Accountancy is not only science but a very sophisticated art as well , Purpose of this article is just to look at different methods which companies use from time to time to present a different picture of thier books , none of these methods can provide any long term benefit , all they can assure is trouble. Real profit is some thing which is earned by a direct increase of top and bottom line and not just be shifting numbers here and there.
depreciation : Depreciation is an highly effective tool of cooking books , specially for manufacturing and logistics companies which have huge capital investments in machineries and vehicles. Suppose the average industry practice is to depreciate a lath machine for 10 years but some smart company thinks it can depreciate similar machine for 15 years , this kind of tweaking will be effective enough to bring the books from red zone to green as the
earning will be increased because lesser depreciation is being subtracted .
COGS : If Cost of goods sold is subtracted from the revenue that gives gross profit , Further subtractions of operational expenses, interests payments and taxes will take us to the net profit. If one wants to increase gross profit artificially the easy way is to move the cost of goods sold towards operational expense. There will be some smart accountants who found arguments for the same.
Showing earnings in advance : In service industry there are contracts which can be as long as 5 to 7 years , if 40% of the money comes from software development than 60% is from maintainace and support. If an organization is getting into a contract with its client which is about delivering a software as well as supporting it for next 5 years , then it can show any fraction ( as liked by its accountants) of this revenue at any time in the books
and guess what its perfectly legal.
Goodwill : one of the best ways to create an impressive asset base is to increase the goodwill, whenever an organization aquires another there is lot more than just physical property. Mainly a huge client list , good work force , a well established brand etc. all can be put under goodwill. In addition to this if some of the value from plant , property can also be shifted to goodwill , that will mean no depreciation charging for such assets in turn direct impact on the bottom line.
Bill and hold : This has been a very popular accounting technique in many of the organizations which asked their corporate customers to purchase much earlier then the business cycle and pay only after sale has taken place. The purchase made was billed and showed as a revenue in current cycle, very clearly this can work only one odd time.
Thursday, March 12, 2009
Saturday, March 7, 2009
Ideation:
As an organization which need to survive on highly innovative ideas how do you make sure that you create an environment suited for idea generation from your employees. In all the organizations an employee is absorbed in routine day to day activity , there are very few like google who have a special 20% of office time is left for the employee to work on the ideas which appeal to them. If we look back , historically organizations have given almost no chance to its employees to generate ideas and implement the same. Most of them had very few key decision makers at the top who were the only people responsible for various ideas and their implementation. There is hardly any effort to manage ideas and innovations. One of the most impressive innovation management I have seen is in John Deers, the global agri equipment organization really knows how to select the best idea and implement it. It has a structured way to do it , it encourages its employees to come with new ideas and some of the best are chosen to be presented in a 3 day long event in the organization , after which the most impressive one is selected for implementation.
Recently I came across another very innovative ways to select ideas in GE, the Global technology group started Idea trading in its department, here employees have registered their ideas in a virtual exchange, each employee has been given virtual currency of 3000 rupees and a trading account for this exchange , once he logs in he can start trading ideas and the price of an idea goes up and down depending on the volume of its trade.
It really make sense to set a structure for generating ideas in organization and giving some of the best once a chance of implementation. Just imagine if one idea can create organization of worth billion dollars than how many brilliant ideas can come from thousands of people in that organization. This is the reason processes like six sigma specially focus on methodologies of idea generation.
One of the oldest method of idea generation is war , most of the revolutionary ideas including Internet were generated during war. Now a war can not be started inside an organization to generate ideas but definitely an environment can be created where every employee feels the heat of competition from outside world, I guess that is what ad agencies best at and that's how they keep generating ground breaking ideas.
Recently I came across another very innovative ways to select ideas in GE, the Global technology group started Idea trading in its department, here employees have registered their ideas in a virtual exchange, each employee has been given virtual currency of 3000 rupees and a trading account for this exchange , once he logs in he can start trading ideas and the price of an idea goes up and down depending on the volume of its trade.
It really make sense to set a structure for generating ideas in organization and giving some of the best once a chance of implementation. Just imagine if one idea can create organization of worth billion dollars than how many brilliant ideas can come from thousands of people in that organization. This is the reason processes like six sigma specially focus on methodologies of idea generation.
One of the oldest method of idea generation is war , most of the revolutionary ideas including Internet were generated during war. Now a war can not be started inside an organization to generate ideas but definitely an environment can be created where every employee feels the heat of competition from outside world, I guess that is what ad agencies best at and that's how they keep generating ground breaking ideas.
Sunday, March 1, 2009
Small but strong
The normal notion also says that bigger is stronger and certainly we will have many examples whre size determines strength. Nature has its ways to create exceptions and examples, The strongest material on the earth is diamond , no doubt about it. In fact phsycis will agree that the smaller is the size of particle , more energy it will require to break it. This year global recession has hit business school placements like never before , MBA graduates who considered themselves employable in any circumstances are having tough time to find a job so colleges started looking for small firms and start ups .
In last few days I have got a chance to interact with several such organizations from head count to 4 people to 100 , from revenue of 60 lacs to 100 crores. I am really amazed that even in such bad times many of these smaller firms who have been in existence for around 3-4 years are doing extremely well . There are many reasons to it and one of them is to target a focussed area and provide end to end executable solution in that area at very competitive price.
In discussions it also came out that where many of the larger firms could not predict about their future projects and cash flows , these smaller firms have project lined up for next couple of years so much so that they are turning down clients because they don't have enough resources to execute many such projects at the same time.
What is keeping small strong ?
Low Operational expense : Most of them are still running from small rented spaces and have not opted for purchasing and maintaining their own facilities. This is keeping the operational expense low. These organizations are running from premises with less than satsificing facilities where they may not even have a cafeteria for their staff. Where other larger ones have now a big task at hand to cut down highly on operational expense , for smaller ones its life as usual on this front.
Every one does everything : For start ups it is not acceptable at any time to handle an attrition rate of 25-20% , even if it happens than the key to remain strong is a flatter hierarchy where every one knows and does pretty much every thing, one is responsible from opening the office doors in the morning to making an international sales pitch, collecting receivables , recruiting projects and managing existing projects in hand.
Closeness to customer : Large organizations today have client list running in hundreds , one of the KPI of quarterly results is number of clients added and specially from fortune five hundred, post which it is about deal size but in case of start ups and new organizations in block , they have almost all of their projects are coming from very few clients which means complete attention and close association with these clients. There may not be deal sizes of millions of dollars but there are definitely continuos flow of projects and great trust on these small but flexible partners.
Its not money but passion and vision : I thought these it is very bookish and theoretical concept that small firms are driven by sheer passion which does not care much about cash flow , specially in short term. Recent interaction with some of the CEOs opened my eyes to a world which is full of energy , vision and un quantifiable passion. They are so intoxicated in it that every second sentence they speak gives a confirmation of their passion and commitment. Small size helps making such feelings contagious to the entire team. Offcourse money follows , many entrepreneur commented that earned much more in their small entrepreneurial stint of 3 year than their corporate career of 30 years.
Developing a perfect ecology : Larger organizations have too much pride and arrogance which hinders development of a cooperating ecology with their peers but this is just opposite in case of smaller ones, they are constantly looking out for friends who can help them in various phases , be it complementing them to provide end to end solution to customers or helping them in expansion to new locations. This kind of ecology gives them more strength.
I am certain that many such small organizations will not only sail through the current crisis but also will establish themselves as strong players in respective fields . Lets hope when they become bigger , they don't forget how they have drawn strength to do so.
In last few days I have got a chance to interact with several such organizations from head count to 4 people to 100 , from revenue of 60 lacs to 100 crores. I am really amazed that even in such bad times many of these smaller firms who have been in existence for around 3-4 years are doing extremely well . There are many reasons to it and one of them is to target a focussed area and provide end to end executable solution in that area at very competitive price.
In discussions it also came out that where many of the larger firms could not predict about their future projects and cash flows , these smaller firms have project lined up for next couple of years so much so that they are turning down clients because they don't have enough resources to execute many such projects at the same time.
What is keeping small strong ?
Low Operational expense : Most of them are still running from small rented spaces and have not opted for purchasing and maintaining their own facilities. This is keeping the operational expense low. These organizations are running from premises with less than satsificing facilities where they may not even have a cafeteria for their staff. Where other larger ones have now a big task at hand to cut down highly on operational expense , for smaller ones its life as usual on this front.
Every one does everything : For start ups it is not acceptable at any time to handle an attrition rate of 25-20% , even if it happens than the key to remain strong is a flatter hierarchy where every one knows and does pretty much every thing, one is responsible from opening the office doors in the morning to making an international sales pitch, collecting receivables , recruiting projects and managing existing projects in hand.
Closeness to customer : Large organizations today have client list running in hundreds , one of the KPI of quarterly results is number of clients added and specially from fortune five hundred, post which it is about deal size but in case of start ups and new organizations in block , they have almost all of their projects are coming from very few clients which means complete attention and close association with these clients. There may not be deal sizes of millions of dollars but there are definitely continuos flow of projects and great trust on these small but flexible partners.
Its not money but passion and vision : I thought these it is very bookish and theoretical concept that small firms are driven by sheer passion which does not care much about cash flow , specially in short term. Recent interaction with some of the CEOs opened my eyes to a world which is full of energy , vision and un quantifiable passion. They are so intoxicated in it that every second sentence they speak gives a confirmation of their passion and commitment. Small size helps making such feelings contagious to the entire team. Offcourse money follows , many entrepreneur commented that earned much more in their small entrepreneurial stint of 3 year than their corporate career of 30 years.
Developing a perfect ecology : Larger organizations have too much pride and arrogance which hinders development of a cooperating ecology with their peers but this is just opposite in case of smaller ones, they are constantly looking out for friends who can help them in various phases , be it complementing them to provide end to end solution to customers or helping them in expansion to new locations. This kind of ecology gives them more strength.
I am certain that many such small organizations will not only sail through the current crisis but also will establish themselves as strong players in respective fields . Lets hope when they become bigger , they don't forget how they have drawn strength to do so.
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