The fraud triangle

Malaysia Company Still doesn’t understand compliance culture

Malaysia leaders and company need to start drafting compliance policy and implement controls in globalization world. We are strongly lacking in export control where we don’t protect information. Employees in Malaysia organization bring in and out company information and transmit this information without any controls.

Another area where government are company is lacking they don’t protect their employee’s information. I bet if I call any Malaysia company today and pretend as government officer and request for an information on their staff they will not think twice to provide this information.

My advice – Company need to start implement controls and compliance culture starting by protecting the company information and their employee’s.

Why Japanese Yen is Stronger….

1) Because government bailout or government spending is lower.
2) Tokyo is still in inflation – demand is still higher then supply.
3) Interest rate on borrowing is still higher.

5 index when recession is over….

5 index when recession is over….

1) Positive and increase in GDP
2) Higher consumer price index
3) Improve in export and import sector
4) Inflation is positive
5) Un-employment is higher

Why all this - it is simple economic when demand is higher then supply – people push the supply higher (1,2,3&4) or when they reduce the demand (5).

Why there is big salary gap between manager and junior officer in Malaysia?

The real main reason why manager salary is significantly different is because they are able to lead and push junior officer to growth.

In Malaysia majority of the junior officer are not up to the par. Their understanding on responsibility is only day-to-day task and does not focus on process improvement.

In first world country junior officer are very matured and they are able to think. They are able to identify problem and resolve the issue by engaging the team to brainstorm the solution.

But manager need to be careful not all-junior office are lacking in this skill, they need to identify them and growth quickly. Otherwise this employee will leave Malaysia to oversea, this is why Malaysia is having many brain drain.

My advice is for junior officer to come up of their comfort zone and take the lead in a problem-solving phase. It is ok to make a mistake and learn from it rather then sitting on the issue and doing nothing.

Productivity Project examples..

How does finance track this new strategy…

Balancing Inventory, Product & Service & Cost

Lack of Malaysian Leadership

Malaysian leaders are very good in technical in what they have to do. But they are lacking in few important skills:-
1) Leadership – Malaysia leader fail to guide his employee to another level.
2) Lack of soft skill such as communication, inter personal skills and presentation.
3) They like to handle and solve most of the issue by themselves. They fail to delegate responsibility to their staff.
4) The biggest of all they fail to understand the big picture. Most of the time they get lost in details and do not know how to connect all the point to the big picture.

My take – In most Malaysia Companies I visit I always hear Boss not around to approve. I just don’t understand if Boss has to sign off for all the issue then I guess when Boss is on vacation all the staff also can be on holiday.

You should create a process and build a trust culture, and employees should embrace integrity.

Malaysia Incentive for Foreign Investment

Do you think Malaysia give enough incentive to encourage FDI. I don’t think so why:-
- Malaysia Tax rate is higher then other country in region.

- The incentive department does not overseas the overall incentive. Example yes incentive was given but if the company does not enjoy for the period given it should extend for future.

- All the stimulation package is given to Malaysia holding companies – In current market environment MNC is also struggling to source for fund for future investment and growth.
Other country in region & around the world offer better incentive. For example Rolls Royce was given direct funding for setting up plant in Singapore.

- Malaysia government protect high management to be local staff – I have nothing against local talent. But if we don’t have the right industry expert then we need to make exception to this.

My take – Malaysia government need to understand Malaysia is small country and MNC Company will not think twice to pull out their investment if the government does not help them to fund future investment.

MNC Companies only pays net tax less then 10% of total income, and with Malaysia tax rate of 26% this works disadvantage for them.

Government should reduce tax rate for Technology Company in MNC and with this tax saving MNC companies will investment in future growth.

Malaysia Depend on Manufacturing Sector

When the world when into rescission the demand on electronic sectors also drop. The best way for people to safe money is stop spending on asset property. Employment income does not have a balance sheet to book property as long term asset and depreciate this their P&L is based on cash expenditure.

Now is the best time for Malaysia to diversify into service sector. Malaysia should focus more on back office operation. Vietnam and Philippines are growing their operation; Malaysia should stay focus and continue to grow this sector.

Another sector that Malaysia should focus is stopping exporting crude oil, rubber and palm oil. Malaysia should continue focus into turning these resources into finish product.

Food technology and consumer product is another sector that Malaysia should focus. Nestle and P&G is not a Malaysia company, but allot of this product is manufactured in Malaysia. We should bring up Malaysia Company to focus on this industry.

Finally allot of tax incentive is only given to Manufacturing sector because of the investment dollar and high number of employment. Maybe it was the right thing to do back then but now this incentive should be given to technology and service sector.

Outsourcing

There is 3 main type of outsourcing IT, Finance and Help Desk. Cyberjaya at Malaysia was originally set up for research and development. But with lack of people skill and technology the Cyberjaya project turn in outsourcing activity.

Malaysia has been recognised a major player in finance and help desk back office support. Malaysia has capability in finance skills because of our education are based on UK Standard.

Usage of English has helped us to maintain the help desk support better then India and South America.

But in IT sector Malaysia continue to struggle. Why…

My take – This is because IT education and training are not inline with the world standard. The core to IT is programming and development where Malaysia education is lacking.

Difference between first world and 3rd world countries.

If you observe closely first world countries depends on borrowing or has cash flow inhouse. Where else 3rd world countries depends on foreign direct investment. This is because 3 world country bonds rating is lower.

Currently with recession 3rd world countries will face more difficulties to overcome it. But when the recession is over the inflation rate of 3rd world countries compared to the first world countries. This is because there is no excess cash flow in the 3rd world countries.

The link between BCG matrix and balance sheet

The BCG matrix categories a business into this 4 class Star, Cash Cow, Dog, and Question Mark. But what is the link to their balance sheet.

For Question Mark – You will see the business is investing more into their asset to generate profit and also see their P&L will have high interest expenses. This will be business like Air Asia that looking for growth.

For Cash Cow – You will see their asset remain stable but their liability reduce year by year. This is because they use the cash to generate better profit.

Star – You will see they have strong liquidity and they have right balance between fixed asset and current asset. And the AR and Inventory turns will be high.

Dog – I just don’t need to say anything.

Right ratio between fixed and variables cost

What is the right balance between fixed cost and variables cost? My take on this, there is no right balance but it depends on what stage the organization is in. Typically during start up, the business would have higher fixed cost but when the business grow their capacity and capture more market share the fixed cost ratio reduce.

This reduction will also have clear direction on the business profitability. When fixed cost ratio reduces business use their current asset more to generate income.

Difference between Internal and External Audit

External auditors focus more on presentation of financial statement. Where else internal auditors focus more on controllership from account reconciliation to internal controls process. The problem with external auditors they are not really independent. I’m saying this because external auditors does not quality an account for missing backup, close open item on timely manner and other controllership issue.

I belief this is because, of their appointment as auditors on yearly basis and their services is paid by the company.

My opinion – There should be an independent body to oversee these controls like SEC in US but this is only applicable for listed companies. And in Malaysia I don’t see Bursa taking the lead in account policy and controllership.

Small and medium companies do not have the fund to set up their own Internal Audit committee and they are not regulated. I would suggest the tax department provide some kind of internal audit support for SME.

What is Stimulation Package is about….

Most of the government in various country has come up with stimulation package but allot of this money is channeled through the same government link companies(GLC). This is the same government that has help the GLC before with tax incentive and other incentive. This is why we as public do not see the cash being flow. I belief the reason why they do this is to protect employment. Government looks at 3 main indexes – employment, GDP where the employee spend back and inflation where I don’t see the logic and how transparent this index is.

I really hope too see government change the direction of the stimulation package offering to public through reduce inflation and reduce the cost of ownership of public long term investment like house and cars.

I would like to suggest that government should give 1 house installment as tax relief to the public.

Finance to understand Contract

Finance manager should spend a good amount of time on understanding the contractual obligation. Don’t take thing for granted that previous finance manager would have reviewed through all the language behind the contract. You would be surprise to see the amount of issues you find through deeper.

Here are few contract you need to make sure you request frequently:-
- Building lease or rental.
- Transportation, Insurance and delivery term – this will impact revenue rec.
- Customer sales contract – this will impact operating margin

My advice – Read the contract together with finance reporting standard this goes hand in hand to make sure the accounting of this contract is properly accounted.

Mixing Finance with IT

Will there be one day where we don’t need finance managers and financial controller. The finance organization has come long way to reduce manual journal entry and process most of the transaction using IT system. But still most of the company need accountant to close their monthly, quarterly and yearly accounts.

Frequent changes in financial standard makes controller role more secured.

But with implementation of IT, finance department has taken addition responsibility on providing real time information related to operation in financial dollars. This has transform finance department to provide financial information before closing to operation team and reduce surprises.

My advice – Controller need to learn and understand company financial system and be smart to generate dashboards and matrix to reduce controllership risk.

5 ways for employee to focus during recession:-

• Stop working overtime because employee see you not productive and it addition cost for the business
• Stay focus and complete the given task on time
• Stop buying depreciating property
• Stop using credit cards
• Go back home on time and spend more time at home

10 Thing on how to handle during this recession time:-

• Focus on collection and not sales
• Buy inventory on consignment even if it cost more.
• Pay employees on-time because employees will work harder
• Reduce entertainment expenses with customers
• Help customer to reduce cost of ownership
• Get higher payment term with vendor even if it cost more
• If you are in service industries focus on turn around time
• Don’t hire any consultant ask your employees for better ideas
• Focus on tax planning to free up cash flow
• Lastly be the first to buy when things start improving

Working with Customer

When I attend to my performance evaluation this year I received a high score due to my relationship working with customer. Yes this is right finance manager and CEO need to spend more time with their customer. We are the best person to advice how to have a win-win deal without compromising our margin and still reduce customer cost of ownership. But this require allot of strength in financial and operation knowledge.

But allot of times CEO is also the first enemy of the customer. This is because we control their customer account and have the final say on their credit.

My advice: Keep professional relationship and times take tough action when customer default payment.

What share holders look for

Council for Customer Account

Bad Debs Impact to BS, P&L and Cash Flow

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• This is not rocket science, it pretty simple when account receivables at risk on balance sheet you need to provide provision for bad debts in P&L, which will reduce your profit.
• With this two impact your cash flow will also suffer with lower collection
• But there is few thing you should consider in order to minimize the impact on net income:-
  
  - The methodology should be consistent
  - Provision for bad debs should be booked quarterly, this is because you don’t want your balance sheet to change drastically when you book monthly. And booking at year-end is too late to analysis.
  - Finally the reserve should be held in general ledger and not at sub-ledger because customer should not be aware of this reserve on their account.
  
  

Operation Excellence Impact to Cash Flow

• Cash flow is more important then operation margin for long-term survival of organization
• The major cash flow funding for a business is working capital
• Shareholders investment or long-term bank borrowing is used to pay expenses and payables for inventory
• Then sales and collection on receivables is an important cycle to a working capital self-funding
• As a CFO’s, we need to make sure receivables are in our control. Dashboard and turns are important measurements that CFO’s needs to look at and delivery monthly
• Through operational excellence in six sigma, lean, TAT, productivity saving organization can free up working capital
• This chart is example in a supply chain business, reduce waste and focus on value process enhanced customer value and reduce cash flow requirement

Working capital funding

Allot of time company look for external borrowing to fund working capital. But with current economic this will be a challenge. Company need to raise cash organically to fund their working capital. This require allot of skills in holding customer accountable to AR Term, Increase Inventory Turn and challenging your vendor for better credit term.

My advice – If you are in service sector make sure you delivery and bill or service faster. This will reduce the turn around time and free up working capital.

Plant and Equipment

Investment in P&E is important for future growth and NPI. But it is very important to manage this investment carefully. This is because you need to spend cash before you see full benefit from this investment.

My advice – Rule of thumb your investment $ should equal to depreciation cost, by this your balance sheet will be inline with profit and statement.

Working with Government Tax Department

Any business needs to file tax on yearly basis. Tax is becoming more complicated area where finance manager need to focus. Also it very challenging to match all the requirement from tax department. In very government organization tax department always has additional resources to conduct audit and crosscheck all filling. We need to work smart to match tax department resources, queries and filling.

My suggestion – If you are small company call your tax agent on how to implement a month process for tax requirement. For large organization get a tax expert in the country and have them to do your filling.

Warranty and Shop Loss

All accounting rule only define a standard for warranty and shop loss accruals. Accruals can be made when the probability is high and can estimate the dollar amount. But I feel the standard should define that business should have a process to close a warranty or shop loss claims. It should start from raising a claim to closing and finding corrective action. It also should define claims should be closed before the consideration is paid to customer.

Identify Key Project

CEO and HQ define the goals and objective for the business. We as finance manager and CFO usually will plan another goal and objective inline with CEO and HQ goals. I feel it is waste of time for us to prepare another goal and objective, in state we should identify key project that will help us to accomplish the goals and objective. Another key point to note is we need to set numerical target to achieve the goals and objective. Example improve cash flow will be HQ goal, we should set inventory target for 1Q is $MM and past due balance should be less then $MM.

Employee Evaluation

Allot of organization and company ask their manager to evaluate their employee performance and contribution on the past year. But I don’t agree with method. I feel the employee need to evaluate his/her performance first then discuss with their manager. With this method employee would be inline with the company goals and the manager expectation. Also allot of the time the manager and employee focus more on the strength, but the most important item should be development needs. Manager and employee need to be very detail and set project, training or plan on how the employee will work on the development needs identified.

2009 Impact of Employee EOP

It is this time off the year where every employee will be evaluated for their contribution and performance. With current market environment where inflation is lower we cannot expect higher EOP. But in allot of country when fuel price was high it has significantly contributed to higher food prices. Since the food prices did not reduce when oil price reduce to $30 per barrel this has significant impact on employee inflation. With country inflation is calculated differently with employee inflation, sure this have imbalance between EOP and inflation.

My Advice – Employee need to reduce entertainment and extra expense is 2009.