Monday, February 25, 2013

Combination of Costing Strategies and Methods

Costing methods used in combination can be used as a devastating weapon for creation of economically and social benefits. But it’s often misunderstood and miss- represented which leads to further poor understanding and implementation of the tools.  The world only sleeps and dreams about financial management which is blindly being chased, but cost accounting tools create financial management if the costing tools are used in combination. In this article and hence forth I will be coming up with articles which will help to create economic and social synergies through efficient combination of cost strategies.

Target costing, the concept more being implemented and adopted after the debacle of 2008.It would be wrong to say that before 2008 it was never adopted. The western economies had in-fact exploited the target costing concept. One of the biggest proofs of exploitation is the mortgage business which gave birth to the recession of 2008.

Target costing cannot be implemented without understanding proper costing of a product as well as the market of a product. Target costing is not cost control but it is control of cost. Target costing control the future cost and helps in designing the product structure. For a country like India where rural India is the prime focus target costing helps to deign cost structures. In an economy like India where inflation and interest rates rules the economy in every three years designing cost structure has taken a radical change over the years. In India cost accountants cannot control cost only by recording expenditures. Product engineering and value creation is the new model which is highly being implemented which requires better understanding of cost propositions. Better understanding of cost proposition means converting target costing into comprehensive costing. We cost accountants need to shift from cost management to profit management since controlling the former is cumbersome due to Indian economic inflation factors so management of profit needs to be focused. I call this new target costing perspective comprehensive target costing. In addition to the original activities of target costing, comprehensive target costing adds the management of achieving the target profit of new products.

It includes setting the target cost and  target profit throughout the life cycle of the new product, and managing such activities as the product planning, development, design, manufacturing preparation, manufacturing, physical distribution, sales, after sales, usage, and disposal. You can see that this is a major shift in thinking, philosophy, and of course effort to develop, maintain, and control. It is anticipated that any of you reading this can then realize if a company can actually do this, they are in the best position to control their destiny and overcome their competition.

For example in the financial industry we find much software’s being provide for financial planning for advisory business model. Advisors use this software for financial planning for their clients. Now in this highly competitive industry where so many companies are having so many products, every advisor may not be appropriate to sell all the products. Moreover for every advisor all the product features may not be the requirement since every advisor has his own product selling domain but he is compelled to pay and accept higher charges for all those products features which he never takes into account.

But when the software is being sold or membership license is being provide they are compelled to accept the entire product feature based software despite the advisor deals with single product. The price remains the same irrespective of the single product requirement of an advisor. The flaw in the system is that companies have the prime motive to derive the cost of producing the software from every advisor irrespective of the requirements by an individual advisor.

Now imagine that if a company just tweaks its policies and gives independent choice of choosing software requirement for an advisor then the company and its product opens up the gate of all types of advisor and increase its product market size. Hence the company changed its policy from cost management to profit management. Earlier the company was focused towards only on cost management where it aggressively focused towards recovery of cost of production by selling all the product features without accessing the individual requirements.

Through this the company will be able to design the product structure and also access the market potentiality and will be able to attract many more advisers which lead to higher profitability. Knowing the competition and competitor is the way to adopt target costing which leads to achievement of balance score card. Now a question might come up that while discussing about target costing how do we came up with Balanced score card. Well among one of the prime pillars of balanced score card is customer perspective which can only be achieved through adoption of target costing. In balanced score card we know that understanding the customer and its preference and behavior change can create optimum results for companies .But after understanding the consumer appetite the next pillar of process of Balance score card is  internal process development. This development is being achieved by adoption of various cost accounting methods and strategies. Among the several strategies target costing plays one of the vital role while achieving the consumer satisfaction which finally leads to financial perspective of the Balance score card.

Balanced score card is the ay to create financial management which can only be achieved if the internal process is being developed by using efficient cost methods. Well balanced score card is often miss represented and often remains an bookish theory since financial management is blindly being chased. Cost management means to run your business using cost as the main criteria. The cost management activity needs to be both continuous and integrated throughout the organization. When fully institutionalized, cost management concepts will be used in all products, services, organizations, processes, and procedures within and around the company. Thus to be effective, the cost management concept has to be accepted as a policy by company leadership.

Balanced Score Card into Budgets

Balanced score card effect is only being restricted or being applied only to the financial perspective of the organization. Even in the western world from where the Balance score card came into affect into the management books was also remained constrained within the cubicle of financial perspective. The biggest poof of the same is the collapse of world’s best organizations like Lehman Brothers, Bank of Merrill lynch and many thousands of companies, the name of them remained unheard to the eras of the world economy.

In my previous article Combination of Costing Strategies and Methods I placed the concept of application of various costing tools to create and combination of cost strategies which will drive the coming decades.   In this article I am again depicting another model where cost strategies can become more powerful while designing the budgets of an organization. We all know that budget is the mother of cost related to any part of the organization.

I find in my research that traditional budget making processes are of no effective use for an organization. Budgets traditional are based upon previous year’s numbers followed with additions from the auditor’s reports about deviations. In my research I find that adoption of various tools into the process of budget making can be of stupendous result for an organization. The four pillars of Balance Score card can be of magical performance improvement for an organization when its being mixed up within budget making process.

A question often hunts that when and where the balance score card needs to implement. I find while preparing the budget one should keep balance score card within the process so that proper identification of resource allocation as well as the future business targets can be kept rightly aligned. While preparing the budgets one will get a clear idea about the previous scorings of the balance score card and the areas which needs right allocation for achieving the target of the balance score card of the organization. Budget making process needs to have new dimension so that balanced score card takes full shape within the organization principles and policies. While making budgets I found that cost cutting is prime focus followed with efficient use of resources. I find the efficient use of resources is a concept being adopted with a wrong meaning. Efficient use of resources allocation of right cost with right cost centre. It’s the opposite of cost cutting in simple terms.

Financial perspective is the prime area of focus of financial score keepers. With changing process and times budgets process needs to be changed. Financial accounting models never accounts for learning and growth perspective.  The process of achieving the financial perspective is never taken into account aligning with the long term sustainability of the organization. Analyst and financial score keepers are brilliant in calculating the short term perspective of an organization. The collapse of the big giants is the proof of the pudding which was practiced over the last decade.

We often hear that pink slips are being still offered by companies across the globe. Well we are only being told that organizations are facing the heat of recession and that’s why mass layoff is being executed. I find balanced score card was never thought within the organization and short term financial perspective was practiced at the optimum level which created the high unemployment. Well don’t think that Balanced score card is a concept only adopted in the Fortune 500 companies. It’s being hardly being adopted anywhere otherwise picture would have been different.

Learning and Growth perspective of the balanced score card is the back bone of the entire Balanced Score card. If employees of an organization are not being factored within the development process of any part of an organization then how the score keepers will come up with the financial perspective. Profit gimmick is the killing instinct of an organization at all times and every time.

Short term profitability often ignores employee’s growth and learning process. Skilled manpower has been the key factor behind the growth of every economy every industry across all times. Historically and at present we find many evidence of this. Today US economy has managed to archive a technological boost up in oil exploration from deep within the ocean through excellent human capital or employees. New strategies for growth and innovation of products can be only be achieved when adoption of learning and growth perspective of balanced score card is being implemented.

Where the organization management fails to understand is that human capital is the key to every aspect of Balanced Score card. Its not about customer or financial perspective but it's about the internal process perspective which is ultimately depends upon learning and growth perspective. While adopting activity based costing we allocated cost with the various respective cost drivers. But did we ever take into account learning and growth perspective while designing the budget structure of an organization.

While preparing budgets we never allocate for learning and growth perspective. We design budget standards based upon the previous year actual numbers added with new notes being provide by the auditors of the company about the diversions and gaps achieved during the last financial year. I find while designing budgets balanced score card needs to be adopted so that all the segments of the organization and its respective cost centers are being taken into account.

Now a question might come up that how learning and growth curve can be developed and implemented within an organization. Say that one is working in a banking sector. Now if employees of an bank are being promoted based upon regular examination and qualification based and not on the basis of one time qualification then imagine the improvement of the bank and also of the entire banking industry. New type of products, streamlined process and efficient use of resources can be achieved. At the same time Indian banking industry will find stupendous growth in term of financial perspective which is prime aim of score keepers of the financial statements.

Well financial accounting models treats leaning and growth curve to be wastage of resources and simply cuts backs the budget allocation for the said purpose.

In India I find human capital is being rated at the lowest number. In financial industry in India I find human capital supply is being accounted as a free supply which leads to no requirement of any learning and growth curve. Insurance industry, mutual fund industry and financial distribution company I find high level of employee turnover ratio. The most common word being said while turning down one employee is that he is a non performer. I find organization is the biggest non performer since it fails to retain its employees. My brothers in the industry are the best speakers for these stories which have passed or that were still dwelling into such organization where human capital is rated at the lowest.

If politicians of a country are undereducated then how they can understand benefits of the various new technologies and how India can achieve its 8%+ GDP growth.  Financial accounting model never identifies the same hence and organization never includes learning and growth perspective within its organization. Organization needs to develop open space where improvement of the employees aligning with the mission and vision of the organization is being cultivated. Organization needs to think that how they can develop their human capital which benefits the companies in the long term leading to an sustainable venture.

Well educated well developed learning and growth perspective helps an industry to grow over the long term. Balance score card is a compass which helps the organization to find the way of its direction while running business.

Cost Reduction and Pricing

Reduce cost and increase profitability is the key metric being learnt and applied blindly for any success of a product. Pricing of the product is often ignored and its being derived based upon the ROI expected from the investments which doubles the percentage of profit to be calculated over the cost of production. In my previous couple of articles Balanced Score Card into Budgets, I have marked very clearly that combination and clear understanding of the tools will redesign cost and improve efficiency for the company. In my research I have found that Price and Cost needs to align with the objectives of the Balanced Score Card. Now my readers might come up with a deep level of curiosity that why I am writing so many articles about Balanced Score card.

The answerer is simple we don’t understand and adopt the easy process of designing business strategy aligning with the cost through Balanced Score card.  After the debacle of 2008 consumption and price of products has been the key factor for every organization and every product. Price decides the fate of the organization but I find this is pricing is being calculated at the least consideration and much of the focus applies on cost of production and finally deriving the profit percentage to arrive at the price of the product. It’s the combination of cost and price that helps an organization to achieve its Balance Score Card. In this article I am starting the new dimension of gaps and flaws while designing cost and cost strategy.

Pricing of a product plays a vital role for deciding the future of a product, organization and all the resources deployed to gain the profitability. Financial management fails to identify the place where expenses needs to replaced and not reduce only. Cost Accountants are equipped to identify the gaps and replace the cost by cutting it from other cost centers. The difference between Price and cost of production is termed as profit. While I find profit is way higher than the real profit. Real profit might turn out to be the key factor while designing the product pricing.  

Cost reduction will lead to profitability is a wrong thinking since it has been found in research across the globe that cost reduction leads to destruction of values and growth of an market, organization and product too. Shifting and right allocation of cost which leads to activity based costing can only be applied when one has detail understanding of the cost drivers and link between shifting of cost between the cost drivers so that balance is not broken at any cost centre. Well it easier said than done. Higher sales will result to higher profit every time is a false concept since higher sales might recover the part of fixed cost. Pricing of a product is a mixture of marketing, cost accounting, business strategy, engineering and economics. Hence cost accountants are the ideal labour who are for having an in depth knowledge of the all these to implement and design the pricing.

Inflation is the biggest problem while designing prices of a product. I find it it’s the biggest problem of earning profitability. One will come with a reply that rising cost needs to be absorbed by increasing the price to maintain the profitability. Well this is the biggest place where a product finds its death. While designing the cash flow we design the structure by increasing cost of production. Well we also increase prices to increase the EPS followed with an increase in P/E ratio. Well the flaw within the system is that prices and cost needs to have a wide gap where despite of increase in cost backed by inflation the real profit remains within the expected lines of the company.

Moreover, fixed cost of a product declines over the years followed with one time innovation cost and depreciating cost of production this is the real profit which is calculated.  But this cost is being kept fixed when we derive pricing of a product and we calculate inflation hikes on the old cost of production. Product pricing should be designed in such a way that despite of increase in cost of production the pricing remains the same. This might sound like a stupid but we never calculate the real profit which remains neglected.

While designing the cost reduction process we fail in developing the benchmark for such reduction. Benchmark for reduction of cost is the vital factor which will guide the way of arriving at the proper price. Benchmarking for cost reduction is developed in two ways:

1) Internal Benchmarking: This is developed on the various departments within an organization and its specific policies. Difference in cost is bound to come since difference between plant layout, automation, and employee training and management practices and

2) External Benchmarking: Based upon best standards of the Industry. Financial management blindly reduces cost and increase prices affecting value to derive the EPS over the years. Fixed cost is often miss-calculated and while designing flexible budgets fixed cost component is being kept constant where the same gets reduced backed by depreciation. Real profit always remains high for every company.

It’s the high ambition of earning double or triple profit that increases the cost of production which itself is a methods of earning revenue.

Strategy Death to be No.1 or No.2

In business colleges we are taught about strategy and business techniques to remain in competition and derive competitive advantage. Strategy to become No-1 or No-2 is the most devastating concept being built within the mind of the top management. Jack Welch used to follow this concept and we imitated the same with a blind vision to replicate the same. Jack Welch achieved through this formula since his industry and geographical economics was different. We replicated the process blindly leading to a catastrophic market of increased competition with a policy of imitation. Profit earning metrics were imitation or copycat which ruled over the several decades.US, Europe, China and India all adopted the same metrics and now the results are very clear.

Profit should be measured as the return of capital invested over the long term. But we measure profitability with our competitor’s business numbers. Often business takes wrong decision following the emotional trap of competitors copycat strategies. Copycat strategies are created by tweaking the original strategies disguised under the name of Innovation. We don’t focus on our own individual innovation of existing strategies but we do brilliant imitation of competitors.

One of the biggest mistakes being adopted by the business heads are that they do comparison without taking into account length and structure of an individual industry. Structure of an industry plays a pivotal role for designing the revenue and profitability sharing which is often miscalculated. A best example to give shape is the stupendous growth achieved and compared by US financial system with Information Technology growth.  In my research I find that US colleges used to teach the growth momentum correlation of financial and information technology industry. Well we all know that both the industries are different in every terms but why the books and lectures were designed to teach the mass is still unknown.

It’s correct that US financial system existed from a long time but analysis of the collapse of Lehman Brothers, Bank of Merrill Lynch and many others reveals that they followed the same suit of competition with IT industry. Well in my research I find the profitability was measured in terms of imitation of products within the competitor industry. Similar mortgage products with tweaking in interest rates were flooded on the streets of US which lead to the stupendous growth of leveraged deals. At the same time these companies rules the Wall Street and earned astronomical business growth. I find in my research that the reflection of the astronomical profits on the bonus being earned by the US financial street players. Copycat lead to stupendous growth which is being enjoyed by the global market in the form of 2008 recession.

Top management often takes strategy as a number race where as it should be used to generate value proposition. We forget that there are many needs to be feed and many processes to meet which will final lead to unique competitiveness. Competition race leads to the final destination of copy cats. Well this is the prime mother of duplicate product industry. I don’t want to name the countries who are leaders in the duplicate industry but they are damaging the true competitiveness of the market.

Once a strategy is being changed into a contest over every sales then price becomes the choice factor for the consumer creating a stupendous damage to the industry in the long term which finally increases the merger and acquisition perspective. In short price competition leads to merger and acquisitions. We often read in management books that economies of scale and growth are the prime growth engines for a corporate/business over the long term. But an economy of scale is achieved at the cost of copycats while participating in the race of competition.

Competitions lead to only one way which is domination of industry over the long term. But in my research I find that till date not an single company in the global map who is a leader has managed to be the most profitable ones.

Changing macro factors, geopolitical factors snatch the crown of No-1 and No-2 over the years. The collapse of the US financial system is the biggest proof of the pudding. A company where one goes for a competition to earn profits enters into the deadlock street of imitation/copycats. This is what has happened in the US and European financial system.

Business profits should for struggle to make and not to earn through imitation. Since through imitation one will reduce the overall performance of the industry in the long term and hence one day either of the two companies goes for a single entity. In my research I find that companies compete for profits with their direct rivals, but also with their customers, their suppliers, potential new entrants, and substitutes. Profit to be earned from every corner/department of the business organization is a fatal slow dead concept being adopted and blindly followed. Since profitability from every segment creates malpractices and often imitation of products. In India we find similar type of insurance products from various companies and there are ambitiously working for promoting their products. Now misspelling has been the king from this segment of the industry due to extensive duplicate products. Prices over here were the form of commission being deployed to increase sales and finally lead to malpractices. Everyone knows about the way insurance products were sold in India prior to IRDA interfered into commission structures.

In my research I find that after the competition is on the full swing the price become the factor of choice for the consumer. Hence if I lower the prices then imitation gets out of the competition bandwagon and kills copycats. I have found that if price competition comes into the playground copycat percentage takes a huge u-shaped turning over the industries statistical map. In my research I find that lowering prices can be of great help to eliminate competition and drive the industry into the circle of competing for profits. Competing profits needs to strategies without following the channel of copycats. Cost Accountants are the only ones who can work extensively for designing the cost structure of an industry where profit is the competition motive curtailing out the copycat theory. Innovation and profit motive are the only survivors for all the industry in the long term.

Innovation Labs for Corporates

Innovation the mother of growth plays a pivotal role in the global economy since inception of the fire on this planet. Invention of wheel and fire were also innovation. The recent debacle of 2008 had changed the landscape of innovation across the globe. Policy makers across the globe have went through cut down on cost on various segments across every organization. Much of the effect has been on research and development segment which the house of the mother of innovation.

At the same innovators took a bold step and moved with their own enterprises. This resulted creation of copycats of large organizations since innovators can innovate techniques with modern minimum tools. This creates significant threats to the large organizations which spends billion dollars at the back of innovation. So where the threat lies and does the small innovators are threat to the giants.

Well the fact is completely different and large companies are unable to tap the resources of innovators who are striving for success. As corporate are unable to bear the cost of Research and Development I find Innovation labs needs to be created which will be an outsourced service for the big giants.

Companies are always on the toss about the end utility of various researches being carried internally. Say if an company whose R&D division does 5 innovation out of which only 2 can be utilized by the same company under the policies and business planning. Now the same company also bears the cost of the other 3 projects but it’s of no use. This rising cost of non income generating research has been ruling force behind shut down of R&D division by the companies.

Now if an Innovation Lab is being constructed by the innovators where they carry out various innovations for different companies then that should work wonders for many industries. Big corporate spends billions to attract the innovators. But innovators under the changing circumstances have shifted into their own world where they are looking for recognition. Hence companies should come up with maps to link up these Innovation labs where companies will pay only for the product which they find to be matching with their business model.

Well innovation labs might sound like an new concept and its highly required. As growing concerns about prolonged slow down in developed economies and volatile movements of the emerging economies the birth of Innovation Labs is highly required. In India we find one prominent and well investments driven Innovation Lab which can also be marked as the King of Innovation Bosch. Well the rest can be easily found from the website of the company. We needs Bosch type Innovation labs.

Today’s we find the biggest Innovation Labs are the NGO who are working on non profit targets. They have converted themselves into a perfect Innovation Lab. Innovation labs need not be an non-profit making organization they all needs to be an mission driven like the NGO’s.

Innovation labs needs the biggest attention of Investments banking segment since huge amount of capital will be required to invest in order to run the segment. Venture capital needs to flow into the Innovation Labs and at the same time the investors should be enough educated to understand the Innovation Labs business process and its risk.

Over the next decade we will need thousand of innovators and double the number of Innovation labs so that new industrial revolution can happen. Extensive capital needs to be deployed for keeping the industrial revolution alive matching with the speed of technological changes. Innovators play a pivotal role in the society in the coming decade. They are the ones who will bring the developed economies out from the dark nights of recession. For successful Innovation labs we should not direct them according to our thought line. Rather I would ask the innovators to dream the future and design accordingly since that’s the base line of the Innovation Lab. Corporate will not be able to dream like Innovators hence they should stay away from indulging into the minds of Innovators.

One more aspect I would like to accentuate is that providing additional financial support decreases the quality of innovation by corporate. The prime reason being the race of competition which forces innovation to catch up the wrong path which further finally leads loss for the organization in the long term.

Slowdown creates opportunities and Innovation lab is the future of the next generation. More Innovation labs gets into an economy the more revolution in various economies will happen in the coming decades. Well its up to India who will take the steps of numbers of Innovation labs.

Six Sigma: Building Product Brand

After the debacle of 2008 the demand of efficiency and defects reduction is on the heights ladder. The debacle of 2008 has taught us to use metrics to measure performance which the world failed to do prior to 2008. While in search of new concepts and thoughts married with new ethical values we forget the ones which are already present matching the same instincts. When I was doing my research on one of the aspects I came across one of very strong and well reputed metrics called Six Sigma. Six Sigma needs no introduction since everyone know the preliminary aspects of its. But I was surprised to find that six sigma is understood less and implemented more in engineering segment rather having an application in every industry comprising of small and big. In this article I will present break up parts of implementation of six sigma for building brands-shifting away from the traditional thought of using it as an statistical tool.

Six Sigma is a data driven process where data accuracy and data collection process is a very important.  If ones initial hypothesis is wrong then the whole calculation can go for a wide fluctuation. The data has to be well accurate from the various segments – from manufacturing to transactional and from product to service. If the data is wrong then metrics and measurement both will take a hit. Some of my learned friends might acclaim that Six Sigma is a statistical process of elimination of defects and hence improving productivity. In my research I find that six sigma is beyond statistical calculation and it has a greater role to improve efficiency. Six sigma was designed to control the errors within a system and creating brand value for an organization/its products and even employees.

Six sigma helps to build brand provide if it’s being witnessed beyond as a statistical tool. The Six Sigma DMADV process (define, measure, analyze, design, verify) is an improvement system used to develop new processes or products at Six Sigma quality levels. The word quality is the backbone which creates brand through six sigma process.

Definition of the problem is the vital pivot point while designing the road map for six sigma. In my research I find that the problem needs to divided into course and solution followed with known and un-know. A matrix is the best suited to understand and efficiently the problem which will form the initial hypothesis.

Once the matrix is well developed behind the mind the initial hypothesis will be a magical solution.  We often find that while deriving the definition of problems we get known problems whereas know solutions but they are not linked hence the problems persists and continues. It’s not always prudent to find the unknown questions and answers. Finding the known can be of great help to resolve the unknown solutions and problems too.

For an efficient brand building a proper process needs to develop aligning it with the measurement metrics so that deviation in any place can be identified before the brands is on the verge of collapse.

For an existing product of whom the life cycle suddenly plummet and is on the verge of getting out from the market six sigma definition process can be of great survival for the organization as well as for the product. One must keep in mind that certain changes in an existing product can be of great innovation. Moreover for bringing a new product and getting success from that product is a huge debatable game where as existing product ramification can be of great proposition. The above matrix can be of helpful in improving the quality of a product followed with creating new brand to an existing product.

In my next article I will come up with the measurement part of Six sigma.

Cost Centre & Driver Miscalculation

This might sound like a stupid word but it has an in-depth meaning which saves the organization from travelling towards the path of destruction in the long term. Doesn’t every sacrifice long term growth to achieve the forecast? This is one of the biggest mistakes regularly practiced in every industry. As I belong from the financial industry I have been fortunate enough to see the legacy of leaders from lower level management to the middle level management playing actively this game in financial Distribution Industry, Insurance and NBFC.

Well by saying this I might have annoyed my hundreds of friend from the industry but I am compelled to see and write all these facts. In my previous articles I have been hammering that cost reduction is not the path to remain in competitive business neither to earn profit. Reducing cost leads to slow long term death of an organization and its products. Right allocation of cost and identification of such cost centers is a herculean task which can only be executed by proper understanding of cost drivers. Activity based costing has been practiced and calculated by many of us but we never understand the in-depth relation of cost centers. Unless one has an detail idea about the cost and its value proposition one will never be able to assign cost management in an judicious way.

Forecasting is usually married with individual compensation packages expected to be drawn and grow over the years. Financial objectives are designed based upon the compensation packages linking the same with the sales figures to be achieved. Steroids of motivation are being injected; ruthless employee turnover ratio is being activated followed with hammering the vision and mission of an organization. I have found that when you ask an employee of an organization at any management level one will find giving lectures on vision and mission of an organization where as they have forgotten the main mission and vision of the organization. Everyone in the organization is trying to hit around the bush. The path to destruction of an organization has begun come to know from all these variety of mission and vision notes. In this article I have come up with various factors behind fall of a product and its long term sustainability.

Remaining competitive is an easy task since financial management simply understood the cost reduction path just like a blind fellow. But there is a long journey before the cost reduction programme is being activated which is ignored in the first place.  As I have been saying previously that forecasting is nothing but the benchmark which is created by the company to access and guide the motion of an organization. This benchmark is often miscalculated and leads to an killing instinct for the organization.

Cutting down on cost to run the business is not a process of keeping the business alive. It’s the first signal that the business is going to have a hard landing the near future. It also indicates that the organization is prudently achieving short term targets at the cost of long term. Cost Reduction measures will work spell bound in short term but at the same time the organization takes the biggest challenge of meeting the long term goals.

Organization pumps steroids of growth and motivation which leads to flush of ideas from the middle and top management. Compensation packages are linked with the ideas irrespective of how that idea will merge into the organization business plan and its vision and mission. Early stage innovation can lead to a great trap for the long term prospects of the organization. In insurance industry there has been a flush of policies which has acted like a killing trap in the long term. Many insurance companies came up with brilliant projects and policies which helped the organization to achieve stupendous growth followed with fat incentives for the middle and top-level management but in the long term the same management changed jobs and lead the organization die at its own fate.

I find similar story in all industries which leads to product dumping or short lived product into the market. One of the biggest costs associated with this type of business process is that the initial cost of product development, marketing and sales cost which is being absorbed by the product over the projected cash flow is being added up as a burden cost or sunk cost which eats the profitability of other products. In simple terms premature death of a product life cycle happens due to Rushing of Ideas which eats away the long term profitability of the organization.

Hence too much aggressiveness leads to a death trap. Product innovation riding on the wheel of compensation growth is a slow poison.  If management should have been so easy then why strategic cost management should have been required. Cost reduction can be the work of any uneducated fellow but cost management needs cost accountants who are capable to understand the cost driver and cost centers. Well in my next article I will shape out the path of identification of cost centre and cost driver relationship.

Capital Budgeting: CMA needs a new look

The financial market took a huge turnaround after the debacle of 2008 where demand and supply inequality were the main players. Industrial revolution took a halt across the world and financial market reflected more fearful days. Global GDP took one of the hardest turnaround followed with diverse policies towards growth and survival of recession.

In this article I would like to depict more about why the companies are not actively behind new projects and why there is an active change in capital budgeting and financial management aspect. I hope this article will provide a new thought for the Cost Accountants and Investment bankers. My main target is to develop the insight of Cost Accountants beyond calculations and to be an active player in the Indian economy as well as in the global economic platform.

The old books of financial management and capital budgeting techniques has changed after 2008 recession phase across the globe. Investment opportunity has all taken a dramatic change due to the changing factors of capital budgeting and financial management. Business schools have also failed in majority of the case to find out the difference in project slowdown after 2008 debacle.

We have found that in India and in U.S economy corporate are having pile of profits in their books in the form of cash. Currently US corporate are having around $2.5 trillion as cash in their books of accounts. But they are still reluctant to drive into the ocean of investments since capital budgeting techniques will fail to capture the recessionary factors. In order to validate my data according to the recent report from Moody's Investors Service non-financial corporate cash position rose to $1.24 trillion at the end of 2011. The report further states, that nearly $700 billion, 57% of the corporate cash total, is held overseas which includes emerging economies. The below image depicts the same story.

One will be shocked to find that according to the Federal Reserve that, at the end of March, U.S. corporations held $1.7 trillion in cash reserves, which they keep in treasuries, other bonds, and bank accounts. When I drilled further I find that the cash position of the US corporate increased from 12% from 2006 to 24% from the Great Recession in 2008.

Time frame of generating cash flow is the biggest factor which the capital budgeting process will fail after the recession slow down. With negative growth in consumer demand in US and Europe and significant slowdown in Asian economy has changed the demand of any product. Hence more time will be consumed in generating a positive cash flow or even break even for any product as compared to the post recessionary phase.

Another aspect that fails to capture is the low cost of debt and equity component mixture within financial management of a project. US have got an zero interest rate which might seem like an gives an thumbs up to an investment project. But with significant slowdown in the global economy the real benefit of zero interest rate has negligible effect. At the same time with poor performance of the equity market and negative show down of the IPO market which is a key exit route for any venture capital and corporate finance has also changed the rules of financial management. Debt to equity ratio across the globe has taken a huge toll and a significant part of it can be witnessed in Indian market in the last 2 financial years.

Disparity about assumptions while drawing conclusion for project viability through capital budgeting and financial management techniques needs a high level of economic factors which needs to be accounted. I find project risk management has got a huge significant role to play since through this we can resolve the economic factors by certain percentage.

• Communication about risk in cash flow projection

• Identification of early risk in projects,

• Diverse markets and economic conditions linked with product consumption need to be linked with cash flow projections,

• In depth focus of equity option more than debt consideration should be the key aspect since equity is the key exit option for financial investments,

• Life cycle costing of the product should be mapped with different geographies since after recession of 2008 there has been an significant change in demand culture.
Well the above list might be incomplete and needs some more inclusion but it’s up to you to add up taking the practical aspects in mind.

In order to have new projects Cost Accountants needs to keep in mind those only mathematical calculations are no longer enough. One needs to grill into the cash flow projection factors while deriving the end result of the investment project. Geographical factors and product life cycle costing, needs to have a high level of priority to decide the project viability. Unless we cost accountants move ahead with these factors new projects will find times to come and hence the economic slowdown will only keep on growing.

Game of Exploitation - India

India the economy which was once treated as a poor economy has become the hot spot of investments over the last decade. In fact it became more attractive for investments once the game of leveraged play of western economy came to a halt after the crisis. In the last couple of years and in the last decade we heard much about rural India and its developments songs. Well India has more than 50% of its population below the age of 25 and more than 65% below the age of 35. It is expected that, in 2020, the average age of an Indian will be 29 years, compared to 37 for China and 48 for Japan; and, by 2030, India's dependency ratio should be just over 0.4. The statistical data would make every Indian proud but there is an deep cry behind the smiling numbers.

We are in the path of exploitation and rural India is the biggest pot of the game. Prior to implementation of Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) Indian framers were finding ways to commit suicide in order to escape from the dark nights of starvation and no income. Well before me there have be more than dozen articles being written on the same topic. But my pivot point of my article is placed somewhere else.

We are still living in the world of illiteracy despite of having many modern plasma based education schools. The biggest proof is that according to India's 2011 census depicts a serious decline in the number of girls under the age of seven - activists fear eight million female foetuses may have been aborted between 2001 and 2011.Well updated Indian technology has failed to educate Indians about this subject. We often compare our life style with the western economies and other emerging economies. We have adopted to their lifestyle particularly in urban segment around 75%.According to  the 2011 census birth sex ratio in India, of 917 girls to 1000 boys, is similar to 870-930 girls to 1000 boys birth sex ratios observed in Japanese. The affects of globalization is only limited to those areas where money is being printed or rather returns on investments are being calculated in number to times.

In the opening lines I told that by 2020 average age of an Indian will be 29 years which gives immense opportunity for the consumption sector to grow. Well I am compelled to come back to economics from social factors again. Western economies and even domestic economy is eyeing the age bracket and not the rising population of India. Since the major difference between the averages bracket of 29 and 35 would the pattern of consumption which leads to the amount of profitability being projected to earn in the long term. In simple words how fast one can be exploited.

Profitability of the companies will only increase from consumption which is marketed well by the economic heads of every economic mind. No one thinks of increasing the savings and making an proper way ahead for the society and economy to grow in terms of health, education, malnutrition and sewage system.

Many of my readers might think that I am again coming back to the old primitive story being written like one wrote by the NGOs or I am trying to portray a negative image of Indian economy. Prosperity of an economy is within the well being living of a citizen. Rural India and part of the urban are still struggling to make an earning. Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) has benefited strongly the white goods, liquor financial companies to sell their products. Rural India still don’t know what legacy they will keep for next generation. They are being exploited for consumption. We are exploited for cast system, we are exploited for religion, we are exploited for purchasing a new mobile handset every month.

Well like me many will come to write on similar thought lines but we hardly can change the exploitation story. Once the rural India got its foods for day and night, suddenly someone came up to have the food of the night converted into mobile handsets.

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