the room, the person has the opportunity to earn the $1000, can he forgoes this opportunity or is he honest enough to return the cheque to the person who left it? Some fraud prevention techniques are segregation of duties (separate duties for each employees) where possible, controls over inputs (especially cash), controls over processing, controls over outputs and physical security of assets.
In conclusion, an individual will have high incentive to commit fraud if he/she is predisposed to dishonesty and the rewards for the particular fraud are high (motivation) and there is an opportunity to commit fraudulent action with little chance of detection or with insignificant sanctions if caught.
In the above, I mentioned about pyramid trading schemes and advance fee fraud, here I will explain about it. Pyramid trading schemes are a system of selling goods in which agency rights are sold to an increasing number of distributors at successively lower levels. Distributors pay for these rights which become worthless as the pyramid grows. Advance fee fraud, also known as Nigerian money transfer fraud, is a fraudulent scheme to extract money from investors living in rich countries. Although these confidence trick originated from Nigeria, they have since become a worldwide criminal activity, they are carried out through the mail, fax and increasingly through email spam.
Finally I would like to introduce two more types of fraud: computer fraud and identity theft. Computer fraud may be easier to commit because of the centralisation of large databases and their accessibility by operators; because the segregation of duties possible with manual systems is not always possible with computer systems; and because technology makes access easier. Computer records are not visible and therefore it is more difficult to trace fraud and detect the deletion of files (as computer systems are lack of audit trails). The complexity of modern computer systems places those with expert knowledge in a privileged position if they are susceptible to fraudulent intentions. Increased control also reduces efficiency and increases cost.
Identity theft is the unlawful taking of another person's details without their permission. The information stolen can be used to obtain financial services, goods and other forms of identification, for example, passports and driving licenses. The information stolen can range from a copy of birth certificate to copies of discarded bank or credit card statements and utility bills. Once the criminals have copies of someone's identity, they can embark on criminal activity in their name with the knowledge that any follow-up investigations will not lead to them. This makes it difficult for organisations to know who they really are dealing with.
In this article, types of fraud are introduced. In the next article, I will emphasize on the internal controls to prevent fraud.
1. Crime against customers and clients (for example, misrepresenting the quality of goods, pyramid trading schemes).
2. Employee fraud against employers (for example, payroll fraud, falsifying expense claims, theft of cash, theft of stocks, disposal of assets to employees, collusion with customers).
3. Crimes by small business against customers and employees (for example, selling counterfeit goods, not paying over tax and national insurance contributions).
4. Crimes against financial institutions (for example, using lost or stolen credit cards, fraudulent insurance claims).
5. Crimes by individuals against government (for example, social security benefit claims fraud, tax evasion).
6. Crimes by professional criminals against major organisations (for example, counterfeiting, money laundering, advance fee fraud).
Those committing fraud may be managers, employees or third parties (sometimes customers or suppliers). A major reason why people commit fraud is because they are allowed to do so. The likelihood that fraud will be committed will be decreased if the potential fraudster (person who commit fraud) believes that the rewards will be modest, that they will be detected or that the potential punishment will be unacceptably high. Therefore, a comprehensive system of control is needed to reduce the opportunity for fraud and increase the likelihood of detection. (Prevention of fraud in detailed will be discussed in next article)
People commit fraud because of:
1. The perceived suitability of targets for fraud
2. The incapability of potential fraud victims to look after their interests
3. The motivation of potential offenders
As for most property-related crimes, there are three prerequisites for fraud to occur and controls for each of the three prerequisites will be discussed here as well:
1. Dishonesty - Dishonesty is generally defined as an individual's pre-disposition or tendency to act in ways that contravene accepted ethical, social, organisational and legal norms for fair and honest trading. Dishonesty can be dealt with by pre-employment checks on all new staff (especially references), careful srunity of staff by supervision and lifestyles that are not supported by salaries, severe discipline for offenders and effective moral leadership.
2. Motivation - In addition to a general disposition or willingness to act dishonestly, an individual will still need a specific motivation to do so. This is likely to involve a calculation of whether a given action is worthwhile. This will take into account the potential rewards in relation to the potential sanctions or negative consequences of the action, the likelihood of being caught and the likely punishment if caught. The individual's motivation for fraudulent behaviour may be financial need (in case of theft or fraud for monetary gain), a desire to exercise negative power over those in authority or a desire to avoid punishment (for example, in the case of cover up or manipulation). Often, the motivation is simply dissatisfaction, based on being passed over for promotion, poor pay or a feeling of carrying more than a fair workload. So for this prerequisite, it can be dealt by having good employment conditions, instant dismissals where necessary and have a sympathetic complaints procedure.
3. Opportunity - Even if a person is willing to act dishonestly, and has a motive of doing so, he/she must still find an opportunity or an opening to do so. This can be a "loophole" in the law or control system that allows for fraudulent activity to go undetected or makes the risk of detection acceptable, given the rewards potentially available. This prerequisite seems the most important one, for example, when a person is in a room alone with a $1000 cheque of someone being left in the room, the person has the opportunity to earn the $1000, can he forgoes this opportunity or is he honest enough to return the cheque to the person who left it? Some fraud prevention techniques are segregation of duties (separate duties for each employees) where possible, controls over inputs (especially cash), controls over processing, controls over outputs and physical security of assets.
In conclusion, an individual will have high incentive to commit fraud if he/she is predisposed to dishonesty and the rewards for the particular fraud are high (motivation) and there is an opportunity to commit fraudulent action with little chance of detection or with insignificant sanctions if caught.
In the above, I mentioned about pyramid trading schemes and advance fee fraud, here I will explain about it. Pyramid trading schemes are a system of selling goods in which agency rights are sold to an increasing number of distributors at successively lower levels. Distributors pay for these rights which become worthless as the pyramid grows. Advance fee fraud, also known as Nigerian money transfer fraud, is a fraudulent scheme to extract money from investors living in rich countries. Although these confidence trick originated from Nigeria, they have since become a worldwide criminal activity, they are carried out through the mail, fax and increasingly through email spam.
Finally I would like to introduce two more types of fraud: computer fraud and identity theft. Computer fraud may be easier to commit because of the centralisation of large databases and their accessibility by operators; because the segregation of duties possible with manual systems is not always possible with computer systems; and because technology makes access easier. Computer records are not visible and therefore it is more difficult to trace fraud and detect the deletion of files (as computer systems are lack of audit trails). The complexity of modern computer systems places those with expert knowledge in a privileged position if they are susceptible to fraudulent intentions. Increased control also reduces efficiency and increases cost.
Identity theft is the unlawful taking of another person's details without their permission. The information stolen can be used to obtain financial services, goods and other forms of identification, for example, passports and driving licenses. The information stolen can range from a copy of birth certificate to copies of discarded bank or credit card statements and utility bills. Once the criminals have copies of someone's identity, they can embark on criminal activity in their name with the knowledge that any follow-up investigations will not lead to them. This makes it difficult for organisations to know who they really are dealing with.
In this article, types of fraud are introduced. In the next article, I will emphasize on the internal controls to prevent fraud.
Wednesday, September 15, 2010
CAT T10-Managing Receivables
This time, I will summarise some of the managing receivables issues and also introduce a bit of law issues related to contract. Offering credit can increase greatly the amount of sales a business makes. If a significant percentage of sales are credit sales, then receivables may represent a significant asset of the business. However if these customers are slow to pay (or do not pay at all), a business can lose a significant amount of money through assets being in the form of debt rather than cash balances which are earning interest. Because of the importance of receivables as an asset, many businesses operate a credit control function to assess whether to grant credit, to monitor credit and to take the necessary action against slow payers.
Just as there is a relationship between offering credit and securing sales, there also has to be a suitable working relationship between credit control personnel and sales and marketing staff. They will have a credit control policy for guidance in credit issues. Inside the credit control policy, they would set up the things to do before, during and after the credit period. During and after the credit period, the things that will be done are typically monitoring the receivables and also collecting debts which had discussed in the earlier articles. I am concern with the issues before the credit period.
Before the credit period, credit controller needs to make decision whether or not to grant credit and how much credit to offer to a certain customer, this will include assessing creditworthiness (also discussed in earlier article), devise suitable credit terms and also offering early settlement discount. Credit terms that will be offer depend on many factors such as profit required, nature of the business, competitors' credit terms offered, relation with customers, credit terms obtained from own suppliers and more. The terms must be simple to understand and easily enforceable. The credit controller may also wish to offer early settlement discount as it has benefits such as reduce cost of providing credit and chasing late payers, improve liquidity position, customers attracted to make larger orders and fewer bad debts. But the early settlement discount will only offer if the cost of offering the discount is less than company's cost of capital.
Just as there is a relationship between offering credit and securing sales, there also has to be a suitable working relationship between credit control personnel and sales and marketing staff. They will have a credit control policy for guidance in credit issues. Inside the credit control policy, they would set up the things to do before, during and after the credit period. During and after the credit period, the things that will be done are typically monitoring the receivables and also collecting debts which had discussed in the earlier articles. I am concern with the issues before the credit period.
Before the credit period, credit controller needs to make decision whether or not to grant credit and how much credit to offer to a certain customer, this will include assessing creditworthiness (also discussed in earlier article), devise suitable credit terms and also offering early settlement discount. Credit terms that will be offer depend on many factors such as profit required, nature of the business, competitors' credit terms offered, relation with customers, credit terms obtained from own suppliers and more. The terms must be simple to understand and easily enforceable. The credit controller may also wish to offer early settlement discount as it has benefits such as reduce cost of providing credit and chasing late payers, improve liquidity position, customers attracted to make larger orders and fewer bad debts. But the early settlement discount will only offer if the cost of offering the discount is less than company's cost of capital.
Percentage cost of early settlement discount=[(100/100 - d)^(365/t) - 1]%
d=the discount offered
t=reduction in the payment period necessary to obtain the early settlement discount
For example, Joblot Co has annual sales of $12000000 and a receivables' collection period of two months (sixty days). Management are considering the introduction of an early settlement discunt of 2%, which if introduced, is expected to reduce the receivables' collection period to one month (thirty days). Joblot Co can invest surplus funds to achieve a return of 30% (the company's cost of capital). Advise the management of Joblot Co as to whether or not they should introduce the settlement discount.
Answer:
Cost of early settlement discount= (100/100 - 2)^(365/30) - 1 = 27.86%
This cost is less than the company's cost of capital (30%) and therefore the settlement discount should be offered.
The credit controller's job often involves the law, especially when enforcing collection. The sale of goods and/or services for cash is a type of contract, and the credit controller's job is to ensure that the customer keeps his or her side of the contract. A contract is an agreement which legally binds the parties (ie those entering into the agreement). The key elements of contract are as follow:
Form - Agreement in writing. Most contracts do not need to be in any strict form except sale or purchase of land must be in writing under UK law. Consumer credit agreements must also be in writing.
Legal intention - Both parties must have intention to create legal relations.
Offer - A firm proposal to give or do something. An offer can be made expressly or by implication, and it does not need to be in writing.
Acceptance - Unconditional agreement to all the terms of the offer.
Consideration - It is what a person (the promisee) must give in exchange for what has been promised to him. For example, X agrees to buy goods from Y for an agreed consideration (price). If X fails to deliver the supply and Y is forced to buy these elsewhere at a higher price, then Y can sue X for the difference in price provided all the elements of a valid contract are present.
In order to minisie losses and manage customers more effectively, specific terms and conditions that can be included in the contracts are as follow:
Length of free credit - Each invoice should also clearly state this credit period. If the customer then breaks this agreement, they are in breach of contract and the relevant remedies can be pursued.
Interest charged on late payments - As with the credit period, the amount of interest to be charged should also be printed on each invoice, as a reminder to the customer that you mean business.
Retention of title clause - This clause states that the buyer does not obtain ownership of the goods unless and until payment is made. Thus if the buyer goes out of business before paying for the goods, the supplier can retrieve them.
In conclusion, managing receivables is about placing enough control on the credit period which is before, during and after the credit period. You need to know about the contract because it is an important document before and after the credit period. Once again, summarise as before credit period (assess creditworthiness, devise credit terms, offer early settlement discount, make contract), during credit period (monitor receivables) and after credit period (pursue due debts, chase late payers and sue if there is breach of contract). These are the knowledge that you have to know about managing receivables.
Tuesday, September 14, 2010
CAT T10-Monitoring and collecting debts part 2/2
This article is continued with the last article which had discussed about monitoring and collecting debts. In this article, I will discuss two more methods of collecting debts which are factoring and invoice discounting. First let me talk about factoring.
Factoring is an arrangement to have debts collected by a factor company which advances a proportion of the money it is due to collect. Well the definition may not be clear, let me make it simplier, the organisation providing the factor service is "factor" and the company which requests for this service is "company". Factors are most of the time financial institutions and they provide factoring service to company. Factoring provides a form of advance against a company's trade receivables. Instead of the company having to wait for cash from its credit customers, the factor agrees to pay for a proportion of the debt in advance to the company. Typically a factor will pay up to 85% of approved invoices. Factor will also take the administration of sales ledger of the company which the company does not have to employ credit controllers. The main aspects of factoring are:
(i) administration of the company's invoicing, sales accounting and debt collection service
(ii) credit protection for company's debts, whereby the factor takes over the risk of loss from bad debts and so "insures" the company against such losses. The factor usually purchases these debts 'without recourse' to the company, which means that if the company's customers do not pay what they owe, the factor will not ask for his money back from the company.
(iii) Making payments to the client in advance of collecting the debts.
The steps involve in factoring would be:
1. company sells goods to the customer on credit payable in 30 days
2. company sells the debt to the factor, the factor administers the sales ledger
3. up to 85% of the debt is paid to the company in advance
4. the customer pays the factor after 30 days
5.factor pays the company the balance less administration fees and financing fees
Advantages of factoring are:
(i)The business can pay its suppliers promtly, and so be able to take advantage of any early payment discounts that are available
(ii)Optimum inventory levels can be maintained, because the business will have enough cash to pay for the inventories it needs
(iii)Growth can be financed through sales rather than by injecting fresh external capital
(iv)The business gets finance linked to its volume of sales. In contrast, overdraft limits tend to be determined by historical statements of financial position
(v)The managers of the business do not have to spend their time on the problems of slow paying customers
(vi)The business does not incur the costs of running its own receivables ledger department
An important disadvantage of factoring is that customers will be making payments direct to the factor, which is likely to present a negative picture of the company as they might think that the business may not be running well that it needs to employ factoring service.
Invoice discounting does not mean offerring discounts to customers. Invoice discounting is the purchase (by the invoice discounter) of trade debts at a discount. Invoice discounting is related to factoring and many factors will provide an invoice discounting service. It is entirely different thing from the provision of early settlement discounts. It is almost the same as factoring, but the invoice discounter does not take over the administration of the company's receivables ledger, the arrangement is purely for the advance of cash. But the main advantage compare with factoring is that customer does not know that the company is using invoice discounting service, customer is still paying back to the company. Therefore it enables the company to raise working capital. But the disadvantage is the company will still need to have a receivable ledger or credit control department for collecting the debts, these collections will be given back to invoice discounter.
Both methods of collecting debts are useful especially when the company is in short of money. We also need to consider whether the company is financially viable to factor its debts or not before employing the service. You need to check the cost of factoring and also the cost of not factoring, if the cost of factoring is lower, then the company might prefer to factor its debts. Normally when the company does not factor the debts, the cost that will be incurred will include the salary for credit control staff, sales ledger administration cost and also overdraft interest charge. If the company chooses to factor the debts, the cost that will be incurred might be the redundancy package for making the credit control staff redundant (as the company does not need much credit control staff), factor administration fees, factor's interest charge on the advance pay to company, overdraft interest charge for financing the rest of the debtors balance and also credit protection charge for "without recourse" agreement. I think one example might be useful to understand more.
Eg. Mr Sykes expects sales for next year to be $75000, with customers paying within 30-day limit set. It would cost him $2000 per annum to employ someone one day a week to invoice customers and collect debts for him. Alternatively, his local bank has offered to provide a factoring service for him, including the advance of 80% of his sales invoices. They would charge 2% of turnover for the administration and charge interest of 8% per annum on advances. However, the bank would not invoice Mr Sykes' customers. He would need to employ somebody for half a day a week to do this, at a cost of $1000 per annum. My Sykes pays interest at the rate of $10% per annum on his overdrawn bank account. Mr Sykes thinks that customers will pay within 30 days regardless of which option is selected.
Calculate and recommend whether or not Mr Sykes should factor his debts.
Answer: Average receivables=30/365 x $75000=$6164
Cost of not factoring:
-$6164 x 10% financed by overdraft=$616
-Administration cost=$2000
=$2616
Cost of factoring:
-80% advanced by factor at 8% (80% x $6164 x 8%)=$394
-20% still financed by overdraft (20% x $6164 x 10%)=$123
-Factor administration charge (2% x $75000)=$1500
-Invoicer cost = $1000
=$3017
Mr Sykes should not factor his debts because the cost of factoring is more than the cost of not factoring.
I had discussed assessing creditworthiness and monitoring and collecting debts, in next article I will discuss managing receivables which is the main thing in working capital management and the articles that I discussed before is part of the managing receivables. I hope this article is clear enough to understand.
Factoring is an arrangement to have debts collected by a factor company which advances a proportion of the money it is due to collect. Well the definition may not be clear, let me make it simplier, the organisation providing the factor service is "factor" and the company which requests for this service is "company". Factors are most of the time financial institutions and they provide factoring service to company. Factoring provides a form of advance against a company's trade receivables. Instead of the company having to wait for cash from its credit customers, the factor agrees to pay for a proportion of the debt in advance to the company. Typically a factor will pay up to 85% of approved invoices. Factor will also take the administration of sales ledger of the company which the company does not have to employ credit controllers. The main aspects of factoring are:
(i) administration of the company's invoicing, sales accounting and debt collection service
(ii) credit protection for company's debts, whereby the factor takes over the risk of loss from bad debts and so "insures" the company against such losses. The factor usually purchases these debts 'without recourse' to the company, which means that if the company's customers do not pay what they owe, the factor will not ask for his money back from the company.
(iii) Making payments to the client in advance of collecting the debts.
The steps involve in factoring would be:
1. company sells goods to the customer on credit payable in 30 days
2. company sells the debt to the factor, the factor administers the sales ledger
3. up to 85% of the debt is paid to the company in advance
4. the customer pays the factor after 30 days
5.factor pays the company the balance less administration fees and financing fees
Advantages of factoring are:
(i)The business can pay its suppliers promtly, and so be able to take advantage of any early payment discounts that are available
(ii)Optimum inventory levels can be maintained, because the business will have enough cash to pay for the inventories it needs
(iii)Growth can be financed through sales rather than by injecting fresh external capital
(iv)The business gets finance linked to its volume of sales. In contrast, overdraft limits tend to be determined by historical statements of financial position
(v)The managers of the business do not have to spend their time on the problems of slow paying customers
(vi)The business does not incur the costs of running its own receivables ledger department
An important disadvantage of factoring is that customers will be making payments direct to the factor, which is likely to present a negative picture of the company as they might think that the business may not be running well that it needs to employ factoring service.
Invoice discounting does not mean offerring discounts to customers. Invoice discounting is the purchase (by the invoice discounter) of trade debts at a discount. Invoice discounting is related to factoring and many factors will provide an invoice discounting service. It is entirely different thing from the provision of early settlement discounts. It is almost the same as factoring, but the invoice discounter does not take over the administration of the company's receivables ledger, the arrangement is purely for the advance of cash. But the main advantage compare with factoring is that customer does not know that the company is using invoice discounting service, customer is still paying back to the company. Therefore it enables the company to raise working capital. But the disadvantage is the company will still need to have a receivable ledger or credit control department for collecting the debts, these collections will be given back to invoice discounter.
Both methods of collecting debts are useful especially when the company is in short of money. We also need to consider whether the company is financially viable to factor its debts or not before employing the service. You need to check the cost of factoring and also the cost of not factoring, if the cost of factoring is lower, then the company might prefer to factor its debts. Normally when the company does not factor the debts, the cost that will be incurred will include the salary for credit control staff, sales ledger administration cost and also overdraft interest charge. If the company chooses to factor the debts, the cost that will be incurred might be the redundancy package for making the credit control staff redundant (as the company does not need much credit control staff), factor administration fees, factor's interest charge on the advance pay to company, overdraft interest charge for financing the rest of the debtors balance and also credit protection charge for "without recourse" agreement. I think one example might be useful to understand more.
Eg. Mr Sykes expects sales for next year to be $75000, with customers paying within 30-day limit set. It would cost him $2000 per annum to employ someone one day a week to invoice customers and collect debts for him. Alternatively, his local bank has offered to provide a factoring service for him, including the advance of 80% of his sales invoices. They would charge 2% of turnover for the administration and charge interest of 8% per annum on advances. However, the bank would not invoice Mr Sykes' customers. He would need to employ somebody for half a day a week to do this, at a cost of $1000 per annum. My Sykes pays interest at the rate of $10% per annum on his overdrawn bank account. Mr Sykes thinks that customers will pay within 30 days regardless of which option is selected.
Calculate and recommend whether or not Mr Sykes should factor his debts.
Answer: Average receivables=30/365 x $75000=$6164
Cost of not factoring:
-$6164 x 10% financed by overdraft=$616
-Administration cost=$2000
=$2616
Cost of factoring:
-80% advanced by factor at 8% (80% x $6164 x 8%)=$394
-20% still financed by overdraft (20% x $6164 x 10%)=$123
-Factor administration charge (2% x $75000)=$1500
-Invoicer cost = $1000
=$3017
Mr Sykes should not factor his debts because the cost of factoring is more than the cost of not factoring.
I had discussed assessing creditworthiness and monitoring and collecting debts, in next article I will discuss managing receivables which is the main thing in working capital management and the articles that I discussed before is part of the managing receivables. I hope this article is clear enough to understand.
Sunday, September 12, 2010
CAT T10-Monitoring and collecting debts part 1/2
Following the last article "Assessing Creditworthiness", this article aims to talk about the issues after granted credit to customers. We are still in the point of view of a credit controller. So what is the role of the credit control department? Credit control department is responsible for those stages in the collection cycle dealing with the offer of credit and collection of debts. The roles will include checking customers' creditworthiness, advising on payment terms, reporting to sales staff about new enquiries, dealing with customer queries, keeping the receivables ledger up-to-date, pursuing due debts and giving references to third parties. After assessing the customers' creditworthiness and granting of credit, we are going to have control action which is to monitor the receivables.
In monitoring the receivables, our main useful internal source is the aged receivables analysis which will show us each customers' total debts in different period, for example within 30 days, 31-60 days, 61-90 days and so on. This is important as we can easily track down which customer is taking more time to pay, next time we may not give that customer more credit. Other method of monitoring the receivables is to check the customers' financial reports. With this, we can find out the financial position of the customer and also the cash flow position by looking at the statement of cash flows. We can even do a ratio analysis on different customers' financial reports and those with problems must be taken into account.
There are many ways in practice for credit controller to monitor their debtors, but now let's talk about collecting the debts. We all know giving credit is easy, but collecting back the money is not always easy. Sometimes companies obtain default insurance (bad debt insurance) against certain approved debts going bad. But to minimise the cost to buy default insurance, we should try our best to encourage customers to pay promptly and chase payments from overdue debts. The ways that we can implement to ensure prompt payment from debtors include giving early settlement discount, deal with queries and complaints promptly, send out invoices immediately after the delivery of goods, issue credit notes as soon as queries have been resolved, issue monthly statements so that any problems can be highlighted early and provide customers with a list of company's terms of credits and their attention should be drawn to these terms. Apart from that, employing debt collection agency to help us collect debts may be one of the ways to collect debts earlier as debt collection agency collects debt for commission, they will try to make debtors pay promptly.
If the debtors have became overdue debts, ways to chase the payments from overdue debtors might include sending out reminder letters, make telephone calls to the debtor, charge interest for late settlement, employ the services of a debt collection agency, take legal action (discuss below) and send an authorised person from your credit control department to visit the customer and request payment. In larger companies, it is the role of the sales ledger staff to issue invoices and receive payments, but it is the responsibility of credit control staff to chase late payers. So methods to encourage promptly payments from debtors are referring to sales ledger procedures and chasing payments from overdue debtors are referring to credit control procedures.
If, having sent a final reminder, the customer has still not paid, legal action will need to be taken. A solicitor should be contacted, and they will send out a "letter before action", giving the customer one final chance to pay before a court summons is issued. But legal proceedings can be expensive, so we will try to find out whether the customer is likely to have funds to pay us before we take proceedings. If we know that they are in such financial difficulties that there is no chance of payment, we might wait until they have settle their problems as they may be willing to pay back us the debts. With this we can improving our relationship and they may pay back us promptly next time, we also ignored the legal costs.
Other ways to collect the debts include factoring and invoice discounting which I will discuss again in the next article as these need some understanding and sometimes people often confused invoice discounting with offering early settlement discount. With both of these methods, we are able to get advance pay for the debts.
Collection of debts are one of the most challenging job for credit controller which you can't avoid it if you are employed as a credit controller. You should know your role well that you are not the one to issue invoices, you are the one that make decision about giving credit, monitor the debtors and collecting debts from the debtors (in larger companies). Methods above are some guides for you about the work of credit controller (and you should note that it is a quite difficult job), for students of CAT T10, these information is useful to understand more about the function of credit controller. This article will be continued with part 2/2.
In monitoring the receivables, our main useful internal source is the aged receivables analysis which will show us each customers' total debts in different period, for example within 30 days, 31-60 days, 61-90 days and so on. This is important as we can easily track down which customer is taking more time to pay, next time we may not give that customer more credit. Other method of monitoring the receivables is to check the customers' financial reports. With this, we can find out the financial position of the customer and also the cash flow position by looking at the statement of cash flows. We can even do a ratio analysis on different customers' financial reports and those with problems must be taken into account.
There are many ways in practice for credit controller to monitor their debtors, but now let's talk about collecting the debts. We all know giving credit is easy, but collecting back the money is not always easy. Sometimes companies obtain default insurance (bad debt insurance) against certain approved debts going bad. But to minimise the cost to buy default insurance, we should try our best to encourage customers to pay promptly and chase payments from overdue debts. The ways that we can implement to ensure prompt payment from debtors include giving early settlement discount, deal with queries and complaints promptly, send out invoices immediately after the delivery of goods, issue credit notes as soon as queries have been resolved, issue monthly statements so that any problems can be highlighted early and provide customers with a list of company's terms of credits and their attention should be drawn to these terms. Apart from that, employing debt collection agency to help us collect debts may be one of the ways to collect debts earlier as debt collection agency collects debt for commission, they will try to make debtors pay promptly.
If the debtors have became overdue debts, ways to chase the payments from overdue debtors might include sending out reminder letters, make telephone calls to the debtor, charge interest for late settlement, employ the services of a debt collection agency, take legal action (discuss below) and send an authorised person from your credit control department to visit the customer and request payment. In larger companies, it is the role of the sales ledger staff to issue invoices and receive payments, but it is the responsibility of credit control staff to chase late payers. So methods to encourage promptly payments from debtors are referring to sales ledger procedures and chasing payments from overdue debtors are referring to credit control procedures.
If, having sent a final reminder, the customer has still not paid, legal action will need to be taken. A solicitor should be contacted, and they will send out a "letter before action", giving the customer one final chance to pay before a court summons is issued. But legal proceedings can be expensive, so we will try to find out whether the customer is likely to have funds to pay us before we take proceedings. If we know that they are in such financial difficulties that there is no chance of payment, we might wait until they have settle their problems as they may be willing to pay back us the debts. With this we can improving our relationship and they may pay back us promptly next time, we also ignored the legal costs.
Other ways to collect the debts include factoring and invoice discounting which I will discuss again in the next article as these need some understanding and sometimes people often confused invoice discounting with offering early settlement discount. With both of these methods, we are able to get advance pay for the debts.
Collection of debts are one of the most challenging job for credit controller which you can't avoid it if you are employed as a credit controller. You should know your role well that you are not the one to issue invoices, you are the one that make decision about giving credit, monitor the debtors and collecting debts from the debtors (in larger companies). Methods above are some guides for you about the work of credit controller (and you should note that it is a quite difficult job), for students of CAT T10, these information is useful to understand more about the function of credit controller. This article will be continued with part 2/2.
Friday, September 10, 2010
CAT T10 Assessing creditworthiness
This article is in the point of view of a credit controller. Bad debt is the one that we need to avoid of, but the problem is how to avoid the bad debt risk? The very starting point is the time the customers want to be our receivable,i.e purchase from us by credit. We need to make decision whether or not to give credit and how much credit period we can give to the customers. Credit will only be given to particular classes of customer. Therefore we are concerned in assessing the customer's creditworthiness so that we can decide to act on three questions in our mind, who is eligible for credit, why offer credit to that customer and how much credit to offer. The purpose of this article is to give some guidances on how a credit control department assesses the creditworthiness of customer, the methods will be clearly stated in the credit control policies.
We are actually able to get information of customers from external and internal sources. First, I will talk about internally generated information. One of the way is through our favourite ratio analysis. In ratio analysis, we are looking for how much credit we are able to offer to our customers by taking into account our financial position. Therefore, ratios such as profit margin, asset turnover, return on capital employed(ROCE), earnings per share(EPS), price earning ratio(P/E ratio), working capital ratio, gearing ratios, interest cover and debt ratio will help us to analyse our financial position to measure how much funds we can invest into debtors. So for example, debt ratio tells us about our total receivables to total assets, this shows us that whether or not we are efficient in getting the money back from receivables, if the receivables % are a lot lesser than our total assets, this shows that we might be capable of investing more money into receivables to reduce our opportunity cost of holding the cash in hand. Furthermore, we can actually assess the customer's creditworthiness by visiting their premises. Through this, we can find out the capability of customer in returning debt and also check whether the customer is trying to cheat us or not. In addition to this, we might also employ a credit scorer to rate the credit of customers in their premises. The higher the credit score, the more reliable and capable the customers are able to return us the debt. We shall also check our aged receivables analysis which shows the customer's payment in different period and those who always exceed the credit limit we provided shall be taken into account, we might not give them more credit and chase them for their money unless they are in the position of growth, then we might consider again. Finally, we should review the credit record of the customers in the past period, those who can return us money faster are the one we are going to serve first.
Internally generated information is reliable, but we might also concern about getting information about a customer through external sources of information. One of the common way is to get references from bank. Bank can tell us about the customer in less detail, for example, how often the customer lends money from bank or did they always pay back in time, we cannot ask for the bank balance of the customers, that's for sure, but these little information could help us to identify the ability of the customers, if they often lend money from bank, this may show that giving more credit to the customers may have risk of default. We can also get some information from suppliers of the customers. But there is a problem with this, there is a risk of collusion between customers and their suppliers to cheat our money, so we have to be careful about this. We can also get information about the customers from the credit rating agencies. Credit rating agencies are basically research companies who research and rate the creditworthiness of the customers, the best is rated as AAA. From here, we can decide how much credit we can give to a certain customer. But there are also problems in the agency report, it may not up-to-date, too old and no track record, so we also need to take into account about it.
Although sometime the external information may have problems, but we still need to consider about it since the internal information is not enough to judge the creditworthiness of customer because most are past records except customer visits. One thing to note here is that we can't get every information that we want about the customers from external references because of data protection act. Some countries, such as UK's Data Protection Act 1998 makes certain restrictions about the use of data about individual customers and the use of their personal data. This act attempts to protect individual, not corporate bodies. Therefore we cannot just ask the bank for customer's bank balance, these are protected.
In my opinion, credit controller should make good use of both internal and external source of information about customers. Sometimes customers can't pay us because their business is growing and they need more money to do investment and therefore may not pay us in time, we can allow them more credit in this situation as this does not show they are not creditworthiness. Sometimes, we might consider to allow for early settlement discount for the customers whose creditworthiness is not good to encourage them to pay earlier and also building up our relationship so that they will pay back us in time in future. So although the creditworthiness is not too good, we should not just ignore the customer, there may be of some reason they cannot pay us in time. Taking into account all the above issues, you are then only ready to be in assessing creditworthiness which is part of the credit management which is done by credit controller. For those who are taking exam for CAT T10, the above information are the one that you need to understand but not really need to be so detail.
We are actually able to get information of customers from external and internal sources. First, I will talk about internally generated information. One of the way is through our favourite ratio analysis. In ratio analysis, we are looking for how much credit we are able to offer to our customers by taking into account our financial position. Therefore, ratios such as profit margin, asset turnover, return on capital employed(ROCE), earnings per share(EPS), price earning ratio(P/E ratio), working capital ratio, gearing ratios, interest cover and debt ratio will help us to analyse our financial position to measure how much funds we can invest into debtors. So for example, debt ratio tells us about our total receivables to total assets, this shows us that whether or not we are efficient in getting the money back from receivables, if the receivables % are a lot lesser than our total assets, this shows that we might be capable of investing more money into receivables to reduce our opportunity cost of holding the cash in hand. Furthermore, we can actually assess the customer's creditworthiness by visiting their premises. Through this, we can find out the capability of customer in returning debt and also check whether the customer is trying to cheat us or not. In addition to this, we might also employ a credit scorer to rate the credit of customers in their premises. The higher the credit score, the more reliable and capable the customers are able to return us the debt. We shall also check our aged receivables analysis which shows the customer's payment in different period and those who always exceed the credit limit we provided shall be taken into account, we might not give them more credit and chase them for their money unless they are in the position of growth, then we might consider again. Finally, we should review the credit record of the customers in the past period, those who can return us money faster are the one we are going to serve first.
Internally generated information is reliable, but we might also concern about getting information about a customer through external sources of information. One of the common way is to get references from bank. Bank can tell us about the customer in less detail, for example, how often the customer lends money from bank or did they always pay back in time, we cannot ask for the bank balance of the customers, that's for sure, but these little information could help us to identify the ability of the customers, if they often lend money from bank, this may show that giving more credit to the customers may have risk of default. We can also get some information from suppliers of the customers. But there is a problem with this, there is a risk of collusion between customers and their suppliers to cheat our money, so we have to be careful about this. We can also get information about the customers from the credit rating agencies. Credit rating agencies are basically research companies who research and rate the creditworthiness of the customers, the best is rated as AAA. From here, we can decide how much credit we can give to a certain customer. But there are also problems in the agency report, it may not up-to-date, too old and no track record, so we also need to take into account about it.
Although sometime the external information may have problems, but we still need to consider about it since the internal information is not enough to judge the creditworthiness of customer because most are past records except customer visits. One thing to note here is that we can't get every information that we want about the customers from external references because of data protection act. Some countries, such as UK's Data Protection Act 1998 makes certain restrictions about the use of data about individual customers and the use of their personal data. This act attempts to protect individual, not corporate bodies. Therefore we cannot just ask the bank for customer's bank balance, these are protected.
In my opinion, credit controller should make good use of both internal and external source of information about customers. Sometimes customers can't pay us because their business is growing and they need more money to do investment and therefore may not pay us in time, we can allow them more credit in this situation as this does not show they are not creditworthiness. Sometimes, we might consider to allow for early settlement discount for the customers whose creditworthiness is not good to encourage them to pay earlier and also building up our relationship so that they will pay back us in time in future. So although the creditworthiness is not too good, we should not just ignore the customer, there may be of some reason they cannot pay us in time. Taking into account all the above issues, you are then only ready to be in assessing creditworthiness which is part of the credit management which is done by credit controller. For those who are taking exam for CAT T10, the above information are the one that you need to understand but not really need to be so detail.
Friday, August 20, 2010
CAT T5-Business Planning and Control
As you know business planning is essential in a business,what is the purpose of business planning?Business planning is used to assist individuals and groups within organisations to be effective in working towards the achievement of the organisation's activities.Planning allows managers to identify the objectives for which they are responsible and how far they are being successful in achieving those objectives.It is an activity which must take place against background of the organisation's environment and which must take account of the organisation's internal strengths and weaknesses.Planning involves decisions about what to do in the future;how to do it;when to do it; and who should do it.These activities are relevant at all levels of organisation activity.Basically we have 3 levels of planning:Strategic,tactical and operational.
At a strategic level this is about deciding what business the organisation should be in and what its overall objectives should be.Strategic planning represents a systematic attempt to influence the medium and long-term future of the business or enterprise by defining the overall company objectives and appraising the major factors within the company and the environment which might affect the achievement of objectives.The overall objective of planning at this level is to point the direction in which an organisation is to move over a fairly lengthy period.Strategic plans should be sufficiently clear to be evaluated in terms of whether they have been achieved or not,but they are not specific that they tie the organisation down to achieving objectives and meeting what could be impossible long-term targets in condition of uncertainty.It is also important in the public sectors areas such as education.It is practiced widely informally and formally.Strategic planning and decision processes should end with objectives and a roundmap of ways to achieve them.
At tactical level this is about deciding how it should go about achieving its overall objectives:what products or services it should offer and how they will be marketed,how it will organise work and so on.This is a lower level of planning and is often termed intermediate range planning.The overall objective of tactical planning is to ensure that resources are obtained and used efficiently and effectively to accomplish the organisation's objectives.It includes decisions around organisation structure,financial budgets,staff requirements and product sales mix.Decisions are usually based on financial analysis and performance reports and summaries of different operations.
The detailed control over each individual operation is exercised at operational level.At operational level this is about deciding what needs to be done from day to day and task to task.This represents the lowest level of planning and involves line managers and first line supervisors in the setting of specific tasks.Operational planning takes place within the context of broader management plans.The focus of operational plan is upon individual activities and tasks,for example scheduling individual orders through a production planning process.
Okay you all must also understand that business planning should take into account the availability of resources.Resource planning would include estimates of requirements with regard to human resource(HR),equipment or machinery,finance,materials and components.But the main concern in CAT T5 is the HR planning as this was one of the most important resources to any business as well.
HR planning can be defined as a strategy for acquisition,utilisation,improvement and retention of an organisation's human resources.The human resource plan is prepared on the basis of the analysis of labour requirement and the implications for productivity and costs.A key goal of HR planning is to get the right number of people with the right skills,experience and competences in the right jobs at the right time at the right cost.
The four main stage of HR planning are auditing,forecasting,planning and controlling,each will be explained below:
Auditing stage involves the analysis of the strategic environment(trends in population growth,education,pensions and employment rights) in the light of the organisation's strategic objectives.The strategy chosen will have implications on the number of employees and the mix of skills required.
Forecasting stage analyses the demand for,and supply of,labour in terms of number,type and quality of people the organisation should employ to meet planned requirements and cover expected turnover.
Planning stage involves policies to recruit,train and develop the labour force identified in the forecast.
Controlling stage involves measuring the effective use of the human resources and their contribution towards the achievement of the organisation's objectives in the forecast.Organisation may use performance appraisal in this stage.
Beside that,the elements of HR planning would include the following:
Recruitment,selection and promotion plan-numbers and types of people and what they are required,culminating in the recruitment programme.
Education and training plan-numbers of trainees required and/or existing staff needing training,culminating in the training programme.
Development plan-programmes for transferring and retaining employees.
Rewards and benefits plan-the system of pay and benefits used to reward employees.
Succession plan-assessing the quality and quantity of employees required at each level within the organisation and ensuring that the necessary measures are taken so that these positions are filled on continuous basis.
Retention plan-actions to reduce avoidable labour wastage.
Redundancy plan-where and when redundancies are to occur;policies for selection and declaration of redundancies;redevelopment,retraining or relocation of redundant employees,policy on redundancy payments,etc.
Productivity plan-Setting of productivity target for employees,those who achieved the targets could be given bonus.
Apart from that,planning requires coordination as well.Coordination is one of the major function of management.Departmental plans and budgets must be coordinated,so that they are all working together to achieve the business plan.At production level,coordination will ensure that department knows what and when they need to achieve,work can be flowed without holdups or clashes and without idle time or overwork for staff and machinery,the resources required for the task are available where and when required and there is no duplication of effort.
As the planning is essential in business,coordination must also be good so that all departments are able to work together to achieve a common business plan,I had provided information which T5 students are not expected to know everything,this has included information for extra reading.For those who are aiming to become an entrepreneur,these information may be important and you need to understand how to differentiate between 3 levels of planning,each has their relative importance. :)
At a strategic level this is about deciding what business the organisation should be in and what its overall objectives should be.Strategic planning represents a systematic attempt to influence the medium and long-term future of the business or enterprise by defining the overall company objectives and appraising the major factors within the company and the environment which might affect the achievement of objectives.The overall objective of planning at this level is to point the direction in which an organisation is to move over a fairly lengthy period.Strategic plans should be sufficiently clear to be evaluated in terms of whether they have been achieved or not,but they are not specific that they tie the organisation down to achieving objectives and meeting what could be impossible long-term targets in condition of uncertainty.It is also important in the public sectors areas such as education.It is practiced widely informally and formally.Strategic planning and decision processes should end with objectives and a roundmap of ways to achieve them.
At tactical level this is about deciding how it should go about achieving its overall objectives:what products or services it should offer and how they will be marketed,how it will organise work and so on.This is a lower level of planning and is often termed intermediate range planning.The overall objective of tactical planning is to ensure that resources are obtained and used efficiently and effectively to accomplish the organisation's objectives.It includes decisions around organisation structure,financial budgets,staff requirements and product sales mix.Decisions are usually based on financial analysis and performance reports and summaries of different operations.
The detailed control over each individual operation is exercised at operational level.At operational level this is about deciding what needs to be done from day to day and task to task.This represents the lowest level of planning and involves line managers and first line supervisors in the setting of specific tasks.Operational planning takes place within the context of broader management plans.The focus of operational plan is upon individual activities and tasks,for example scheduling individual orders through a production planning process.
Okay you all must also understand that business planning should take into account the availability of resources.Resource planning would include estimates of requirements with regard to human resource(HR),equipment or machinery,finance,materials and components.But the main concern in CAT T5 is the HR planning as this was one of the most important resources to any business as well.
HR planning can be defined as a strategy for acquisition,utilisation,improvement and retention of an organisation's human resources.The human resource plan is prepared on the basis of the analysis of labour requirement and the implications for productivity and costs.A key goal of HR planning is to get the right number of people with the right skills,experience and competences in the right jobs at the right time at the right cost.
The four main stage of HR planning are auditing,forecasting,planning and controlling,each will be explained below:
Auditing stage involves the analysis of the strategic environment(trends in population growth,education,pensions and employment rights) in the light of the organisation's strategic objectives.The strategy chosen will have implications on the number of employees and the mix of skills required.
Forecasting stage analyses the demand for,and supply of,labour in terms of number,type and quality of people the organisation should employ to meet planned requirements and cover expected turnover.
Planning stage involves policies to recruit,train and develop the labour force identified in the forecast.
Controlling stage involves measuring the effective use of the human resources and their contribution towards the achievement of the organisation's objectives in the forecast.Organisation may use performance appraisal in this stage.
Beside that,the elements of HR planning would include the following:
Recruitment,selection and promotion plan-numbers and types of people and what they are required,culminating in the recruitment programme.
Education and training plan-numbers of trainees required and/or existing staff needing training,culminating in the training programme.
Development plan-programmes for transferring and retaining employees.
Rewards and benefits plan-the system of pay and benefits used to reward employees.
Succession plan-assessing the quality and quantity of employees required at each level within the organisation and ensuring that the necessary measures are taken so that these positions are filled on continuous basis.
Retention plan-actions to reduce avoidable labour wastage.
Redundancy plan-where and when redundancies are to occur;policies for selection and declaration of redundancies;redevelopment,retraining or relocation of redundant employees,policy on redundancy payments,etc.
Productivity plan-Setting of productivity target for employees,those who achieved the targets could be given bonus.
Apart from that,planning requires coordination as well.Coordination is one of the major function of management.Departmental plans and budgets must be coordinated,so that they are all working together to achieve the business plan.At production level,coordination will ensure that department knows what and when they need to achieve,work can be flowed without holdups or clashes and without idle time or overwork for staff and machinery,the resources required for the task are available where and when required and there is no duplication of effort.
As the planning is essential in business,coordination must also be good so that all departments are able to work together to achieve a common business plan,I had provided information which T5 students are not expected to know everything,this has included information for extra reading.For those who are aiming to become an entrepreneur,these information may be important and you need to understand how to differentiate between 3 levels of planning,each has their relative importance. :)
Wednesday, August 18, 2010
CAT T7,ACCA F5-Activity based costing
I know not everyone know about this costing technique as it was relatively unknown and not commonly used,most people prefer absorption costing(AC),marginal costing(MC) and standard costing.Therefore not many people really know how to use activity based costing(ABC).I am here to provide guideline in how to use ABC to calculate the cost of products.
The traditional approach to fixed overhead absorption has the merit of being simple to calculate and apply. However, simplicity does not justify the production and use of information that might be wrong or misleading.For example,in absorption costing,when we use labour hour as the base to have an overhead absorption rate(OAR),it is not accurate if we have different types of overhead which didn't use any labour hour,thereby causing the final cost per unit of product charged is misleading.In the modern manufacturing environment now,overheads are much greater in proportion of total costs and direct costs are lower because human is replaced by technology.Therefore traditional costing technique cannot provide an accurate cost information.
ABC is a costing model that identifies activities in an organisation and assigns the cost of each activity resource to all products and services according to the actual consumption by each: it assigns more indirect costs(overheads) into direct costs.Simple speaking,ABC analyses the cost according to the cost driver.Cost driver is factor which causes a cost of an activity(cost pool),it might be better to think of it as the ‘cost causer’.For example,the cost driver of the material handling costs would be number of components handled.Ok let's get started,the steps of ABC is as follow:
1.Identify a cost
2.Identify cost driver
3.Calculate cost driver rate(cost incurred each time the activity occurs.)
4.Trace the cost into the units produced
A simple example would enhance understanding:Cost of goods inwards department totalled $10000.During 2010 there were 1000 deliveries.200 of these deliveries related to product X.2000 units of product X were produced.Calculate the unit cost of product X.
1.We know that the total cost of good inwards is $10000.
2.We then identify the cost driver,in this case the cost driver is the number of deliveries and we have total of 1000 deliveries in this year.
3.Then you find out the cost driver rate(this is just like OAR but we calculate according to each activity),cost driver rate=total cost/cost driver=$10000/1000=$10.
4.Then use this $10 to charge against the total deliveries for product X,in this example there are 200 deliveries for product X,therefore $10 X 200=$2000,this cost is the total cost of 2000 units product X,we want to find unit cost,therefore
unit cost=cost/units=$2000/2000units=$1.
Therefore in this example,if there is other product,for example 500 deliveries for 500 units of product Y,then take the cost driver rate of $10 multiply with 500 deliveries=$5000,$5000 is the total cost for 500 deliveries,so unit cost=$5000/500units=$10.
I hope this simple example helps to understand how to calculate costs using ABC,there may be more activity such as material handling costs,set-up costs and so on given in exam or in reality,you need to identify cost driver for each activity and get a cost driver rate for each activities,then find out the costs by multiplying the activities consumed by each products and finally adding all costs up to get the final total costs for each products.
In addition to estimating more accurately the true cost of production,ABC will also give a better indication of where cost savings can be made.Working on the principle that large cost savings are likely to be found in large cost elements,management's attention will start to focus on how this cost could be reduced.But ABC has limitations as well,it undoubtedly requires an organisation to spend time and effort investigating more fully what causes it to incur costs,and then to use that detailed information for costing purposes.It can be very complex,recently there are only about 4% of companies in this world which actually implemented ABC.But understanding the drivers of costs must be an essential part of good performance management.
In summary,ABC can be used to identify inefficient products, departments and activities,allocate more resources on profitable products, departments and activities,control the costs at an individual level and on a departmental level,find unnecessary costs and helps in fixing price of product or service scientifically.It is very hard to implement in practice although it provides accurate information,practice often if you are interested to try to implement ABC in your business or workplace,make sure you understand everything about ABC.You should also understand that ABC values inventory using full production cost(variable production cost+fixed production overheads),therefore it is similar to AC in this way.
The most important thing to remember in the calculation of cost using ABC is the 4 steps,if you follow the steps,it will definitely help you a lot and you can do most questions.Practice for a number of times until you are used to the steps.
The traditional approach to fixed overhead absorption has the merit of being simple to calculate and apply. However, simplicity does not justify the production and use of information that might be wrong or misleading.For example,in absorption costing,when we use labour hour as the base to have an overhead absorption rate(OAR),it is not accurate if we have different types of overhead which didn't use any labour hour,thereby causing the final cost per unit of product charged is misleading.In the modern manufacturing environment now,overheads are much greater in proportion of total costs and direct costs are lower because human is replaced by technology.Therefore traditional costing technique cannot provide an accurate cost information.
ABC is a costing model that identifies activities in an organisation and assigns the cost of each activity resource to all products and services according to the actual consumption by each: it assigns more indirect costs(overheads) into direct costs.Simple speaking,ABC analyses the cost according to the cost driver.Cost driver is factor which causes a cost of an activity(cost pool),it might be better to think of it as the ‘cost causer’.For example,the cost driver of the material handling costs would be number of components handled.Ok let's get started,the steps of ABC is as follow:
1.Identify a cost
2.Identify cost driver
3.Calculate cost driver rate(cost incurred each time the activity occurs.)
4.Trace the cost into the units produced
A simple example would enhance understanding:Cost of goods inwards department totalled $10000.During 2010 there were 1000 deliveries.200 of these deliveries related to product X.2000 units of product X were produced.Calculate the unit cost of product X.
1.We know that the total cost of good inwards is $10000.
2.We then identify the cost driver,in this case the cost driver is the number of deliveries and we have total of 1000 deliveries in this year.
3.Then you find out the cost driver rate(this is just like OAR but we calculate according to each activity),cost driver rate=total cost/cost driver=$10000/1000=$10.
4.Then use this $10 to charge against the total deliveries for product X,in this example there are 200 deliveries for product X,therefore $10 X 200=$2000,this cost is the total cost of 2000 units product X,we want to find unit cost,therefore
unit cost=cost/units=$2000/2000units=$1.
Therefore in this example,if there is other product,for example 500 deliveries for 500 units of product Y,then take the cost driver rate of $10 multiply with 500 deliveries=$5000,$5000 is the total cost for 500 deliveries,so unit cost=$5000/500units=$10.
I hope this simple example helps to understand how to calculate costs using ABC,there may be more activity such as material handling costs,set-up costs and so on given in exam or in reality,you need to identify cost driver for each activity and get a cost driver rate for each activities,then find out the costs by multiplying the activities consumed by each products and finally adding all costs up to get the final total costs for each products.
In addition to estimating more accurately the true cost of production,ABC will also give a better indication of where cost savings can be made.Working on the principle that large cost savings are likely to be found in large cost elements,management's attention will start to focus on how this cost could be reduced.But ABC has limitations as well,it undoubtedly requires an organisation to spend time and effort investigating more fully what causes it to incur costs,and then to use that detailed information for costing purposes.It can be very complex,recently there are only about 4% of companies in this world which actually implemented ABC.But understanding the drivers of costs must be an essential part of good performance management.
In summary,ABC can be used to identify inefficient products, departments and activities,allocate more resources on profitable products, departments and activities,control the costs at an individual level and on a departmental level,find unnecessary costs and helps in fixing price of product or service scientifically.It is very hard to implement in practice although it provides accurate information,practice often if you are interested to try to implement ABC in your business or workplace,make sure you understand everything about ABC.You should also understand that ABC values inventory using full production cost(variable production cost+fixed production overheads),therefore it is similar to AC in this way.
The most important thing to remember in the calculation of cost using ABC is the 4 steps,if you follow the steps,it will definitely help you a lot and you can do most questions.Practice for a number of times until you are used to the steps.
Monday, August 9, 2010
CAT T2-Variances calculation
In CAT T2,students are required to be able to calculate variances and identify whether variances is favourable or adverse.Variance is basically the differences between actual result and budgeted result.Well before starting on the calculation,we need to understand a few terms first:
Fixed budget=original budget(budgeted/standard cost per unit X budgeted unit)
Flexed budget=adjusted budget to reflect what budgeted revenues and costs would have been if set at the actual level of activity,in simplier word,using budgeted/standard cost per unit X actual unit.
Actual result=actual cost per unit X actual unit
Favourable variances=good variances
adverse variances=bad variances
Total variances=actual compare with fixed budget
Price/Efficiency variances=flexed budget compare with actual
Activity variances=fixed budget compare with flexed budget
Then let's get started,you may not understand much when seeing the above terms,let me provide a simple example to make everything clear:
eg. A company budgets its material purchases cost per unit=$1,budgeted units purchases=10 units,but in actual the material purchases cost per unit=$2 and actual units purchased=20 units.
Therefore:
Fixed budget=$1/unit X 10 units=$10
Flexed budget=$1/unit X 20 units=$20
Actual=$2/unit X 20 units=$40
Total material purchases variances=$40-$10=$30(adverse) why adverse?Using common sense,our actual expenses is more than budgeted,that's why no good,as simple as that.
Price variances use flexed budget compare with actual because you see,their differences are just the cost per unit right,so to see whether the actual or budgeted price is more expensive,both of these are to be compared:
Total Price variances=$40-$20=$20(adverse) why adverse?Again use common sense,our flexed budget adjusted the fixed budget figure by using budgeted cost per unit X actual units and we used this to compare with our actual which is calculated using actual cost per unit X actual units,their differences will be cause by the differences of price,so if our actual is more than flexed budget,it means actual price is more,conclusion is no good.
Activity variances use fixed budget compare with flexed budget because their differences are just the units purchased,their cost per unit is the same,therefore to see whether the actual units purchases are more than budget or less,flexed is used rather than actual because actual result was calculated using actual cost per unit:
Total Activity variances=$20-$10=$10(adverse) why adverse again?Well common sense is quite important to help you to understand variances,when flexed budget compare with fixed budget,we are meaning that we want to find out the differences between their units purchased,because flexed budget is calculated using actual units purchased but fixed budget used budgeted units purchased,therefore if flexed budget figure is more than fixed budget figure,that means we purchased more than we budgeted,that's not good for us.
Therefore if you really understand,you can find that total variances is actually made up of activity variances and price variances,in this example:Total material purchases variances=price variances+activity variances=$20+$10=$30(same as the total material purchases variances previously calculated).
In conclusion,this paper involves a little bit of variances analysis where we analyse the variances into price and activity variances,if you can truely understand this,it will definitely help you to settle this topic and also contribute to CAT T7-Planning,control and performance management.The most important thing is to understand how it works,carefully read through this example and it will enhance your understanding.This topic is one of the most difficult topics in CAT T2,I hope this article makes you think this topic is actually easy enough. :)
Fixed budget=original budget(budgeted/standard cost per unit X budgeted unit)
Flexed budget=adjusted budget to reflect what budgeted revenues and costs would have been if set at the actual level of activity,in simplier word,using budgeted/standard cost per unit X actual unit.
Actual result=actual cost per unit X actual unit
Favourable variances=good variances
adverse variances=bad variances
Total variances=actual compare with fixed budget
Price/Efficiency variances=flexed budget compare with actual
Activity variances=fixed budget compare with flexed budget
Then let's get started,you may not understand much when seeing the above terms,let me provide a simple example to make everything clear:
eg. A company budgets its material purchases cost per unit=$1,budgeted units purchases=10 units,but in actual the material purchases cost per unit=$2 and actual units purchased=20 units.
Therefore:
Fixed budget=$1/unit X 10 units=$10
Flexed budget=$1/unit X 20 units=$20
Actual=$2/unit X 20 units=$40
Total material purchases variances=$40-$10=$30(adverse) why adverse?Using common sense,our actual expenses is more than budgeted,that's why no good,as simple as that.
Price variances use flexed budget compare with actual because you see,their differences are just the cost per unit right,so to see whether the actual or budgeted price is more expensive,both of these are to be compared:
Total Price variances=$40-$20=$20(adverse) why adverse?Again use common sense,our flexed budget adjusted the fixed budget figure by using budgeted cost per unit X actual units and we used this to compare with our actual which is calculated using actual cost per unit X actual units,their differences will be cause by the differences of price,so if our actual is more than flexed budget,it means actual price is more,conclusion is no good.
Activity variances use fixed budget compare with flexed budget because their differences are just the units purchased,their cost per unit is the same,therefore to see whether the actual units purchases are more than budget or less,flexed is used rather than actual because actual result was calculated using actual cost per unit:
Total Activity variances=$20-$10=$10(adverse) why adverse again?Well common sense is quite important to help you to understand variances,when flexed budget compare with fixed budget,we are meaning that we want to find out the differences between their units purchased,because flexed budget is calculated using actual units purchased but fixed budget used budgeted units purchased,therefore if flexed budget figure is more than fixed budget figure,that means we purchased more than we budgeted,that's not good for us.
Therefore if you really understand,you can find that total variances is actually made up of activity variances and price variances,in this example:Total material purchases variances=price variances+activity variances=$20+$10=$30(same as the total material purchases variances previously calculated).
In conclusion,this paper involves a little bit of variances analysis where we analyse the variances into price and activity variances,if you can truely understand this,it will definitely help you to settle this topic and also contribute to CAT T7-Planning,control and performance management.The most important thing is to understand how it works,carefully read through this example and it will enhance your understanding.This topic is one of the most difficult topics in CAT T2,I hope this article makes you think this topic is actually easy enough. :)
Wednesday, August 4, 2010
T5-The business environment
Not only for CAT T5 students,but to anyone who started to study business related subjects,this is an important topic to start off your long journey.People who just started to enter business world would probably do not know what is happening around the world,so let's get started with basics.
In business,most of the time you may not choose to work on your own,so-called sole trading,because you have an individual limits and you need to take care of everything in the business on your own.Therefore,the existence of organisations became more common.Organisation is defined as a social arrangement which pursues collective goals,which control its own performance and which has a boundary separating it from environment.It is basically mean people who have the same goals gather to share their expertise so that they can earn more profits.
So why do we need organisation?I had already mentioned above that individuals have limitations,they cannot do everything on their own especially if your business is growing.With organisation,members can specialise their skills and perform in the area that they are more capable of so that tasks can be done faster and better.I had also mentioned that when people are gathered,they can share their expertise and complex work can be done by synergy of people.There is much more benefits when operating under an organisation.
Organisation is an open system too.Let's see what is open system.Open system is a system which continuously interacts with its environment.It takes influences from its environment and also influences its environment.It also obtains inputs and generates outputs.
Why do we need to know that organisation is an open system?This is because that organisation is regularly exchanging feedbacks with its environment.That's why environment is an important issues for managing an organisation.Healthy organisations will regularly try to understand their environments through use of environmental scanning,market research and evaluations and often try to influence their external environment.
Environment can be divided into two types:micro environment and macro environment.Well the difference is just about the control,micro environment is the one that we can control easily for example customers and suppliers but macro environment is the one that is almost out of our control such as rise of interest rate,inflation and so on.We have to be careful in deciding what type of business is more suitable in different place.Well there is a well known model called PEST which analyse the external environment factors using political/legal,economic,social and technological.Let's me provide guidance on how to use this model.
Legal factor will affect all organisations,that's for sure.We can analyse the laws such as company law,employment law,health and safety act,data protection act,tax law and so on of an area.For example,if a certain country requires a strict health and safety procedures in an organisation,it will affect us and we must do so.
Political risk is an important factor to consider when looking for a new market.Political risk in a decision is the risk that political factors will invalidate our strategy and perhaps severely damage our organisation,for example,wars and political chaos.Remember investors will only come to invest if the politic is stable,we shall keep an eye on the government policy too.
Business planning must also take into account the forecast state of the economy.In this case,Gross Domestic Product(GDP) of a country can help a lot,we can start our business in the country where the GDP is higher because it measures the overall economic output of a country.Keep an eye on the local economic trends too such as the wages rate.Other factors such as inflation,interest rates,tax levels,government spending and business cycle of a country should be taken into account as well.
For the social factor,we analyse the demographic change.Demography is the study of human population and population trends.So for example,if our business is selling expensive items,we may open our business in the area where the wealth(buying power of people) is good,then we have business to do.Beside wealth,we can also see factors such as growth,age,geography,ethnicity,social structure and so on.
Technological factor is also important if our business requires high technologies to operate.Technology can help in gaining productivity,reduce costs and introduce new types of product.For example,if our business is selling computer,technological factor becomes very important to us as we want to improve our products from year-to-year so that we can compete with our competitors.
So you can see that PEST model actually helped us a lot in analysing the external environment.Okay now let's talk about stakeholders,who are stakeholders?Stakeholders are groups or individuals who have interests on the organisation.We can categorise stakeholders into three types:Internal(employees,managers),external(government,shareholder) and connected(bank,suppliers).In the basic,you just need to know who are stakeholders,for further studies,we need to analyse the stakeholders probably by stakeholder mapping,triple tasks method and so on because stakeholder analysis is a key part of stakeholder management.
Okay now you should have some basics knowledge about business,you should understand organisation,environment and stakeholders by now.Therefore,have you realise that we actually have a lot things to study in business,even these basics knowledge contain a lot of information.This article is an introduction to business studies,you need to understand this article and if you can explain the terms in your own words,that's the best!!I wish everyone good luck in business studies and enjoy it :)
In business,most of the time you may not choose to work on your own,so-called sole trading,because you have an individual limits and you need to take care of everything in the business on your own.Therefore,the existence of organisations became more common.Organisation is defined as a social arrangement which pursues collective goals,which control its own performance and which has a boundary separating it from environment.It is basically mean people who have the same goals gather to share their expertise so that they can earn more profits.
So why do we need organisation?I had already mentioned above that individuals have limitations,they cannot do everything on their own especially if your business is growing.With organisation,members can specialise their skills and perform in the area that they are more capable of so that tasks can be done faster and better.I had also mentioned that when people are gathered,they can share their expertise and complex work can be done by synergy of people.There is much more benefits when operating under an organisation.
Organisation is an open system too.Let's see what is open system.Open system is a system which continuously interacts with its environment.It takes influences from its environment and also influences its environment.It also obtains inputs and generates outputs.
Why do we need to know that organisation is an open system?This is because that organisation is regularly exchanging feedbacks with its environment.That's why environment is an important issues for managing an organisation.Healthy organisations will regularly try to understand their environments through use of environmental scanning,market research and evaluations and often try to influence their external environment.
Environment can be divided into two types:micro environment and macro environment.Well the difference is just about the control,micro environment is the one that we can control easily for example customers and suppliers but macro environment is the one that is almost out of our control such as rise of interest rate,inflation and so on.We have to be careful in deciding what type of business is more suitable in different place.Well there is a well known model called PEST which analyse the external environment factors using political/legal,economic,social and technological.Let's me provide guidance on how to use this model.
Legal factor will affect all organisations,that's for sure.We can analyse the laws such as company law,employment law,health and safety act,data protection act,tax law and so on of an area.For example,if a certain country requires a strict health and safety procedures in an organisation,it will affect us and we must do so.
Political risk is an important factor to consider when looking for a new market.Political risk in a decision is the risk that political factors will invalidate our strategy and perhaps severely damage our organisation,for example,wars and political chaos.Remember investors will only come to invest if the politic is stable,we shall keep an eye on the government policy too.
Business planning must also take into account the forecast state of the economy.In this case,Gross Domestic Product(GDP) of a country can help a lot,we can start our business in the country where the GDP is higher because it measures the overall economic output of a country.Keep an eye on the local economic trends too such as the wages rate.Other factors such as inflation,interest rates,tax levels,government spending and business cycle of a country should be taken into account as well.
For the social factor,we analyse the demographic change.Demography is the study of human population and population trends.So for example,if our business is selling expensive items,we may open our business in the area where the wealth(buying power of people) is good,then we have business to do.Beside wealth,we can also see factors such as growth,age,geography,ethnicity,social structure and so on.
Technological factor is also important if our business requires high technologies to operate.Technology can help in gaining productivity,reduce costs and introduce new types of product.For example,if our business is selling computer,technological factor becomes very important to us as we want to improve our products from year-to-year so that we can compete with our competitors.
So you can see that PEST model actually helped us a lot in analysing the external environment.Okay now let's talk about stakeholders,who are stakeholders?Stakeholders are groups or individuals who have interests on the organisation.We can categorise stakeholders into three types:Internal(employees,managers),external(government,shareholder) and connected(bank,suppliers).In the basic,you just need to know who are stakeholders,for further studies,we need to analyse the stakeholders probably by stakeholder mapping,triple tasks method and so on because stakeholder analysis is a key part of stakeholder management.
Okay now you should have some basics knowledge about business,you should understand organisation,environment and stakeholders by now.Therefore,have you realise that we actually have a lot things to study in business,even these basics knowledge contain a lot of information.This article is an introduction to business studies,you need to understand this article and if you can explain the terms in your own words,that's the best!!I wish everyone good luck in business studies and enjoy it :)
Tuesday, August 3, 2010
T7-Collection of Information
Everyone knows that collecting useful information is a benefit for companies to plan,control and decision-making,but let's discuss about where can we get information that is useful.At first,let's talk about internal sources of information.One of the examples are accounting system of the organisations,we collect data from source documents such as invoices,time-sheets and journal entries.Reports of direct and indirect costs compared to budgets may be produced at regular intervals to help managers plan and control costs.Ad hoc reports such as aged receivables report,wastage report may be produced to help managers make specific decision.Appart from accounting system,we can get useful information from payroll system too which provide information concerning detailed labour costs.
Well in practice we really can't get much information from internal sources to help in planning,since then let's get some information from external sources!An organisation is difficult to succeed if they ignore external environment(can be analyse using PESTEL) which will influence their activities.Process known as environmental scanning or environmental monitor is becoming a more important part of the role of mangement accountant.Main sources of external information includes government sources(which may not always be true),business contacts(customers and suppliers),trade associations and trade journals,financial and business press and other media.Most of the information collected externally are known as secondary data which for us,is not as accurate as primary data which we generated ourselves.
Although collecting information is useful,but what if an overload of information are available?It may costs us a lot of time to analyse whether the information available are accurate and relevant or not.For example,an auditor will not have time to check all the invoices of a company.So we must consider different types of sampling techniques depending on what information we need.Before going into detail,first understand two words:
Population-group of people or objects of interest to the data collector.
Sample-small proportion of that population.
The purpose of sampling is to gain as much information as possible about the population by observing only a sample.There are a lot of sampling techniques,I will explain some of them.
Random sampling-Sample is taken in the way that every item of the population has an equal chance of being selected.Normal way of achieving this is by numbering each item in the population.For example,if a sample size(the number of sample) of 20 items is needed,first number each items of the population,then randomly pick 20 numbers maybe by drawing from box and then these 20 items are the samples.This is used when the population is known and with random sampling,we can avoid bias.
Systematic sampling-This is a bit similar to random sampling,just that only the first item is selected randomly. For example,if the population has 100 items and sample size of 10 is required,first item will be determined randomly eg.if choose 5th,then second item will the 15th,third will be 25th...up to 95th item.Then these 10 choosen items are samples.But there is danger of bias if the population has a repetitive pattern.For example,if a street has five types of house arranged in the order,A B C D E A B C D E.....an interviewer visiting every 5th home would only visit one type of house.
Stratified sampling-Random sample is taken from well defined group(eg.men and women,adults and children).This is done in such a way that the number in each sample is the proportional to the size of the group in the population.For example,in selecting a sample of people in order to discover their leisure habits,age could be an important factor,so if 50% of the population are over 40 years old and 50% are under 40 years old,when a sample size of 200 people is needed,50 should be people who are over 40 years old and 50 are under 50 years old.This method is often used by auditors to choose a sample to confirm receivables balances,in this case a greater proportion of larger balances will be selected.
Multi-stage sampling-Population is splitted into groups and random samples are taken from these groups,then the random samples are investigated.This method often applied if the population is large,for example all TV viewers in UK,the process involved would be first:country is divided into areas and random sample of areas is taken,second:each area chosen is then subdivided into towns and a random sample of these is taken,third:each town choosen is further divided into roads and random sample of roads is taken,forth:from each road choosen a random sample of houses is taken and people in the houses are interviewed.
Cluster sampling-Similar to multi-stage sampling,is just that in the final,every items in the final random samples are investigated.This is also like a more detail version of multi-stage sampling.This is a non-random sampling method because finally all items in the random samples are investigated.
Quota sampling-This is a non-probability sampling method because randomness is forfeited in the interests of cheapness and administrative simplicity.Investigators are told to interview all the people they meet up to a certain quota.This is thus very biased because for example,males investigors may be more interested to take females as their samples for interview.
Ideally the sample would be chosen at random and would be large enough because the larger the sample the more reliable will be the results and also avoiding bias.In order to use different sampling methods effectively,it is often necessary to have some knowledge of the population.Systematic sampling should not be used if the population follows a repetitive pattern.Quota sampling must be used with caution.The data collector may introduce bias because they choose how to fill the quota.
In conclusion,there are a lot of information available to us,but to determine which information is more useful for us,we can use sampling techniques to reduce time and costs.These sampling methods are important in practice especially for auditors.
Well in practice we really can't get much information from internal sources to help in planning,since then let's get some information from external sources!An organisation is difficult to succeed if they ignore external environment(can be analyse using PESTEL) which will influence their activities.Process known as environmental scanning or environmental monitor is becoming a more important part of the role of mangement accountant.Main sources of external information includes government sources(which may not always be true),business contacts(customers and suppliers),trade associations and trade journals,financial and business press and other media.Most of the information collected externally are known as secondary data which for us,is not as accurate as primary data which we generated ourselves.
Although collecting information is useful,but what if an overload of information are available?It may costs us a lot of time to analyse whether the information available are accurate and relevant or not.For example,an auditor will not have time to check all the invoices of a company.So we must consider different types of sampling techniques depending on what information we need.Before going into detail,first understand two words:
Population-group of people or objects of interest to the data collector.
Sample-small proportion of that population.
The purpose of sampling is to gain as much information as possible about the population by observing only a sample.There are a lot of sampling techniques,I will explain some of them.
Random sampling-Sample is taken in the way that every item of the population has an equal chance of being selected.Normal way of achieving this is by numbering each item in the population.For example,if a sample size(the number of sample) of 20 items is needed,first number each items of the population,then randomly pick 20 numbers maybe by drawing from box and then these 20 items are the samples.This is used when the population is known and with random sampling,we can avoid bias.
Systematic sampling-This is a bit similar to random sampling,just that only the first item is selected randomly. For example,if the population has 100 items and sample size of 10 is required,first item will be determined randomly eg.if choose 5th,then second item will the 15th,third will be 25th...up to 95th item.Then these 10 choosen items are samples.But there is danger of bias if the population has a repetitive pattern.For example,if a street has five types of house arranged in the order,A B C D E A B C D E.....an interviewer visiting every 5th home would only visit one type of house.
Stratified sampling-Random sample is taken from well defined group(eg.men and women,adults and children).This is done in such a way that the number in each sample is the proportional to the size of the group in the population.For example,in selecting a sample of people in order to discover their leisure habits,age could be an important factor,so if 50% of the population are over 40 years old and 50% are under 40 years old,when a sample size of 200 people is needed,50 should be people who are over 40 years old and 50 are under 50 years old.This method is often used by auditors to choose a sample to confirm receivables balances,in this case a greater proportion of larger balances will be selected.
Multi-stage sampling-Population is splitted into groups and random samples are taken from these groups,then the random samples are investigated.This method often applied if the population is large,for example all TV viewers in UK,the process involved would be first:country is divided into areas and random sample of areas is taken,second:each area chosen is then subdivided into towns and a random sample of these is taken,third:each town choosen is further divided into roads and random sample of roads is taken,forth:from each road choosen a random sample of houses is taken and people in the houses are interviewed.
Cluster sampling-Similar to multi-stage sampling,is just that in the final,every items in the final random samples are investigated.This is also like a more detail version of multi-stage sampling.This is a non-random sampling method because finally all items in the random samples are investigated.
Quota sampling-This is a non-probability sampling method because randomness is forfeited in the interests of cheapness and administrative simplicity.Investigators are told to interview all the people they meet up to a certain quota.This is thus very biased because for example,males investigors may be more interested to take females as their samples for interview.
Ideally the sample would be chosen at random and would be large enough because the larger the sample the more reliable will be the results and also avoiding bias.In order to use different sampling methods effectively,it is often necessary to have some knowledge of the population.Systematic sampling should not be used if the population follows a repetitive pattern.Quota sampling must be used with caution.The data collector may introduce bias because they choose how to fill the quota.
In conclusion,there are a lot of information available to us,but to determine which information is more useful for us,we can use sampling techniques to reduce time and costs.These sampling methods are important in practice especially for auditors.
Monday, July 26, 2010
T10-Investing Surplus Funds
Companies may face situations where they have surplus funds.What to do with these surplus funds?To hold it or to invest it?According to Keynes,business holds cash for 3 motives:
(i)Transaction motive-hold money to meet regular commitments such as paying employees
(ii)Precautionary motive-hold money for emergency purpose such as demand from payables (iii)Speculative motive-hold money for investment purpose
(i)Transaction motive-hold money to meet regular commitments such as paying employees
(ii)Precautionary motive-hold money for emergency purpose such as demand from payables (iii)Speculative motive-hold money for investment purpose
Companies may invest surplus funds to earn return.Four factors need to be taken into account when deciding how a company should invest its surplus funds:
(i)Risk
(ii)Liquidity
(iii)Maturity
(iv)Return
When we talk about risk of an investment,we are really talking about the extent to which its value is likely to fluctuate.There is a strong link between risk and return:the higher the level of risk taken,the greater the return of the investment.The risk can be divided into two components:
(i)Systematic risk-risk that cannot be diversified away,variability of returns caused by factors affecting the whole market,eg.macroeconomics such as inflation.
(ii)Unsystematic risk-risk that can be diversified away,variability of returns caused by factors just affecting a specific market sector.This element of risk can be diversified by holding a well-diversified portfolio of investments(more than one investment).
Liquidity described how easily the money invested can be converted into cash.There is also a link between liquidity and return.An investment that is highly liquid will generally result in a lower return on the investment.On the other hand,an investment with a low level of liquidity will generally provide a higher return.If the amount and duration of surplus funds are subject to change,then only very liquid investments should be considered.
Maturity means the duration of investments.A company's investments should mature so that the surplus funds is available when the business needs it.This can be assessed by preparing a detailed cash budget to cover at least a six-month period into the future.There is also a link between maturity and return.A longer maturity will generally provide you with a higher return.On the other hand,an investment with a shorter maturity will result in a lower return.
The rate of return is the last factor to consider when investing surplus funds.This is because it is largely dictated by the three aforementioned factors-risk,liquidity and maturity.Once you have decided on the appropriate level of risk,liquidity and maturity,you have substantially narrowed down the types of investment that are appropriate.The market then dictates the rates of return on these investments to you.
There are numerous types of investment available for company with surplus funds.Surplus funds can be deposited in interest bearing accounts offered by banks,finance houses or buiding societies.Interest amount between such accounts can be compared by calculating the compound annual rate of interest(CAR):
(ii)Liquidity
(iii)Maturity
(iv)Return
When we talk about risk of an investment,we are really talking about the extent to which its value is likely to fluctuate.There is a strong link between risk and return:the higher the level of risk taken,the greater the return of the investment.The risk can be divided into two components:
(i)Systematic risk-risk that cannot be diversified away,variability of returns caused by factors affecting the whole market,eg.macroeconomics such as inflation.
(ii)Unsystematic risk-risk that can be diversified away,variability of returns caused by factors just affecting a specific market sector.This element of risk can be diversified by holding a well-diversified portfolio of investments(more than one investment).
Liquidity described how easily the money invested can be converted into cash.There is also a link between liquidity and return.An investment that is highly liquid will generally result in a lower return on the investment.On the other hand,an investment with a low level of liquidity will generally provide a higher return.If the amount and duration of surplus funds are subject to change,then only very liquid investments should be considered.
Maturity means the duration of investments.A company's investments should mature so that the surplus funds is available when the business needs it.This can be assessed by preparing a detailed cash budget to cover at least a six-month period into the future.There is also a link between maturity and return.A longer maturity will generally provide you with a higher return.On the other hand,an investment with a shorter maturity will result in a lower return.
The rate of return is the last factor to consider when investing surplus funds.This is because it is largely dictated by the three aforementioned factors-risk,liquidity and maturity.Once you have decided on the appropriate level of risk,liquidity and maturity,you have substantially narrowed down the types of investment that are appropriate.The market then dictates the rates of return on these investments to you.
There are numerous types of investment available for company with surplus funds.Surplus funds can be deposited in interest bearing accounts offered by banks,finance houses or buiding societies.Interest amount between such accounts can be compared by calculating the compound annual rate of interest(CAR):
CAR=[(1+x/n)^n-1] X 100%
x=% interest as in decimal figure
n=number of times interest paid per year
So let's understand this formula by looking at an example:nominal interest rate is 12% and is compounded quarterly.
nominal interest rate is the same meaning as interest rate per annum.In this example,it was received quarterly,so the n=4 meaning one year we received 4 time,then do as follow
CAR=[(1+0.12/4)^4-1] X 100%=12.6%
Other than this,we may also invest in the money market.Money market is a market for short-term debt securities.The yield(profitability) of a money market instrument depends on
(i)Its face value
(ii)interest rate or coupon rate offered
(iii)period of time before it is redeemed(ie.converted into cash) by the issuer
The interest yield=coupon rate/market price X 100%
let's see an example:On 5th january 2010 the market price of 5% treasury stock 2011 is $145.Calculate the interest yield.
So,the market price was given $145,but what about the coupon rate?You need a face value first but most of the time it is not given in exam,therefore always assumed it is $100.So the coupon rate=5% X $100=$5 and interest yield=$5/$145 X 100%=3.45%
Okay let's consider the securities in the money market.Gilts are one of them which are marketable British Government securities.The government issues them to finance its spending,but also uses them to control the money supply.Government promises to buy the gilt back on a specific date in the future.Gilts usually have fixed interest rates,although there are various index-linked gilts.If a company buys a gilt and holds it until it is repaid by the government,the return received will be fixed from the outset.As the government will not default on the debt and the interest to be earned is known in advance,this makes it a low-risk investment.
A certificate of deposit(CD) is a negotiable instrument issued by an institute(bank or buiding society) that indicate a sum of money deposited with a bank and will be repaid at a later specific date(as short as 7 days and as long as 5 years).CD is in bearer form which means title belongs to the holder and can be transferred by delivering the CD to the buyer.CDs can be bought and sold easily and offer attractive interest rates and low credit risk.They are useful for investing funds in the short-term since they can be sold at any time on the secondary market.They are liquid type of investment.
A bill of exchange is like a cheque.It is an unconditional order in writing from one person(the payee) to another,requiring the person to whom it is addressed(the drawee) to pay a specific sum of money on demand(sight bill) or at a future date(term bill).Bank and non-banking institutions are the main buyers of bills on the secondary market.The buyer makes a profit by purchasing the bill at a discount to its face value,then receiving the full value at maturity,or reselling it before this time.The level of risk attached to bills depends on the credit quality of the drawer.If the drawer is a large company or institution,the risk will be lower than if the drawer is relatively small and unknown.
Bonds are fixed interest security issued by government,company,a bank or other institution.May or may not be secured.
Commercial paper is a certificate issued by company promising to pay a fixed sum to the person bearing the note on a specific date.Commercial paper is an unsecured type of investment.
Loan stocks is issued by company in return for loans secured on a particular asset of the business.The loan is for long term.
Permanent interest bearing securities(PIBS) are securities created by building societies to raise funds and are quoted in the stock exchange.
Although there are more ways of investing surplus funds such as shares,high interest accounts,option deposits and more,but students are not required to know all,just some understanding of the investment options is sufficient.The important point to remember is that only after a company has assessed risk,liquidity and maturity,it is then in a position to consider the investment options available to it.I had provided a comprehensive explaination on different kinds on investment options above,it is up to you to decide how you are going to invest your surplus funds in future.Do not just hold the cash as you will suffer holding cost such as opportunity cost and theft of cash.Please have a throughout understanding on what this topic is trying to teach you.This article is applicable not only to CAT T10 students but also anyone who are doing business :)
Friday, July 23, 2010
CAT T4
CAT T4-Accounting for Costs is one of the intermediate level papers of CAT,which is the paper that give you knowledge about management accounting and most of the knowledge from this paper is going to be brought forward to CAT T7-Planning,control and performance management,therefore it is important to truely understand what is learnt in this paper.
This paper builds up the knowledge from CAT T2-Information for management control,but there are a very huge difference between CAT T2 and T4.In CAT T2,you will learn about IT and a little of costing concepts only,but in CAT T4,it was expanded widely,IT is not important in T4,T4 builds up the costing concepts and plus more costing techniques to learn.Therefore you may find that there are a lot to learn from this paper,but actually nothing is difficult,what you need is to have open-mind always to learn new things.
The aim of this paper is to develop knowledge and understanding of how organisations record,analyse and report current and future costs and revenue data for use within the organisation.As you can see,examiner stated that all areas of the syllabus are equally important,it means that the knowledge that is provided by this paper can help you a lot in future,so it is essential not to skip any topics.
In this paper,you will find that the material chapter learnt in T2 are way too easy compare to the one in T4.In T4,you will learn even more like how to value the inventory and what amount of inventory to order so that you will minimise holding cost and ordering cost.Labour chapter does not differ much,almost the same.In the overhead chapter of T4,you need to be able to do the 3 steps of overhead absorption costing and also determine the over or under absorption.
Remember to understand the absorption and marginal costing well because in T7,you must do well for it.In T4,you also get to learn about the T account for costs for intergrated accounting system and interlocking accounting system.You will also learn job costing,batch costing and service costing to calculate costs respectively.Next is process costing which is a big area of the syllabus,you have a lot of things to learn from this topics,be prepare.
Beside these costing techniques,you will also learn CVP analysis which will be brought forward to T10 later.You will also learn short-term decision-making which you need to determine the relevant costs to charge the customers,this is called relevant costing.Limiting factor and make-or-buy decision can be learnt in decision-making topic too.Finally you have a chance to learn how to appraise a capital investment,this is a long-term decision and will also be brought forward to T10.
Therefore,you can see that whatever things that are included in T4 are very important,you should value this paper and study well of it.This paper is to give students knowledge about management accounting but it is not an application paper yet,therefore if you study the books enough,you can pass easily.Try to score well for this paper,the better you are for this paper,the easier for you in CAT T7 and T10.Good luck :)
This paper builds up the knowledge from CAT T2-Information for management control,but there are a very huge difference between CAT T2 and T4.In CAT T2,you will learn about IT and a little of costing concepts only,but in CAT T4,it was expanded widely,IT is not important in T4,T4 builds up the costing concepts and plus more costing techniques to learn.Therefore you may find that there are a lot to learn from this paper,but actually nothing is difficult,what you need is to have open-mind always to learn new things.
The aim of this paper is to develop knowledge and understanding of how organisations record,analyse and report current and future costs and revenue data for use within the organisation.As you can see,examiner stated that all areas of the syllabus are equally important,it means that the knowledge that is provided by this paper can help you a lot in future,so it is essential not to skip any topics.
In this paper,you will find that the material chapter learnt in T2 are way too easy compare to the one in T4.In T4,you will learn even more like how to value the inventory and what amount of inventory to order so that you will minimise holding cost and ordering cost.Labour chapter does not differ much,almost the same.In the overhead chapter of T4,you need to be able to do the 3 steps of overhead absorption costing and also determine the over or under absorption.
Remember to understand the absorption and marginal costing well because in T7,you must do well for it.In T4,you also get to learn about the T account for costs for intergrated accounting system and interlocking accounting system.You will also learn job costing,batch costing and service costing to calculate costs respectively.Next is process costing which is a big area of the syllabus,you have a lot of things to learn from this topics,be prepare.
Beside these costing techniques,you will also learn CVP analysis which will be brought forward to T10 later.You will also learn short-term decision-making which you need to determine the relevant costs to charge the customers,this is called relevant costing.Limiting factor and make-or-buy decision can be learnt in decision-making topic too.Finally you have a chance to learn how to appraise a capital investment,this is a long-term decision and will also be brought forward to T10.
Therefore,you can see that whatever things that are included in T4 are very important,you should value this paper and study well of it.This paper is to give students knowledge about management accounting but it is not an application paper yet,therefore if you study the books enough,you can pass easily.Try to score well for this paper,the better you are for this paper,the easier for you in CAT T7 and T10.Good luck :)
Wednesday, July 21, 2010
CAT T7
Now let me introduce what is all about in this paper.CAT T7-planning,control and performance management aims to develop knowledge and understanding of the application of management accounting techniques to support the management processes of planning,decision-making,control and performance measurement.Again this paper requires students to apply the knowledge into different situations.Knowledge will be brought forward from CAT T2(variances calculation part) and all of CAT T4.This paper actually contains broad area of syllabus but short-term decision-making and CVP analysis were removed and included in CAT T10 from june 2009 which has reduce the load of this paper.
So why is it useful to learn from this paper?Do you all know that what kind of accountant in an organisation make most profit?It is actually management accountant and treasury accountant.In this paper,you will learn the skill that is needed to become a management accountant in the future.After you completed this paper and have some relevant working experience,you are able to become a management accounting technician in an organisation.
The key areas of the syllabus are forecasting,budget preparation,flexible budgets,variance computation and interpretation,performance indicators,cost reduction and value enhancement.It was important that students remember the knowledge that is learnt from CAT T4 such as absorption costing,marginal costing and more.In CAT T7,you will learn even more costing techniques which are useful to determine the pricing of the product,analysing variances and investigation of variances,prepare a budget and more.Not only costing techniques,you also have the opportunity to learn performance measurement and use performance indicators to measure quality of service,unit costs,profitability,economy,effectiveness,efficiency and more.
Beside of using absorption to charge product,we will learn one more method,activity-based costing(ABC) which is the upgrade version of absorption costing,it eliminates the 3 steps of getting the Overhead Absorption Rate and able to charge a more realistic price especially for big companies which have a lot of overheads rather than direct costs.We also learn to apply standard costing,which will compare the actual with budget and calculate the variances and interpret it.All of these are useful in organisation,especially the most common used standard costing.
Therefore,don't be demoralised by this paper,keep your mind open to accept any new costing techniques and performance measurement method so that finally you are ready for managing the performance of an organisation.Guidance may be given when I found the difficult areas of CAT T7,have fun :)
So why is it useful to learn from this paper?Do you all know that what kind of accountant in an organisation make most profit?It is actually management accountant and treasury accountant.In this paper,you will learn the skill that is needed to become a management accountant in the future.After you completed this paper and have some relevant working experience,you are able to become a management accounting technician in an organisation.
The key areas of the syllabus are forecasting,budget preparation,flexible budgets,variance computation and interpretation,performance indicators,cost reduction and value enhancement.It was important that students remember the knowledge that is learnt from CAT T4 such as absorption costing,marginal costing and more.In CAT T7,you will learn even more costing techniques which are useful to determine the pricing of the product,analysing variances and investigation of variances,prepare a budget and more.Not only costing techniques,you also have the opportunity to learn performance measurement and use performance indicators to measure quality of service,unit costs,profitability,economy,effectiveness,efficiency and more.
Beside of using absorption to charge product,we will learn one more method,activity-based costing(ABC) which is the upgrade version of absorption costing,it eliminates the 3 steps of getting the Overhead Absorption Rate and able to charge a more realistic price especially for big companies which have a lot of overheads rather than direct costs.We also learn to apply standard costing,which will compare the actual with budget and calculate the variances and interpret it.All of these are useful in organisation,especially the most common used standard costing.
Therefore,don't be demoralised by this paper,keep your mind open to accept any new costing techniques and performance measurement method so that finally you are ready for managing the performance of an organisation.Guidance may be given when I found the difficult areas of CAT T7,have fun :)
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