Monday, July 3, 2017

INCLUDE 'SME' UNDER COST AUDIT


Skill India Initiative will not grow merely by giving technical know how and financial support to them Make in India can only happen when cost measurement is possible. If one SME is not able to measure the cost which will make his product competitive will finally lead to failure of the Skill India and Make in India initiatives.  Pricing of gods produced in India should be competitive not only domestically but also on the export market is dependent on cost management and pricing management. Long term sustainability of Pradhan Mantri MUDRA Yojana, Make in India, Startup India, and Skill India will be the most important aspect since all these segments needs to scale into mid and larger companies over the long term. Unfortunately the whole segment of SME below Rs 50cr and Rs 100 cr turnover under regulated and unregulated industry have been kept out of the Cost Accounting, Cost Auditing and Cost Record Maintenance.Remove the threshold limits of turnover and reduce the same so that most of the SME comes under cost audit ambit.

Improving the SME segment in rural India which will create new business opportunities and employment one needs efficient support of cost management and pricing support. Post demonetization there have been a significant slowdown in the rural credit off take and hence new business opportunities have taken set back. India is quickly stepping into a market-oriented economy which requires many facets of its economy and society to be changed. Banks are also reluctant to fund under SME segment due to NPA issues biting their profitability.Remove the threshold limits of turnover and reduce the same so that most of the SME comes under cost audit ambit.

Now a question might come up that SME cannot afford cost audit and cost record related compliance aspect. Well Indian SME can afford the same since most of the work can be outsourced and will be  managed by the practicing cost accountants who based on certain fee will take care the entire part. Hence SME will not face the burden of huge compliance cost as its expected by the industry. Practicing cost accountants can take care of the same.

As per a latest study conducted by SAP and Oxford Economics of 2,100 executives across 21 countries, increasing global competition has been cited as the top concern affecting Indian SMEs. 43 per cent Indian SMEs said global competition as their major worry. Economic uncertainty (34 per cent) and shifting customer expectations (29 per cent) were second and third most critical concerns.  The current trade barriers by US and also the deteriorating condition of Europe is matter of concern for the SME export market in the long term.
Problems of The Indian SME  in terms of Cost and Pricing which leads to fall in quality of Output

SME’s are facing the heat of rising global war material prices and also pricing strategy of their products. The applicability of costing standards and cost audit will help the SME to identify the cost reduction and pricing. Currently cost cutting is not the same thing as cost control. Owners of SMEs are concerned with cost cutting which often leads to resource cutting. Holding back resources has implications on behavioral aspects of the firm. Motivation of people gets affected and the quality of output suffers in a cost saving exercise. Such cost saving exercises are ad-hoc and discontinuous.

On the other hand cost control is a planned and continuous process. Cost controlling may not always result in resource cutting. Changing the source of raw material by exploring better logistical feasibility is an example of planning for controlling cost. But replacing the superior source of raw material with an inferior cheaper variant is what SME managers end-up doing as an alternative cost saving mechanism.

The process of costing is unscientific and vague. Direct costs are fairly traced to the final output but the method of tracing indirect costs and overheads is not appropriate. This results in wrong calculation of unit level product cost which eventually results into wrong pricing in the market.

Indirect costs are usually bundled-up into a single aggregate expense and then spread across various products using heuristic basis of allocation like volume of production or labour hours per category of product etc.
 But such simplification in measuring and reporting of costs does not give a clear picture about how costs behave for each of the categories of products sold by a SME. Unavailability of unit level and product level data then becomes a major constraint in keeping track of costs.

Our neighboring country China has undergone significant restricting of its economy towards a market oriented economic system. The focus is laid on management accounting practices in small and medium enterprise industries. According to the statistic data of China, micro, small and medium enterprises (SMEs) comprise 97% of all firms, accounting for 80% of urban employment, and for 60% of total GDP. This growth have been phenomenal as china adopted management accounting in confronting the pressure from current higher cost, only by improving financial cost management, SMEs can overcome difficulty and fulfill sustainable and healthy development.

The institute of Cost and Management Accountants of India (ICMAI) and its professionals can work closely with the SME through the door of their practicing opportunity.

How “The Institute of Cost and management India” & Cost Accountants and the cost audit reports can help the SME:

The first step in building a culture of cost consciousness in a SME is to establish a proper system of cost accounting in the enterprise.  Young generation who are joining  the bandwagon of SME are focused towards markets, products and price. Cost control is highly required in order to scale up business .

A SME based in Rural India might get credit and grow his business but at a later time due to improper cost management might end up with slow growth and might have to close down business.

Owners should look at expenditure on establishing costing system as investment which yields returns over a long period of time. Having a good system of cost accounting is not a statutory pre-requisite for a small company.

Indian companies who have galloped their operations from small scale to large scale are the ones who concentrated their effort on monitoring their financial performance from time to time.

Modern manufacturing systems demand modern costing systems.

Rising raw material prices can be managed by sales mix of products manufactured and sold without affecting the business revenue. SMEs should adopt techniques like Activity Based Costing for overhead cost allocation and customer profitability management, Target Costing etc.

Cost Audit and cost records help the SME management to understand the price and cost patters. The next step is towards bringing a cultural change for cost consciousness is creating awareness about cost control among employees. Training managers to deal with cost data helps them in creating the right outlook.

Sometimes the owners fail to perceive an operational issue but the shop floor workers might have a better understanding of the problem at hand. A culture of cost consciousness can resolve such matters in timely manner and avoid undue complexities leading to drain in financial resources.

Those SME who are already in the operation beyond decade have their product life cycle changed  after approximately every 4 years and hence  there is possibility for implementing vital concepts of value engineering to improve the value and reduce the cost. Management accounting practices such as budgeting for controlling cost, profit and sales budgeting and target costing have proved to be beneficial for the SME.

Improper costing and pricing of products have become detrimental for the growth of the SME segment. Over and above in the global map Indian SME needs to price their products in such a way that penetration into exporting countries grows. This pricing can be termed as penetration pricing. SME needs the expertise of cost accountants under the cost audit to measure the price and design the penetration pricing.  

Now a question might come up that SME cannot afford cost audit and cost record related compliance aspect. Well Indian SME can afford the same since most of the work can be outsourced and will be  managed by the practicing cost accountants who based on certain fee will take care the entire part.Remove the threshold limits of turnover and reduce the same so that most of the SME comes under cost audit ambit.

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