K'no'w Risk! To the people who are working in multi-national companies or those who are planning to have a new business venture! Let me tell you what I understood from my experience - The importance of USP, Marketing, Cash flows, Psychology of the employees and the implementation of internal controls in an organization. The key factor in starting and running a successful business is always it’s planning and before thinking about a startup (if it is...), we should admit the fact that the chances of finding something completely unique are slim now a days. If there is something we do especially well, look into a way to utilize it! Competition is healthy and good for the economy but just make sure that the market isn't already flooded with it. Our best bet is to start a business where we can provide a better service than our competitors. For this, it's essential to have a USP -unique selling point- which is our main weapon in gaining the market share. It can be a price, product or service, but once we choose it, always stick to it and develop the USP to get noticed. Marketing is the other important aspect of any business. Some startup/small scale business owners have a misconception that these marketing techniques and approaches are applicable only to large scale organizations. All type of ventures can/must conduct their market research to find out their target markets and should analyze them before making any move. Other crucial part is our ability to manage the cash flow! Cash and profit are two different things and they are from different sources. Please don't mix them up. Cash flow is the day to day income and outcome of a business while profit is the overall objective of an organization (after effect). Some organizations may not perform well, and so they won't be able to generate good profits but still they survive, because they can manage their cash flow while some having great profits fail in the long run just because of their poor cash management.! DON’T BE A RISK TAKER, BE A ‘CALCULATED’ RISK TAKER Another big bet is the psychology of our employees. It does have a great impact in the overall performance of an organization. Employees- who are the real assets, are always meant to take the responsibility of their work and should strictly adhere to their work ethics. There is a difference in thought process between those who migrate to Middle East, and to Europe/US/Australia/Canada etc. for work. Around 60 - 70% of those who are relocating to Middle East will be having only one major aim - Make as much money as possible and then settle back to the home country at the earliest, while those who opt other continents would be thinking of settling down there itself. Literally, this thought difference do seriously affect their work ethics and their commitments towards the work place. The management should make sure that it’s not always the degrees from Harvard or any other Ivy leagues that matters the most, but it’s the proper implementation of internal controls that determines the performance, credibility and existence of the companies. A weak internal control is always a threat to the overall performance and there, the internal control mechanism should be restructured and implemented. Let’s have a look at those controls in two major cost centers – Admin & Finance.! (Purely based on my experience in internal/external audits and working in finance dept.) ADMIN DEPT. • Can be considered as a carriage department since it acts as an interlink with the other departments and also helps the other depts. to function with ease. • One of the depts. where proper internal control should be implemented. If the organization is large, admin will be generally under the control of Operational Manager or else it will be under the supervision of HR management. • Stationary, pantry purchase, accommodation, travel, utility updates, managing office equipment’s, etc. are some of the major admin functions. • In short, Admin is directly responsible for maintaining a pleasant working environment. • Stationary purchase request form should be sent to all departments and the requisition should be approved by the respective department heads. • Purchase requests should be based on the previous expenditure records. Proper anticipation should be there while ordering items. For ex: If a company is using three A4 bundles a week, its ok to order a maxim of 14 bundles a month. Ordering more than it will affect the cash flow although papers are not under perishable items. • Before making any purchase requests, it’s always better to have a look at the allotted budget or else finance team will reject the request. • If there is no budget and if the purchase request is something urgent, there should be an add on to the allotted budget and should be approved by the higher management. The same should be updated in the budget file also. If there is a proper internal control in the department, the chance of this add on will be only less than 20%. • Once the advance is being released by the finance dept., admin can do the requested purchase. All advances should be closed within 2 working days after purchase. The approvals (as per Delegation of Authority Matrix) is mandatory for all purchases. • Verbal and WhatsApp approvals should not be considered. • If the approvals are through mails (pre-approvals on advances/approvals on expenses), the entire amount should be mentioned in the mail body. Approver should be able to see the amount requesting or spend. For ex: ‘Dear Mr. Allan... Please find the attached file and approve.’ - This cannot be considered. • If it’s an expense approval, detailed list of purchases/expenses should be in the mail body seeking approvals. • If the admin department is maintaining a petty cash, it’s always better to close the cash with finance once in 10 days. This will help the finance in their book closing activities and the admin dept. can also be in a tension/confusion free state. • Petty cash balance carry forwarding should be strictly avoided. It’s always better to close the petty cash, deposit back/give back the balance amount and if needed, a new request can be made at that time. • All asset purchases should be approved by the higher management. Generally, assets should not be purchased from petty cash. • All business travel settlements should be made in a travel excel voucher listing the main categories of expenses and the travellers are requested to fill in the details of expenses they have incurred. • All travel settlements should be submitted along with the ‘original’ supporting documents within 3 working days after the travel. • Personal expenses/liquor expenses (unless its pre-approved by the management) should not be considered as business travel expense. • Never ever use personal credit cards/debit cards for the purchases and also don’t allow employees to use it for official purposes unless and otherwise it’s approved by the management. • Housekeeping and pest control activities in the office as well as in staff accommodation premises should be done on regular intervals. Health and safety should be a motto of the admin dept. • While renewing the office/accommodation contracts, always try to negotiate and get the best price. Even though post-dated cheques are submitted, there are chances to get a good discount through negotiation. • Make sure that the employees are strictly adhering to accommodation policies. Do’s and don’ts should be strictly monitored. It’s better to have a mail group/ WhatsApp group with those employees in the accommodation to have a better communication. • Do regular spot checks in accommodation and communicate the findings with the respective employees and with the management. • Make sure that all office safety equipments viz fire extinguishers, alarms etc. are updated and is in functional mode. • Vehicle service details, kilometre logs, insurance details and registrations should be updated and renewed on time. • A separate file should be kept and updated for the vehicle accidents, recoveries and insurance claims. • Always have a keen observation on market and the suppliers. Have an update on the prices of all frequent purchases. Try to be friendly with all core suppliers. (if the stationary/pantry purchase is through vendors) • Always keep an updated file of purchases, travel settlements, accommodation expenses and utility payments. • Monitor the telephone bills. All personal calls should be deducted after getting the consent from the employee and the approval from his reporting manager. • Expense comparison based on YTD, PYTD & MTD should be updated on a monthly base to suggest for cost control measures and to see the effects on steps taken for cost control. • Internal auditors/management may ask for any supporting’s ranging from a day before to 3 years back. So always be cautious in filing documents. • Keep a scanned copy/photocopy of all settlements/bills submitted to the finance department for better internal control. • Always try to get printed invoices/bills, especially fuel bills. Fuel bills should have the vehicle number, date, time, litres and amount printed on it. • There are chances where a printed invoice is not available. Some purchases in a local store might end up in hand written bills. In those cases, always make sure that the purchase description is in a readable format and it should have the date, name of the store, unit price, quantity. Total price, Net total, contact details, signature and the store seal. • If there are any printed bills which may fade over time, take a copy of those bills, acknowledge it and submit along with the originals. This will save us from a “what if?” situation from the auditors/management over the days. • Any purchase requests worth more than AED 3000 (this limit depends from company to company) should be accompanied by three quotations. This is mandatory and finance will be asking for these. Pantry and frequent stationary purchases are exempt from this. • There should be proper communication within the department (drivers, office boys) and with other departments, visitors & vendors. Staff pick up/ airport pick- ups & drops should be effectively communicated with the driver and the employees. There should not be a confusion in the timings, pick up/drop off locations/terminals. It’s better to have a chat group with the drivers for a better understanding. • Communication gap often seriously affect the credibility of the admin department and there should be proper internal control over this. FINANCE DEPT. One of the major departments where an effective internal control mechanism should be strictly implemented. The owners/shareholders are always keen to know about the financial reports being submitted by the external/statutory auditors and their reports directly depends on how well those internal control is implemented in finance. Often known as the ‘fighting’ department but Employees in this department either ends up as ‘warriors’ only. If an organization is running smoothly, generating profits, and is consistently maintaining the goodwill, all claps will go to the business development/operational teams while if there is an issue in cash flow or instability... Everyone will blame the finance dept. So, don’t expect an Oscar for the best performing department. It’s applicable to all finance departments across the world and it doesn’t matter whether the organization is a start-up or is in an established fortune 500 list. It’s literally a curse to this department but at the EOD, we all are under one family and they know what we are doing. 1. BUDGETING & FORECASTING. • Yes, both are different. Budgeting is the expectation of an organization what they want to achieve in a particular time frame/period. It can also be called as a cash flow and is literally more important than the actual cash that we have in our accounts while forecasting is analysing an organizations future position based on the previous finance data. • Budgeting activities should start by around Sept/Oct and should end before the new financial year starts. It’s the management who decides whether to have a Top-down budget or Bottom-up budget. • Revenue/Sales budget for the next financial year should be the first budget to be made because without future cash flows, expense budgets cannot be made. Revenue/Sales budget should be submitted by the Operations team. Finance should support them if they are requesting any sales/revenue figures of the current/previous years. • Each department should prepare its own budget and then all of them will be combined in the Master budget file. Make sure that all key elements are included like recruitments, appraisal, bonuses, capital expenditures etc. and should be included only after getting approvals from the management. • The master budget file should be reviewed thoroughly. Always double check the figures in all heads since a single decimal placed wrongly can create a huge mess. • Once the master file is crosschecked, it should be presented to the top management for approvals. • After approval, now the budget is official now. It acts as an effective tool for controlling and monitoring. Approved budget should be forwarded to all respective departments. (their part) Going forward, all the operations should strictly take place according to the approved official budget. 2. ACCOUNTS RECEIVABLE. • It’s the total amount which is yet to be collected as per the sales book. Literally known as the back bone of the organization. It’s an active part in the O2C process (order to cash) • A well-developed order management system should be in place. • When a credit application is received, don’t blindly accept it just because it will increase the customer base. Have a thorough study about the customer, their credibility and goodwill in the market. Only accept the application if the management is confident enough that the customer is having the potential to pay back the receivables within the credit period. Consider in future also. • It is must to have a contract with the customer. The terms and conditions should include the credit period, maximum allowed amount limit, fixed price or not, discounts if applicable like 5/15 Net 30 (5% discount if the payment is made within 15 days although they have credit period of 30 days), about the legal actions if not paid, order to delivery time frames, place of delivery etc. • Always get a guarantee check from the customer for the maximum allowed limit. Make sure to block the customer once they crosses the allowed limit. If the management approves, Yes- you can deliver over the limit. But it’s too risky! Direct cash purchases would be better in these scenarios. • When a sales enquiry is received, have a detailed consultation with the sales team and send the quotation at the earliest. Quotation should include date, reference number, product description, availability, unit price, quantity, total price, discount if any and the validity of quotation like 7 days from this day onwards, detailed payment terms etc. • If the customer accepts the quotation, always make sure that LPO is being send from their side. Once the LPO is received, cross check it with the quotation and other conditions. If everything is fine, then it’s a legal agreement to deliver the goods. Proceed further only if LPO is received. • Check with the customer’s warehouse and deliver the goods as per the LPO. Once it’s delivered, hand over the original invoice and delivery note to their purchasing dept. /store keeper. (in some companies, invoices are submitted directly to their finance dept. while only delivery note is submitted to the purchase dept./storekeeper) Always make sure to get a signed acknowledged copy of the invoice and the delivery note. • If there is an issue/damage with the goods delivered, always double check it and get the debit note from their side. A credit note should also be submitted to the customer. • Make sure that the AR department is collecting and filing the acknowledged invoice copy, delivery notes and debit notes if any. • At the month end send the statement of accounts (based on ageing) to all customers and ask them to confirm it. • Maintain a follow up team. They should have the contact details of their customers up to the management level. Always be polite while sending the reminders. Beware that the customers are the real cash inflows. • Once the payment is ready, customer should mail it or the follow up team will come to know about it. If it’s a cheque payment, collect it from the customers finance department. Before going to collect the payment, have a word with the AR dept. and confirm the outstanding amount to be received. It’s better to carry the SOA along with. • Give the receipt for the collected cheque. Don’t sign here and there. Make sure where you are signing. If there is any doubt, clarify it from their finance dept. and still if it exists, contact the AR department at the earliest. Mostly, late month end deliveries will be accounted by their finance dept. only on the next month. So the received amount will be in short of those invoices. Check the reconciliation provided by their finance. • If the payment is made through online transfer, get a copy of the bank transfer and also get the details against which all invoices, the payment has been made. • Once the payment details are received, do the customer reconciliations and close the pending receivable invoices with the amount received. • If even after regular follow ups, the payment is not received. Have a visit to the customers’ office and try to have a meeting with the higher officials. Tell them about depositing the guarantee cheque. • Still if its pending, take a final approval from the management and deposit the guarantee check. • Update the excel file when there is a credit sales and again update when the payment is received. Make sure the AR team is having a good working knowledge on excel like vlookup, pivot, data segregations, charts, filters etc. • Always maintain and update the customer’s database. • Have at least a single direct contact line for the customers to contact the AR dept. and vice versa. • Have a continuous monitoring of customers ageing analysis. • Pass the AR entries in the system at the time of credit sales, at the time of credit notes and also at the time of payment receipts. This is mandatory and all stages of sales should be strictly recorded in the system. • Don’t forget to record the guarantee cheques’. • File all documents – Quotation, Received LPO , Acknowledged Invoice and Delivery note copies, Debit & Credit notes, SOA, Customer SOA, Customer a/c reconciliation, Payment receipt copies - Cheque/Online transfer prints, Incoming payment prints based on the AR Invoice numbers. • The total of AR in the excel file/reports should match exactly with the AR in the ERP. • At the month end have a look at the DSO ratio (Daily sales outstanding). It shows the average days, an organization takes to collect the amount. If higher is the DSO, it means the organization is taking more days to collect its receivables. It will seriously affect the operational cash flows. • If it’s a service based industry, sales should be updated in excel on a daily basis. Cross check the daily sales report with the bills/credit card receipts submitted by the outlets. Receivable entries should be posted in the ERP on a daily basis (bulk single posting of revenue at the week/month end should not be allowed at any cost) • There will be only two types of sales- Cash and credit. All cash sales happened on day 1 should be deposited at the bank on day 2 itself. Purchases/petty cash reimbursements from daily cash sales should be strictly prohibited. The deposit amount should always match with the cash sales. Deposit slip should be collected daily and cross check the deposited amount in the bank statement with the DSR cash sales. • Talabat, Carriage, Deliveroo or any other third-party delivery sales should be recorded separately. Make sure that the service charge they are claiming is only as per the contract. • Cross check the bank merchant statement with the total credit card sales in the DSR. Credit sales minus bank commission should get credited on the next day. Post the credit sales entries also. If there is any shortage in the credit receivables, contact the bank at the earliest. Make sure that the allotted POS machines are used for the respective credit service providers. Visa should be closed and included in Visa itself and not in MasterCard. • In short, the receivable amount at the month end in the ERP should be exactly matching with the total sales in the DSR and the received amount in the ERP should also match with the total sales in the DSR except for the last day sales and bank commissions. The last day sales will be deposited only on the next month, day 1. • Always save the DSR received from the outlets. If it’s a hard copy file it on a daily basis because there a chance like some customers will come back with doubts. Mostly with the credit card issues. All POS machine merchant slips should be attached with the DSR. • Bank reconciliations should be done on a weekly basis. It’s better to do the reconciliations from last Thursday to this Wednesday on every Thursday afternoons. (considering Friday or/and Saturday is off). This weekly reconciliation helps a lot to clear some obvious issues and to close the books on time. • Always beware and cautious while in AR dept. Since Operational cash flow is directly related to the AR function, it’s always better to implement strict internal controls without any compromise. . 3. ACCOUNTS PAYABLE. • This is an another important constituent of Working Capital. It includes all those company’s payments (bills and invoices). It’s a part of the P2P process (Procure to pay) • It’s not as risky as the AR, but implementation of better internal controls in the AP process can contribute to better and effective working capital. • The whole process starts from opening the credit applications with all vendors. Always, try to purchase goods/services on credit. Cash purchases should be minimum and limited. Minimal cash dealings will yield better internal controls. • Negotiate the vendors for an extended credit period. Blindly ask them for 90 days. Who knows. Sometimes... we can land up in 60 days or at least 45 days. • Have a market research and make sure that the amount quoted is reasonable. Try to include the condition - fixed price for a specific period in the contract. • Try to get maximum credit limit. This one is very important. For ex: We are expected to purchase from M/s.ABC Ltd for around AED 25k/month and the maximum allowed credit period is 30 days. If we manage to get a credit limit of 35k/month, we can have the purchase for around 45 days and since we haven’t exceeded the limit and the ageing is only less than 45 days (15 days more from the allowed credit period) the chance of blocking our account is nearly nil. For the first time. have the payment ready exactly after 30 days and do wait for the purchase to hit till 35k. If anything wrong happens in between, release the payment immediately and unblock the account. • Try your best not to give any guarantee cheques. • If you are left with no other option, give the guarantee cheque but always make sure to acknowledge the cheque copy from their higher official and also collect the filled in and signed form that says, they have collected the guarantee cheque for this much amount. File it in the Guarantee Cheque folder and keep it in the safe locker. • While selecting a vendor, it’s not only the price that matters. Credibility of the vendor, their supply source, quality, networks, shipping/storage etc. all matters. • Try to get net discount if the payment is made within the credit period. Like 10/15 Net 45 – which means, 10% discount on value if the payment is made within 15 days although the credit period is 45 days. Get this in contract if they agree to this. • Negotiate with the vendors frequently. like once in 4 or 5 months. Tell them, an another vendor is ready to deliver by this price. Just try. Sometime they would reduce the price. • If you really come up with an another vendor who can deliver the same quality with reduced price, just inform the existing vendor about this and the price change. If they can reduce a bit more than the one offered by the new vendor, there is no need to change the vendors. The vendor will try their best to hold their customers. • Should have an updated file of all vendors. Name 1, Name 2, their contact numbers, email id’s, office address, higher official name with contact number and email id should be included. • Should have a single direct line to contact the vendors and vice versa. • Always maintain a good and healthy relationship with vendors. Even though if the items are not available in the market, it will reach your warehouse if you are having a good relationship with them. Never ever take any supplier for granted. • The whole purchasing process starts from sending the requisitions to the vendors. • As the result, the vendors will send back the quotations. If the value of the purchase is more than 3000 AED (amount differs from company to company) there must be three quotations. Regular vendors with contracts are usually exempt from this. • Appropriate quotations are selected based on the quality of materials, unit price, mode of delivery, time required for delivery, service costs, credit period, credibility of the vendor and the payment terms. • Once a quotation is fixed, the purchase dept. will send the LPO to the concerned vendor. If it gets accepted, then it’s valid like a contract with the vendor to deliver the goods as per the terms and conditions in the LPO. • An LPO should contain the quotation reference number, company name, vendor name, contact number product description, date, unit price, quantity, total price, discount, net total, shipping method if any, delivery place, date needed, credit period, payment terms and should be signed off by the purchase dept. along with the company seal. • Vendor should deliver the items requested and the warehouse/store keeper receives the item along with the copy of a delivery note. • Either they should submit the original invoice also to the warehouse or they will submit the invoice to the finance dept. • The warehouse will update the GRPO in the ERP system and it will remain open till the AP team closes the invoice. • If the invoice is not submitted directly to the finance department, purchase dept. should forward the invoice along with the delivery note and the LPO to the finance department on a regular basis. All the invoices received on a day should reach the AP team before the next EOD. • AP team should do the 3 way matching process, which is one of the most important internal control in the AP function. LPO should be send and updated in the system by the purchase officer, Goods/Items should be received and updated in the ERP by the warehouse/storekeeper and the original invoice should be crosschecked and recorded in the system by the AP team. • AP team should always cross check the LPO with the Delivery notes and the original invoice. The value of LPO should always be same or more than the invoice amount. Any issue/non arrival of goods should be clearly mentioned and the debit note should be issued at the earliest. Same should be notified to the vendor AR team to issue a credit note and should be updated in the system and SOA accordingly. • Always be cautious while posting the AP invoices. Crosscheck the dates in the LPO, Delivery note and in the Invoice. Match the documents with the vendor name, item description, unit price, quantity, discount, net total. Check the tax amount in the invoice. Make sure that the GRPO date in the ERP is exactly the same date when the delivery was made and accepted. If the 3-way matching is also fine, AP team should post the invoice (AP invoice) and have to close that open GRPO made by the warehouse/ storekeeper when they received the items & delivery note. If you have any doubt in the entry, just see the relationship map in the ERP and confirm. • If it’s not related to inventory, like cleaning and pest control service, maintenance etc. there will not be any GRPO since it’s not an item but there should be a ‘Job done’ paper certified by the respective delegated person allocated by the company at the time of the service. While posting the invoice, instead of selecting ‘item’, you have to select ‘service’. Type in the service description and post the entry. It will be a credit to the vendor and a debit to the related expense account. • At the month end, request all the vendors to send the SOA as on the month end date. Make sure that the AP team is receiving all the SOA’s on a regular basis. Create a rule in the outlook or Gmail and route all the SOAs to a new folder. • Once the books are closed, start making payments based on the SOA and the vendor ageing analysis. Always monitor the ageing analysis frequently. • Obviously there will be some vendors who are yet to send their SOA’s. Send a gentle reminder to the previous mail that you have send to them asking for the SOA. Always try to communicate with the vendors through mails, as it will be very easy to document. • All invoice bunch (LPO + Invoice + Delivery Note) for a particular vendor for that month, credit notes if any, print out of the vendor ledger of that month, SOA submitted by the vendor, Vendor reconciliation, outgoing payment print (draft) along with the prepared cheque (if it’s through cheque) should be forwarded to the AP team lead/manager for his/her scrutiny and approval. Then it goes to the AP head/FM, where he/she will approve the outgoing payments in the system based on the documents provided. • The prepared cheque along with the approved and signed outgoing payment should be forwarded to the CEO/Owner/Signing authority for the signatures in the cheque and in the outgoing payment. Once it’s being signed off by the AP head/FM, invoices and all other supporting documents need not be forwarded to the signing authority. But if it is, then the control will be much stronger. • Once it’s signed, inform the vendor that the payment is ready after making sure that the credit period allowed is over. Hand over the cheque to the collection executive, after checking his ID and he should acknowledge in the cheque copy and also in the outgoing payments. (his contact number also) So in the outgoing payment, we have the signatures of the AP team lead/manager, AP head/FM, signing authority and the received signature of the collection executive. If the executive is demanding the details of the amount, give him/her the invoice details. Before leaving, he/she will try to give you the new SOA which their AR dept. has given, but it’s better to tell him/her to send via mail. Don’t forget to get the receipt from the collection executive. If he/she is saying like... Oops...I forgot...It’s in the car. Am coming from home...etc. etc... Just Don’t release the payment until you get the receipt. • If the payment mode is through bank, after getting the signature of the signing authority in the outgoing payment, the person who is allowed or delegated to do the bank transfer should transfer the amount and the payment receipt should be shared with the AP team. AP will share the bank transfer receipt to the vendor with the details of all included invoices and should request them to close those invoices. • AP team should also do a manual internal reconciliation in the ERP and close all the invoices with the payment made. • Without vendor reconciliation (with their SOA and the GL), no payment for a single vendor should be processed. Keep this mandatory. Reconciliations are very important. • Without approvals, none of the outgoing payments should be reflected in the ERP. Should customize the ERP like that. Only after approval, the outgoing should hit the bank account in the ERP. This is also mandatory. • Bank reconciliation is a must and should be done weekly. It will help to avoid so many confusions and will also help to close the books on time. • File all the documents based on the AP numbers or based on the outgoing payment reference numbers. The payment bunch should include the receipt against the cheque collected, acknowledged copy of the cheque, signed outgoing payment, Signed reconciliation statement, vendor SOA, vendor GL and the invoices. • Make sure to file the documents once the cycle is done. Use the ERP system fully to its maximum. From the procurement to payment (P2P) everything can be done in the ERP, including the cheque printing of vendors. • Office rent, Warehouse rent, Accommodation rent, Outlet rent etc. will be all on post- dated cheques. Make sure that its debited from the bank statement and pass the entries without any fail on the same day itself. Update the PDC file accordingly. • All PDC’s should be entered into the system • If they are not keen (not mentioned in the contract) about the PDC dates, always put the PDC cheque date - Day 14 of every month. • It doesn’t matter whether the rental contract is for 2 years or 5 years. Try to negotiate and get a better rental amount after every year. Not with the middle men but try to speak with the owner. Just try... what if it happens.! The only bet is we have to collect the old PDC’s back and have to issue a new bunch of cheques but it doesn’t matter at all when there is a cost savings of some few thousands monthly. • All utility payments, telephone bills etc. should be collected from the admin dept., if they are the one who is providing it or else follow up for the bills/invoices. Get it approved and post it accordingly. Check for any employee personal call confirmation from admin/hr. If so, deduct it accordingly. • Be 100% sure about the expense allocation in each cost centre. All expenses should be backed up by cost centres. This will be most needed when we want to take an expense report based on the cost centres. Customize the ERP in such a way that no expense can be booked without hitting a cost centre. • The AP team is not there only for managing the payables. They can very effectively control the costs also. For that they can use the average, average moving methods etc. • AP- it seems to be confusing but if you have some hands on experience, its literally very interesting. This 3 way matching, invoice duplication, Amount verification, documents scrutiny etc. etc. can be done in minutes. I still remember, around 6 years back- I single handedly processed 98.04% of payments (720 invoices) in a turnaround time of 3 days with 0% error in a month. There was no credit period. I have to get the approvals in these 3 days and on the 4th day, the payment proof should reach the vendor. When you get experience, you will do better & better & better.! 4. PETTY CASH. • Consider, admin dept. is requesting a new petty cash with a float of AED 5000. • Analyse and make sure whether the admin dept. needs this much float. Check whether this float has an approval from the higher management/authority matrix. • Release the amount and document who is the responsible person for this float. • If there are approvals, release the amount and record it in the ERP. Create a new head, Petty Cash – Admin in the chart of accounts. • Clearly communicate (through mail) the permissible and non-permissible items that can be purchased from the petty cash and also the maximum limit per purchase, say AED 350. Never ever allow any asset purchases from the petty cash. • Petty cash amount should never be used for personal expenses. • Use petty cash vouchers for all petty cash transactions. Make sure all cash releases are made only with the pre- approvals. Update those disbursements in a petty cash log. The petty cash log should contain – SL No, Date, Particulars, Amount, Cumulative balance, Approved by: and Cost centre. • All petty cash should be closed on or before the last working day of the month. If the transactions are huge, it’s always better to close the petty cash once in 10 days as it will have adequate control over the cash and expenses. • Finance team should confirm the receipt of the petty cash log along with the petty cash vouchers and original supporting’s. Request the admin to send the soft copy of the cash log. • Make sure the finance is getting printed bills/invoices. Hand written bills can be accepted only if it adheres to certain conditions. (please refer to admin dept., where I have mentioned it in detail) • Finance should review the filled in cash log along with all original supporting’s. Have a detailed look at the supporting’s and crosscheck it with those fields in cash log and confirm the total expense and the balance to return. • If its fine, forward for approvals as per DOAM or clear it with the admin dept. at the earliest if there are any doubts. • Once its approved, request the admin dept. to deposit back the money. Never ever allow them to carry forward the petty cash balance. Whatever the balance is, it should be deposited back and the deposit slip should be submitted to the finance dept. The concept is, an outgoing should be closed with an incoming within a period. • Replenish the petty cash, get it confirmed through mail and record it in ERP. • Record the petty cash expenses in the ERP. It’s always better to make an AP Invoice for every single transaction (invoice/bill) although some comes under the same category. • Reconcile the released amount with the AP invoices booked + the balance deposited in the bank and close it. • Always make sure to maintain the actual petty cash balance in the ERP. • Make a summary of the petty cash released and the expenses incurred. (Petty cash release amount, its outgoing payment ref no:/cash voucher no, total expenses, AP ref nos., Balance amount, Balance deposited, Incoming Payment ref no.) • Attach this summary with the petty cash log submitted by the admin along with the petty cash vouchers, approvals, invoices, balance deposit slip and file it. • Have a spot check on all petty cashes once in a while and confirm the total expenses and balance cash in hand. • Always monitor the expenses incurring through the petty cash. 5. FIXED ASSETS. • Be sure enough to implement best internal control policies on fixed assets since these are having a big impact on the financial statements. • Organization should implement key controls over all the aspects of fixed assets viz – the approval to procure, during procurement, storage, depreciations, proceeds and in keeping the records. • Every organization has a specific set of capitalization as well as depreciation policies. It differs from organization to organization, but make sure to have one approved and documented. • Auditors are always keen about these fixed assets, fixed asset register and its depreciation. In mid-year/year end audits it’s a very significant area to the auditors. • The purchase dept. should make sure that before the procurement of any assets (as per the requisition of other depts.) the proper pre-approvals from the higher management are received and documented and always deal it through vendors please... • Make it clear whether the purchase will go under an expense head or is it a fixed asset. Different companies are having different capitalization policies. In some companies, purchases under AED 1000 are expensed it out while in some organizations, purchases above AED 1000 are considered as fixed asset. • Maintain an asset register and it should have an up to date records of the fixed assets in the organization. • All fixed assets should be safely stored and are good to use. It doesn’t really matter whether its directly related to the operations or not. • Make sure to put an identification number/code to all assets. It will be easy to recognize the assets with the asset register/list during the counts and audits. • It’s always better to have a good insurance cover over all assets especially for high value categories. • All fixed assets viz Land, buildings, plants and machineries, vehicles etc. whether it’s of high value or not, make sure that these all are in the name of the organization and not in the name of the management officials or other employees. • Only authorized persons should be dealing with the assets, both on or off during the office hours. Unauthorized usage for personal purposes should be prohibited. In charge depts. should take the responsibility of their assets. • Chances of assets getting lost, theft, ‘disappearance’, damaged etc. are to be treated as per the company policies and should be recorded in the asset register as well as in the ERP. • Annual physical verification of all assets and its updations are recommended but it’s always better to have the verification once in 6 months. • All fixed assets should be accounted on the ERP. Landing cost if any (transportation charges, customs, duties, taxes etc.) should be allocated to the concerned assets. • Make sure to get the original documents (Quotations, LPO, Delivery note, Invoice, Landing cost documents) and file it accordingly with the AP invoice and Outgoing payments made, in a separate Fixed Asset file. • Should have separate sub ledgers under the main GL- Fixed assets and it should be accounted accordingly. • Asset register and fixed asset GL in the ERP should match. Update both the register and the GL based on the physical verification/count. • Check the depreciation policy for each asset group and run the depreciation monthly without any fail. For ex: Some categories are having 20% flat straight line method. It differs from organization to organization and from country to country. Apply those rates. • Manually do the depreciation in a separate excel file and also update it in the asset register. • No matter what, the accumulated depreciation figures and the asset’s carry value in the GL should exactly match with the asset register at any point of time. • Like purchase and transfer, disposal of the fixed assets (as per the policy) should be also recorded in the ERP as well as in the asset register. 6. INVENTORY MANAGEMENT. • Can be literally classified as a high risk prone area but can be effectively managed if proper internal controls are implemented. • The warehouse should be located in a place where all suppliers and officials can easily access. • Always adhere to the regional laws/regulations and the warehouse should be secured properly with an in charge and surveillance cameras. • Make sure the warehouse is having enough space to accommodate the inventory and it should be arranged in an organized way based on the inventory types. • Make sure the food area/ cold storage area is always having 24/7 power supply. • Make sure the store is neat and tidy especially if its dealing with food materials. Regular pest controlling activities should be also done. • It’s better to maintain FIFO. This will serve extremely well in perishable goods. Apply this principle to non-perishable goods also. If the first in goods are always in the shelves, there are chances like outdated design in packaging, expiry etc and may end up in the category obsolete items/goods. • Set par levels for each/category of products. It’s the minimum level of quantity that should be maintained. Order and refill once it reaches the par level. The reordering should be based on the availability of items, inventory turnover ratios, availability of budget, storage capacity, type of items/goods, economic conditions, contingency planning etc. • Prioritize and stock the items based on the categories – High value items with low sales frequency, Moderate value products with moderate sales frequency and low value products with high sales frequency. • Schedule a time with a supplier to deliver the items. Delivery should happen only in the presence of Store keeper/ Asst. Store keeper. • All the items/goods delivered should match with the quantity in the delivery note. If not inform the delivery team, mention it in the delivery note and take a counter signature from them. Demand a new updated Invoice also. (if store is collecting the invoices) • Check for the quality. If it’s not as demanded, don’t receive. Return the goods and inform the supplier and the management at the earliest. • Any extra delivery over the LPO should never ever be accepted. • All GRPO’s should be updated in the system at the day of items/goods receipt. • All items/goods should have the respective inventory item codes in the ERP system also. If not please inform the authorized person to create new codes and the item details including price, unit of measurement etc. • If there is an update in the price, get an approval and inform the authorized person to update in the system. If the price difference is huge, investigate on it and check with other suppliers about the price (same brand) and if necessary, change the supplier. • Change in brand/change in supplier should be made only after pre-approvals as per the authority matrix. • If there are more than one warehouse, number it/code it and should be recognized in that numbers/codes. Implement efficient tracking systems. • Always have a look at the expiry dates. It’s better to maintain a file for it especially for food items if any. • Remove all those obsolete stocks from the warehouse. Check whether it can be sold out for lesser prices (after approvals) and if not, inform the management to write off. • All wastages/scraps/expired items should be tracked down separately. Take an approval, do the dump and record it in the ERP. If it’s not recorded, it will overstate it in the inventory and will create variance. • Periodic physical counting/spot checking of the items/goods should be done. ERP system count should match with the physical count. If there are any negative balance/variances, check out the reason for the variance and rectify it at the earliest. If not inform the management about this and start an investigation asap. • Store in charge is the responsible one for the store. Whatever happens, at the EOD, he is responsible. The warehouse must be locked and only authorized persons are allowed to be in. Urgent request handling during the off hours should have approvals. • Any ins and outs from the store should be with the consent of the store in charge. More the people are entering into the store without authorization, more is the chance of variances during the physical count or spot check. • Any transfers from the store should be back supported by the transfer sheets. It should be confirmed and signed by the store keeper and also by the one who is receiving it on the other end. • It’s the responsibility of store in charge to keep/document all the transfer sheets and all transfers should be updated in the system without any fail. • Purchase Department should always maintain a good relationship with vendors. Communication should be clear and crisp. If the relationship is smooth, vendors can really help to get those items which are not available in the market, extra requirements if any, urgent deliveries, compromise in MOQ etc. If the customers are God, treat suppliers as the God of Gods.! • Once in a while, try to negotiate with the suppliers for a better discount. Just try. • Make sure that all purchases are made through credit. Purchases from petty cash should be limited and if any purchases are made, it should be having the pre approvals also. • Make sure the LPO copies, Original Delivery Note, GRPO#, Original Invoices - If its collected by the purchase dept. should reach the AP department in the next day itself. Confirm and get a receipt of all those documents which are being sent to the Finance department. Document and file it. • For better month closing activities, control/schedule the deliveries and transfers on the last day of month. • Inventory master files, LPO files, Supplier details etc. Seals, stamps, letter heads etc. should be kept in a safe place where only the authorized persons have got its access. 7. MONTH END CLOSING. Make sure that: • The Cash receipts are all posted. The balance in the ERP should match with the total cash sales in the excel file. Sometimes the last day cash receipts will be deposited only on the next cycle. • The previous un deposited cash (last month) is already deposited, accounted and reconciled. • The Bank reconciliation is done. Review all outgoing payments made. Do the internal reconciliation in the system and if there are any variance, investigate and sort it out. • The Interest receivables and other income (apart from sales) if any are deposited. • The Deferred revenue (liability) has been recorded and reconciled. Check and sort out the reason for the variance if any. • The Investment statements are received (if any) and account the realized and unrealized gains or losses if any. • All AR invoices including the Credit notes are posted. • The AR receivables and ageing is matching with the ERP balance. • The updated AR ageing report is analysed and if there are any write offs, proceed to the higher management for approvals and update it in the ERP and in the ageing file. • All AP invoices (purchases) and debit memos are posted. • There are no open GRPO's in the ERP. If so, check this with the purchase department for the invoices and close it accordingly. • The items/goods received but not invoiced are recorded. (Non-PO items) • The AP postings are all done after the 3-way matching process. Report if there are any variance. • To get all SOA's from the vendors and the previous month’s discrepancies have been sorted out. • All key vendor ledgers are reconciled. • AP receivables and ageing are matching with the ERP balance. • All inventory purchases are entered into the system. The FIFO principle is followed while transferring the items/goods as LIFO is banned by the IFRS. Review the transfer sheets if needed. • Inventory physical count is done (in presence of a Finance team member) on the last day of month after all purchases and transfers have been recorded. • There are no variances in the stock after posting the inventory in the system. If there are any negative variances, check with the purchase dept./storekeeper and sort it out. If there are any unacceptable variances, escalate it to the higher management. • The wastages/expired/obsolete items are categorized and recorded in the system. • All utility bills have been updated in the file and posted in the ERP. • All petty cash expenses have been updated in the file and closed in the ERP. • All prepaid entries have been updated in the file and posted in the ERP. • All provision entries have been updated in the file and posted in the ERP. • All provisions posted on the previous month have been reversed with the actual expenses. (for monthly expense provision) • All PDC's have been updated in the file and posted in the ERP. Confirm it has been debited from bank. • All tax provisions have been updated in the file and posted in the ERP. • The VAT tax filing has been made (not later than 28th day of the month following the tax period) and has been recorded in the system. • All accrued income/expenses have been updated in the file and posted in the ERP. The reconciliation for previous accruals should be done. • EOSB, Leave Salary, Air ticket allowances, Bonus provisions has been updated in the file and posted in the system. (if finance is dealing with the payroll) • All additions/deductions have been made, updated in the payroll file and is recorded in the ERP. (if finance is dealing with the payroll) • All intercompany transactions have been updated, reconciled and posted in the ERP. (after getting the invoices) • All advances have been updated in the file and posted in the ERP. Follow up for pending employee travel advances etc. • All the fixed asset acquisitions have been updated in the asset register. • All the additions, disposals, proceeds are recorded in the system (as per the fixed asset policy) and confirm the asset classifications are accurate. • Run depreciation in the system and calculate the amortization. Check for any variances if any, and the asset register figures should always match with the ERP balance. • The loan accounts are updated and reconciled. • The expenses are entered into the correct ledgers and sub ledgers. Deactivate the ledgers which are not in use. Don’t delete as it may have some balances. • The main GL's are being scrutinized and reconciled. • All asset/expense/loss/drawing GL's should be having a debit balance and all liability/revenue/equity should be having a credit balance. Check if not, and sort it out if needed. • Finally, don’t leave everything for the last day of the month. Please be consistent. 8. FINANCIAL REPORTS • It doesn’t matter whether you are working 24/7 or your team is highly efficient to face any challenging situations, if you are unable to deliver the financial reports on time, all your work, dedication and commitments would be in vain. Reports – these are the end core data, based on which the management has to take key decisions on the overall operating efficiency of the organization. • Extract the TB and have a scrutiny on all ledgers. Compare it with the previous month TB. If there are any ledgers with zero balance for that month or have doubts on the balances, go to those ledgers, investigate and then rectify it if needed. If there are any entries to be posted, post it after reviewing the documents. There would be some ledgers where the YTD figures are exactly the same as of the MTD figures. Check and see whether it can be allotted to the prepaid. • Pull out the income statement based on the cost centres and review the expense accounts. If you find any variance, check it, confirm and then rectify it in the ledgers. • Once we make sure that all entries are posted, actually we don’t have much things to do on the statements. Just prepare it. Extract the TB again from the system. • Most of the financial reports are now available from ERP in a single click. If not, create reports manually based on the extracted statements. • Prepare: 1. Income Statement 2. Balance Sheet 3. Cash flow 4. Consolidated revenue/sales report 5. Accounts receivable report with AR ageing 6. Budget Vs Actual report (with variance) 7. Accounts payable report with AP ageing and 8. Bank reconciliation reports. • It’s always better to include YTD, PYTD, and PMTD figures and ratios like DSO, AR/AP turnover, operating expense ratio, ROA, ROE, Inventory turnover ratios etc.in the statements. This will help the management to analyse the performance happening over the days. • Prepare YTD income statement and it should match with the till date (month end) TB figures. • Submit all the statements/required reports to the higher management for their review and approvals. Any changes or modifications on the reports/GL’s should be made only with the approval of the higher management. (document the communication) • Once the review is complete and the statements are finalized, close the books and the period. No entry/adjustments should be made ever. The TB figures in the reports for the month of June 2019 should always match with the same month ERP figures, even after 5 years. 9. AUDIT PREPERATIONS. Literally, most of the organizations would be having two types of audits. Internal or operation audit and external or financial audit. It’s also known as the statutory audit. Internal audits are done to check the effectiveness of internal control mechanism implemented in the organization as per the policy and procedures. It is performed by the employees of the organization itself and they report to an audit committee in the directorial board. The scope of Internal Audit is very wide. They can peep into any department, any transactions and can analyse or scrutinize any matters which affect the achievements of organizational objectives. Every medium to large scale organizations should have an internal audit/control department to check how well those internal controls are implemented and followed. While statutory audits often involve the examination of the truth and fairness of the financial statements of an organization. They are somewhat restricted to those matters which affect the financial statements. Apart from a year end statutory audit, some organizations may prefer a mid-year audit also. Both mid-year and year end statutory audits are done by an external auditor/audit team who/which is independent of the organization. It’s based on their reports; the owners and shareholders analyse the organizational performance and control mechanisms. Both internal and external audit teams’ plan their activities based on the risk involved in the business. Year-end external audits often happen on the Jan/Feb of the next year. The finance dept. should be aware of the audit dates and it’s always better to prepare some core datas before the audit commence. • Start with the balance confirmation. Have a close look at the signed financial statements of the previous year and confirm that all TB balances are matching with the ERP. All closing balances should be exactly the same opening for this year also. • Both AR and AP team should take the balance confirmation from some high value customers/vendors (10 no’s) as on Dec 31. Make sure the balance confirmation is having the customers/vendors signature, date and seal. Keep it safe for our controls. The auditor may use it or they will randomly select some customers/vendors to confirm the balance and usually they deal it directly but we need to prepare the confirmations for them. • Double check all the year-end schedule worksheets, its formulas, totals etc. · Reverse all provisions that are passed in the year if the actuals didn’t happen. • Provisions like Salary Bonus, EOSB, ticket allowances etc. should be matched with the actuals and the adjustment entries should be passed. • Have a look at the prepaid entries. If possible, while posting the prepaid, it’s always better to close it by year end. The prepaid file should match with the TB balance in the ERP. • The PDC file should be updated and it should match with the cheque numbers. It’s very important to have a file for all cancelled cheques. Make sure the physical cheques are matching with the actual cheque numbers and excel file. • Confirm the guarantee cheques. Make sure all guarantee cheques are physically available along with the signed documents and the balances are matching in TB. • Review all high value/important journal entries that have been passed in the system. Make a separate file for it with all supporting’s and documents. • Make sure all loans and advances are updated in the file and is matching with the TB balance. • Concentrate more on the last quarter of the year and review all major transactions and adjustments made – especially advances and its settlements. • All sales/revenue in the excel for the whole year is matching with the year-end TB balance. Make sure all the sales documents are organized, arranged and filed on a monthly basis. Check and double confirm with the last 5 day’s sales for the year. • Take a balance confirmation from all petty cash holders and match it with TB. • Have a close look at the asset register. This is a definite area for the auditors. Make sure the balances in the register is matching with the TB. Keep all the original documents of asset additions/disposals and proceeds on a separate file. Apart from the register, maintain an excel file for these assets based on the categories. • All AR/AP ageing on the year end should match with the TB figures. • All tax returns (VAT etc.) are paid and is matching with the TB. Keep a separate file to maintain all original documents of return filings. • Till date (month end) salary disbursements should match with the TB figures. Maintain an excel file for that. Check for the confidentiality and remove the fields like employee name, job role etc. after getting an approval from the higher management. • Make sure all signed contracts for the year are being filed. It includes, credit application forms, contracts with the vendors, AMC’s etc. • Cross check the excel file of utility/telephone expenses with the balances in the TB. • Prior inform the purchase dept. /storekeeper to be cautious about all inventory/transfers for the last month. Communicate with them to have a mid-month physical count also. • While doing the last month inventory, a finance team member should be there to cross check the items/goods and instead of doing a random check, it’s better to be with them and confirm the full inventory counts. • Have a detailed documentation of the delegation of the authority matrix – who can approve what and up to what limit. • Approved budget for the year, actuals and the variances. • Have a close look and confirm the year end bank reconciliations. Confirm the year- end balance with the bank statements. The bank confirmations regarding the balances are been taken by the auditor/audit team. • Have a detailed look at the other income and the write offs during the year. The worksheet should match with the TB balance. Make sure to have the supporting documents and approvals for the write offs. • Maintain a separate excel file for expenses like legal fees, corporation fees, license renewal fees, management fees etc. and it should match with the TB. • Review all the advances released (vendor and employees). Make sure it’s recorded in the system and reconciles with the receipts. Check out the advance accounts in the last quarter. Review those advances that are closed and make sure all supporting’s and approvals are attached. • Once the audit starts, have a clear communication with them and any documents submitted to them should be only with the approvals from the higher management. • All communications with the auditors should be documented. As I told you in the beginning, these all are based on my experience. I know, there would be more control procedures that can be included. Some controls can be implemented only after knowing the nature and the risk involved in the business. Thank you for your read. 😊 Aravind Sreevalsan Nair. email@example.com May 02,2021.