IMPORTANCE OF FINANCIAL PROCESSES INCLUDING CHART OF ACCOUNTS AND PRICING THE PRODUCT. By CA Ketoki Basu

Transcription

1 IMPORTANCE OF FINANCIAL PROCESSES INCLUDING CHART OF ACCOUNTS AND PRICING THE PRODUCT By CA Ketoki Basu

2 Financial Process-Methods Visuals/Detailed flow charts Accounts Manual Purchase/Procurement Manual

3 Importance of Financial Processes Critical to business success Successful planning by decision makers Easy for new employees Accountability Fraud is minimized Innocent errors flagged for correction

4 When is it important? Company starts operations Clear understanding of the business Revenue generation commences Before damage is done

5 Areas Financial Processes General Ledger Capital Expenditure and asset control Accounts payable Accounts receivable Collection and recovery Internal Control Records Management

6 General Ledger Complexity, volume and pace of information flow Accounting system changes, M & As etc. Control Systems- Accurate, Consistent, Reliable Central system in accounts

7 General Ledger Large organizations- more than one person handling Review process of updating and checking Inconsistency-cost high

8 General Ledger Integrity in financial reporting Shorten closing process Accuracy and reliability in case of consolidation Detect and correct errors with ease Meet compliance mandates and streamline audits

9 Capital Expenditure Assets and records safeguarded Separation of duties Accountability Authorization of transactions Transactions and events recorded Periodic verification of condition of assets Compliance and reporting

10 Capital Expenditure- Approve Economic life can be enhanced -do not replace Asset will result in business scale up Competitor acquired Necessitated by turn of events Improvement of staff morale Planned expenditure

11 Capital Expenditure- Reject Short use to the business Wasteful and avoidable Unproductive assets Trade off between aesthetics and utility

12 Accounts Payable Separation of duties Accountability and approvals Stock control Review and reconciliation

13 Accounts Payable Separation of duties Approval of purchase orders Receive ordered material Approve bills for payment Review and reconcile the records Consequences of non separation Erroneous/Fraudulent invoices paid Payment to non existent vendors

14 Accounts Payable Accountability and approvals-best practices Review approval signatures periodically Verify goods received with bills Review and reconcile the records Payment as per company policy Consequences of non accountability Unauthorized work performed by vendors Loss of discount due to late payment

15 Accounts Payable Stock control-best practices Security in storage Restricted access Periodically match opening and closing stock Consequences of lack of control Theft Shortage of inventory Additional cost of procurement

16 Accounts Payable Review and Reconciliation-best practices Periodic review and reconciliation of bills with purchase orders Monthly reconciliation of balances Consequences of absence of review and reconciliation Payment made for goods not received or services not rendered Increase in costs

17 Accounts Receivable Contract terms Authorization, approval Segregation of duties Reconciliation of invoices with shipping

18 Accounts Receivable Contract terms Credit terms-bad rating Payment terms- unusual? Verify. Authorization, approval Proof read invoices Restriction on generation/approval of invoices

19 Accounts Receivable Segregation of duties- best practices Invoice generation, approval and receipt of payment separated Recording of transactions Reconciliation of invoices with shipping Goods billed have been shipped All documents associated with sales have been forwarded Cash receipts reconciled with invoices

20 Collection and Recovery Who is the debtor? How much is due? When was it due?

21 Collection and Recovery Agreements and contracts- verbal? Collection policy Late payment When is it late? Penalty, Interest charge, Legal action Relationship with customer

22 Internal Control-Objective Effectiveness and efficiency of operations Reliability of financial reporting Compliance

23 Internal Control-components Control consciousness Risk assessment Control activities Information and communication Monitoring

24 Internal Control-components Control consciousness Understand responsibilities Understand limit to authority Committed to doing things the right way Risk assessment Identify risks Manage risks- preventive or detective control

25 Internal Control-components Control activities Approvals, authorizations, reviews, reconciliations, security of assets etc. Information and communication Essential for effective control Monitoring Self assessment Peer reviews Internal audit

26 Records Management Archiving Storing Retrieving

27 Records Management What information will be records? Active documents and records How long to preserve? Method cost effective and non intrusive Protecting records Disposing off expired records

28 Records Management Identify record managers Analyze documents Develop a file plan Design retention schedule Ensure easy retrievable

29 What is Chart of Accounts? Created list of accounts Defines each class of item Segregates income, expenses, assets and liabilities

30 Why is Chart of Accounts important? Unique to the business Nature of business requirements Easy retrieval of data Useful for management reporting and decision making

31 Features of Chart of Accounts For any type of organization ERP system in use Purpose of data sorting Each code is unique to an account Flexible

32 Features of Chart of Accounts Can be numeric, alphabetic or alphanumeric Logically coded Usually arranged according to financial statements

33 Case Study-1 XYZ Ltd.- A Dessert Bar Some of the items sold -Chocolate and coffee drinks, Milkshake, Cocktails- non alcoholic, Cocktails- alcoholic, Fondue Company has its presence in Delhi, Mumbai and Bangalore Customers - Retail, Corporate and Business/Dinner parties

34 Case Study-XYZ Ltd. Chart of Accounts can be structured in the following manner: Level 1- Broad heads of Balance Sheet and Profit & Loss Level 2-Type of product Level 3- Geographical location Level 4- Customer/ supplier Level 5- Nature of income/expense

35 Case Study-2 ABC Educational Academy Institute in higher education Grants received from Government of India, Government of Karnataka and Private Sector

36 Case Study- ABC Educational Academy Chart of Accounts to separate each asset into multiple accounts according to source of funding. Example: Building- GoI Building- GoK Building- Private Building- Own funds

37 Chart of Accounts and Tally 4 levels possible Level 1-Group Level 2-Ledger Level 3-Cost Category Level 4-Cost Centre Groups given by default. New ones can be added

38 ABC Educational Academy and Tally Balance Sheet and Profit and Loss can be separate set of codes Meaningful sorting with the restrictions Example- Create Chart for tracking of data related to Sponsored Research projects

39 ABC Educational Academy and Tally Group- Direct Income (provided by Tally) Ledger Research Project- Primary Education-Karnataka Research Project- Primary Education-Other States

40 ABC Educational Academy and Tally Cost Category Research- Primary Education-Bangalore City Research- Primary Education-Mysore Cost Centre Professional Fees Salary to assistants Boarding Lodging Others

41 Importance in pricing of a product Business an economic activity with profit motive All costs related to business to be accounted and recovered

42 Methods adopted for pricing Cost based Customer based Competition based

43 When to price? Prototype ready Ready for commercialization Program/Project Evaluation and Review Technique (PERT) chart and Critical Path Method (CPM) Costs related to business clear

44 Applicable to what organizations Any organization Manufacturing Services Education

45 Cost of Product Separate direct and indirect costs Materials and components- manufactured in house outsourced

46 Important Issues Make or buy Warranty After sales service

47 Cost reduction Quantum of production-efficiency/ capacity Technology Substitution Wastage control

48 Summary Processes are important Processes must be documented and communicated Introduce it before much damage is done Chart of Accounts Price of product

49 Thank You Ms. Ketoki Basu Founder, FinEx Solutions www. finexsolutions.com