Saturday, July 15, 2017

The Success Story of a Financial Controller

The unit was into the business of dealership of Maruti vehicles.  It started operation in the year 2002. The promoter had already gathered experience in the line in another firm where he was a partner. But his experience was more in the field of marketing and exposure to accounts was limited. Hence he was unable to understand the nuances of finance and accounting.

As a marketing man, the promoter had no problem in achieving a decent turnover in the first year itself. He was quite successful in managing the front office by reaching the targeted sales. However, the management of back office functions took a back seat. The attitude was somewhat like ‘if you achieved your sales target you have achieved everything’; other functions like back office were supposed to fall in line automatically. 
The balance sheet and P & L account for AY 2003 showed a loss of Rs.40 lacs. The Management accepted the loss typically treating itself as a manufacturing concern wherein the initial years’ performance results invariably in losses. This assumption made the Management to overlook the accounting failures. The Management conveniently forgot that, after all, their activity was nothing but a pure trading activity wherein the profits start from day one, provided the sales start happening. Thus the opportunity to review the accounts on a realistic basis was lost. 
The financial papers of the firm for AY 2003 were audited by M/S X and company. They found the accounts in a total mess. One of the main issues raised was that Bank accounts were not reconciled. Management treated this as a typical audit observation to be replied as “necessary action is being taken”. Audit Team also found that there was supposed to be an internal audit system in place. However, there was no trace of any such audit reports or rather the very existence of such a system was doubtful unless proved otherwise. Again, the Management found this as a matter of making some payment to the auditors and asked them to prepare the necessary reports and send the bill to them!

The best thing that the audit Team did was to suggest that a Financial Controller be engaged. When asked to suggest a name, they recommended the name of Mr. AVL Rao. He was to retire shortly from a Major Engineering Company as Finance Manager. The Team was quite confident that he could turn around the Company from the financial mess they had landed in! 
Enter the financial Controller
Mr.Rao reported for duty in the month of March, ie, one month prior to the ending of the financial year 2004. It took very little time for him to conclude that the accounts were really in a state of mess! Like an experienced Doctor treating a patient for the first time, he made a thorough investigation and immediately concluded that loss for the current year AY 2004 could not be less than a crore! The Management could not simply believe! The accounts Team had already presented them quarterly P & L accounts for first three quarters showing profits in each quarter! Of course, these were Excel sheet workings arrived more on the basis of sales figures than on the actual accounts database.
Rao constituted a team with the help of which he scrutinized the entire accounts for the current financial year. He arrived at the following position:
1       Strangely for a trading firm, there was no profit margin available on the individual sale of each vehicle! The Principal had designed an ingenious system, which was fully loaded towards the Manufacturer!  The dealer had to open a Letter of Credit under which the Principal would raise a bill against the dispatch of each consignment. The bill would be paid on presentation by the Bank against debit of Dealer’s current account. The dealer was to sell each vehicle at Manufacturer’s listed price only, i.e., without any margin. He was eligible for incentives strictly based on the sales performance for each month. In effect, the cash flow was fully in favour of the Principal.
2       In respect of vehicles sold under discount schemes, the dealer had to claim the discount amount from the Principal. As per the Scheme, very ingeniously designed by the Principal, the dealer was not only to offer 50% of the discount by cutting into his own margin, he was also required to first allow the discount and claim the same in the monthly target achievement statement. The accounts Team had either failed to prepare the claims properly or had submitted the same with delay.  Further there was no effective monitoring of the same for early realization from the Principal. Another dent in the profitability!
3       The Company had outsourced the sale of accessories at the post sales level to an outsider. Hence only a portion of the margin on such sales was realizable against the full margin, which would have accrued to them otherwise.
4       The issue of Insurance policies by the Company under arrangement with Insurance companies was a major source of income but required necessary thrust.
5       The arrangement of Bank finance was another area of major income, which also required proper attention to fully realize the benefits.
6       Finally the four-wheeler market was both buyer’s and sellers’ market but not even remotely the ‘dealer’s market’! The dealer was to earn his profit more through after sales services rendered by way of sale of accessories, arrangement of Bank finance and issue of insurance policies. Of course, all these activities were directly linked to sales.
7       The Bank accounts had not been reconciled for the last two years. The said reconciliation when completed revealed that a good number of customers’ cheques had bounced and debits had been raised in Bank accounts. The accounts Team had failed to collect these cheques and initiate further action for recoveries. This failure was to throw a big dent in the current year’s profits. Similarly certain credit entries were found missing in the Bank statements for which the accounts had no explanation to offer. 
1       To convince the Management the necessity of giving due importance to the back office working. The fact that back office and front office were different sides of the same coin needed to be established.
2       To explain the position of the actual financial status of the company as at the end of AY 2004.which was to result in a net loss of not less than a crore of rupees.
3       To convince the Tax officials that the loss was a real one and not a ‘figure made out’ to hide profits and avoid payment of taxes.
4       To start direct sales of Accessories and give major thrust to market the issue of insurance policies and disbursement of Bank loans through proper co-ordination with Insurance Companies and Banks.
5       To initiate the recovery of the outstandings which were a result of bounced cheques from customers and which had been overlooked in view of the Bank accounts not being reconciled
6       To ensure prompt and correct submission of monthly target achievement and discount claim statements to the Principal and obtain early payments resulting in comfortable cash flow to the Company.
I had a meeting with Rao recently. He gave the performance of the Company after his joining as follows:

Profit/Loss in Rs (lakhs)
100.00 -loss
2007 Estimated

Needless to say that Rao was successful in contributing to the turnaround of the Company. (One of the positive aspects of the situation was the availability huge space within the large building owned by the company). Of course it was a teamwork involving both front and back offices with full support from the Management. The successful team was given the incentive of a Bangkok trip by the Management in 2006!

(Originally written in 2007)

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