Categories
Budgeting

Business Structure

Each company, firm, joint venture, stock-holding company, concern, bank, fund has its own complicated business structure and the stuff which is necessary for the work. But still there are some general principles how to organize the work at the enterprise. We’ll try to give you some information about it.

The Managing Director or the Chief Executive or President is the head of the company. The company is usually run by a Board of Directors – each Director is in charge of a department. The Chairman of the Boards is in overall control and may not be the head of any department.

Vice-President or Vice-Chairman is at the head of the company if the President or the Chairman is absent or ill.

Most companies have Finance, Sales, Marketing, Production, Research and Development, Personnel, Tax, Logistics Departments. These are the most common departments, but some companies have others as well.

Most departments have a Manager, who is in charge of its day-to-day running, and who reports to the Director. The Director is responsible for strategic planning and for making decisions. Various personnel in each Department report to the Manager.

Let’s dwell on some positions in details.

General Manager-supervises and leads the company’s employees, maintains relations with customers, executes sales contracts and provides problem analysis and resolutions. Represents the company at fairs and distributors’ conferences. In some companies maintains a local warehouse. Provides quality audits. Self-motivated, decision maker.

Sales Manager-manages the sales staff of a company, supervises sales activity including a stuff of sales representatives, plans and achieves target sales revenues and maintains a positive relationship between the company and its clients. Must have extensive sales experience, often as many as 5 years in the position of sales representative before moving up to the position of sales manager. Excellent communication and management skills are required. The person must be a proven problem solver and possess management skills necessary to develop a sales team.

Finance and Administration Manager-must have strong accounting experience including maintenance of Internal Controls, costing. Budgeting, forecasting and the development of Logistics and Administration Systems to support a rapidly growing business.

Marketing Manager-manages marketing department. Plans, directs and executes all marketing and related activities. Oversees creative effort and media plans. Must have year commercial experience, strong interpersonal skills, ability to manage a team and lead personnel, excellent communication skills, computer literacy.

Customer Service Manager-finds proper persons, organizes and supervises the job of Customer Service Clerks, Receptionist. Provides the solution for all existing conflict situations. Provides information and orders forms for distributors, directors. Prepares monthly reports regarding performance of distributors.

Product Development Manager-develops branded products for the company. Prepares a brief of the project, a timeline with priorities and options for the successful competition of the project. Researches on potential facilities, provides competitors’ analysis. Realizes market research on product quality and packing. Negotiates with the producer.

Forecast, Supply and Transport Supervisor-makes monthly forecasts of all products. Works with a company software system (Product Forecast). Provides logistics, works with suppliers concerning shipments of product.

Categories
Budgeting

Optimal Cost Structure and Effective Scale Economies

How do firms choose their cost structure? What is the nature and function of scales of operation? What are sources of functional and dysfunctional scales of operation? These policy questions relate to the optimal overhead of a business enterprise-the appropriate mix of expenditures that maximizes the return on investment and shareholders’ wealth while minimizing the cost of operations, simultaneously.

Clearly, effective economies of scale (MES-Minimum efficiency scale) are correlated with optimal cost structure and critical to sound business strategies designed to maximize the wealth producing capacity of the enterprise. In these series on effective expenditure management, we will focus on the pertinent strategic overhead questions and offer some operational guidance. The overriding purpose of this review is to highlight some basic cost theory, strategic expenditures relationships, and industry best practices. For specific financial management strategies please consult a competent professional.

As we have already established, the optimal cost structure and appropriate scale of operation for each firm differs markedly based on overall industry dynamic, market structure-degree of competition, height of entry/exit barriers, market contestability, stage of industry life cycle, and its market competitive position. Indeed, as with most market performance indicators, firm-specific cost structure position in insightful only in reference to the industry expected value (average) and generally accepted industry benchmarks and best practices.

One of the most important contributions of economic science to management science is the principle of optimality-derivative of Bellmann Equation-the dynamic programming method which breaks decision problem into smaller sub-problems and early applications in economics by Beckmann, Muth, Phelps and Merton, and the resultant Recursive model. In practice, any optimization problem has some objectives often referred to as the objective functions such as maximizing output, maximizing profit, maximizing utility, minimizing total cost, minimizing cycle time, minimizing distribution cost, minimizing transportation cost, etc.

Types of Cost Structure:

Cost Structures consist of a mix of fixed costs, variable costs and mixed costs. Fixed costs include costs that remain the same despite the volume of goods or services produced within current scale of production. Examples may include salaries, rents, and physical manufacturing facilities. A number of high capital-intensive businesses, such as airlines and manufacturing companies, are characterized by a high proportion of fixed costs which may constitute effective barriers to entry for new industry entrants. Please note that effective exit barriers are effective entry barriers. When firms cannot easily exit unprofitable markets due to high exit barriers, they should not enter such markets in the first place.

Variable costs vary proportionally with the volume of goods or services produced. Labor-intensive businesses focused on services such as banking and insurance are characterized by a high proportion of variable costs. In practice, variable costs frequently factor into profit projections and the calculation of break-even points for a business or project.

Mixed cost items have both fixed and variable components. For example, some management salaries typically do not vary with the number of units produced. However, if production falls dramatically or reaches zero, then attrition may result. This is evidence that all costs are variable in the long run.

Finally, a firm with a large number of variable expenses (compared to fixed expenses) may exhibit more consistent per-unit costs and hence more predictable per-unit profit margins than a company with fewer variable costs. However, a company with fewer variable costs (and hence a larger number of fixed costs) may magnify potential profits (and losses) because revenue increases (or decreases) are applied to a more constant cost level.

Most business enterprises define cost structure in terms of costs incurred in relation to a cost object or activity. And because some expenditures can be difficult to define, we often implement an activity-based project to more closely assign expenses to the cost structure of the cost activity or object in question and use activity-based accounting. Note that time required to complete any given activity is the critical factor in cost management. Therefore, to minimize the overhead of any activity or project it is critical to minimize the time required to complete the activity or project. The following are examples of key elements of the cost structures of various expenditure objects:

Product cost structure: Under this structure there are fixed costs which may include direct labor and manufacturing overhead; and Variable expenses which may include direct materials, production supplies, commissions, and piece rate wages. Service cost structure: Under this cost structure there are fixed expenses which may include administrative overhead; and Variables costs which may include staff wages, bonuses, payroll taxes, travel and entertainment.

Product line cost structure: Under this structure there are fixed costs which may include administrative overhead, manufacturing overhead, direct labor; and Variable costs which may include direct materials, commissions, production supplies; and Customer cost structure: Under this structure: Under this cost structure there are fixed costs there are administrative overhead for customer service, warranty claims; and Variable costs which may include costs of products and services sold to the customer, product returns, credits taken, early payment discounts.

The optimal Cost Structure is the combination of fixed and variable costs that minimizes the total operating overheads while maximizing net operating income simultaneously. The Cost Structure describes all costs-(fixed and variable) incurred to operate a business model. Further, Cost structure refers to the types and relative proportions of fixed and variable costs that a business enterprise incurs. In practice, the cost concept can be classified by region, product line, product item, customer group, department, or division, etc.

In cost-based pricing strategy, cost structure is used as a technique to determine effective prices, as well to identify areas in which expenses might potentially be reduced or at least subjected to better management control. Therefore, the cost structure concept is a useful management accounting tool that that has many financial accounting applications.

All business models have costs associated value creation- which occurs with the addition of actual or perceived value to a customer for a superior good or service; value delivery-creating and maintaining effective mutually beneficial and satisfying customer relationships; and value capture-which occurs through changes in the distribution of value in the good or service and production chain. The objective function is to minimize total operating expenditures. Such overheads can be calculated relatively easily after isolating cost drivers, key activities, key inputs; key resources, and strategic partnerships.

It is our experience that operating costs can be minimized in every business model. Additionally, low cost structures are more important to some business models than to others. Therefore it is useful to distinguish between two broad categories of business models: Cost-driven and Value-driven (many business models fall in between these two extreme categories).

The DuPont model demonstrates that Return on Investment is calculated as the product of Profit Margin (Net Income/Sales) and Turnover Rate (Sales/Total Assets). DuPont analysis indicates that ROE is affected by three factors- Operating efficiency, which is measured by Profit Margin; Asset Use Efficiency, which is measured by Total Asset Turnover; and Financial Leverage, which is measured by the Equity Multiplier: ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity).

Types of Business Models:

Cost-driven business model-Most Cost-driven business models focus on minimizing overheads wherever possible. This approach aims at standardization and least cost method by creating and sustaining the leanest possible Cost Structure, using low and dynamic price value propositions, maximum automation, and strategic outsourcing.

Value-driven business model– Under this business model most companies are often less concerned with the cost implications of a particular business model design, and instead their main focus is on value creation. Premium value propositions, customization and a high degree of personalized service often characterize value-driven business models.

Some Operational Guidance:

In practice, firms seeking to optimize cost management must optimize time management. One of the most significant revelations of Activity Based Accounting is the impact of time and activity in firms’ overall operating cost: Cost structure is activity driven and activity is time driven. Therefore, time is the most critical factor is effective cost management. Simply put, firms must reduce time required to execute specific activity to reduce cost associated with the specific activity, ceteris paribus.

Additionally, firms seeking to leverage and optimize scale economies must optimize cost savings derivative of specific scale of operation. Please note that scales of operation may be functional and log-run-cost reducing derivative of experience curve; learning effects; scope economies; division of labor; specialization; horizontal as well as vertical differentiation or dysfunctional and long-run-cost increasing derivative of reactive and entrenched management with musty and personality-driven vision; organizational inertia; adaptive and abusive supervision; increasing bureaucratic cost; lack of innovation; increasing internal and external transaction costs.

In sum, firms optimize cost structure through effective time management and optimizing scales of operation. Therefore, firms seeking to maximize the profit producing capacity of the enterprise must formulate and execute dominant efficient and effective cost management strategies based on appropriate combination of costs that maximizes the return on investment and shareholders’ wealth while minimizing the cost of operations, simultaneously. As we have already established, there is growing empirical evidence suggesting firms that opt for scale and volume tends to outperform those that opt for premium, ceteris paribus.

Categories
Taxes

Indonesian High Yield Bond Market Structure and Opportunities

Global investor demand for Indonesian corporate paper increased substantially in 2012 and 2013 after the rating upgrade of Indonesia to investment grade early last year and investors looking for exposure in the country’s strong growth story (Indonesia’s GDP growth averaged above 6.0% over the last five years). Majority of the global bonds issued are USD-denominated and are non-investment grade due to the sovereign rating cap (Baa3/BB+/BBB-).

High yield bonds in Indonesia are typically issued through an SPV located in tax efficient jurisdictions like Singapore, Netherlands, or Cayman Islands. The bonds generally benefit from parent guarantee as well as guarantee from major operating subsidiaries, but in some instances certain key operating subsidiaries are excluded from guarantee. Investors should, therefore, carefully analyse the structure of the bond to ensure a tightly structured cash trap mechanism, which minimises chances of cash leakage. Also, given the fact that majority of the bonds issued are unsecured in nature, structural subordination and recourse to operating assets might be a concern if the bonds are loosely structured.

Covenants in the high yield bonds issued by Indonesian corporates are largely financial in nature, which restricts/ regulates the issuer’s financial activities within pre-determined limits. Generally, covenants fall into one of the following three categories:

· Affirmative Covenants: These covenants outline company requirements while the bonds are outstanding, and would include requirements such as maintenance and submission of quarterly accounts, payment of taxes, maintenance of insurance, payment of bank interest and fees, etc.

· Negative Covenants: These covenants limit company activities. For example limits on mergers/ acquisitions, asset sales, dividend payment, negative pledge, etc.

· Financial Covenants: These covenants require that the issuer maintain a minimum financial condition, usually in the form of ratios. Standard financial covenants include restrictions on debt incurrence (the most commonly used being Fixed Charged Coverage ratio), restricted payments, restriction on asset sales, Interest Reserve Accounts, etc.

High yield bond covenants in Indonesia are broadly in line with those in China, Hong Kong, Singapore, and India. They do act as an early indicator of any potential default. For example, certain high yield bond indentures require that the issuer to maintain an Interest Reserve Account with a Trustee Bank, where at least one interest payment amount on the bonds is deposited at all times. If the issuer of the bond fails to timely top-up this account, it acts as an early indication of liquidity issues within the issuer company.

As a result of global tightening bias and flight safer assets, the USD-denominated bonds issued by Indonesian corporates have consistently declined in price over the last two months. The long dated papers, in particular, have declined considerably reflecting increased inflation expectations amidst ongoing fuel reforms in the country. This trend is in line with other emerging market bond performance, as global investors moved funds out of emerging markets to safer assets. While it is difficult to say if the bond prices have bottomed at current levels, the running prices adequately price-in the expected Fed tapering and tightening interest rate environment in Indonesia. Therefore, the current low prices offer select good investment opportunities for global fixed income investors and wealth management firms.

Categories
Taxes

Price Monitoring Structure Under GST in the Pipeline

According to the dictionary, meaning monitoring means to supervise activities in progress to ensure whether the objectives and the targets are met. Price-Monitoring means to observe and check the prices over the duration of time and to keep a systematic review of the pricing.

GST is a bill passed by the parliament to remove the various indirect taxes like VAT, and other taxes and to subsume it into a unified tax structure. This benefits the country in having a streamlined tax collection process that is less time-consuming and more efficient.

The business owners and working professionals now benefit from tax relief provided to them under GST based on different qualifying criteria.

In addition, working professionals and business owners must get their GST Registration done to get the GST number if they have not applied for the same.

A price monitoring structure has been proposed by the government under the GST regime to ensure various benefits of the reforms or changes in any unjustified price disturbance.

With the effects of the bill, it tends to provide a push or boost to the economy. The GST is expected to put in place latest by April 1st, 2017, where taxes on goods are expected to fall sharply after its effect.

The GST regime is undoubtedly the biggest tax reform post-independence. The main aim of the bill is to remove or eradicate all the unnecessary or indirect taxes into a unified tax structure, which would result in a sharp decline in logistics and taxes as well.

Keeping in consideration the federal structure of the country must work flawlessly. The center and the state will collect the GST. The tax collected by the center is called CGST and taxes collected by the state are called SGST.

There are some similarities and differences between the CGST and SGST's in individual states. The CGST and SGST are applied on products, goods, and services on the destination principle. Thus, making the exports will become zero-rated and the imports will attract tax in the same manner.

As far as the interstate trade of goods and services is concerned this will attract an Integrated GST. A price monitoring structure without sufficient legislative backup may from the legislature be ineffective and an additional compliance shall necessarily be imposed.

The government does not want any increase in price or inflation after the implementation of the GST, so it does not ensure its effectiveness without the proper backing of the legislature. This could lead to intricate paper works and it shall ensure that the GST rate is feasible enough thus making a smooth credit system.

It is evident that after the implementation of the GST, regimes in many countries have actually added up inflation and by the price, monitoring structure the government expects to avoid a similar situation by lowering the tax rate.

By the price monitoring mechanism, the government tends to abstain frequent dabbling of rates to make a steep specific sector.

It would be more suitable if the GST rates were lowered in the beginning.

This would definitely make sense due to the variation in VAT across the country. It has also been said that the center will compensate for any revenue loss for five years post GST implementation.

The price monitoring includes the standardization of rates along with levying on goods. The GDP of 2% increase is expected and any other benefits are expected. The price monitoring structure of the government tends to remove the doubts on whether it would result in negative impacts or not.

The structure ensures that there is no downside of the bill and with proper implementation and the backing of the central government. It is expected to bring a positive impact of the implementation of the bill.

A price mechanism is necessary and many are of the opinion that it is better to have multiple rates as a large part of the economy.

This is similar to the EU where VAT rates change across the states, keeping a SOP to the minimum tax base would lower the rate of GST.

A wider tax base gives a wider scope to lower the rate of GST that allows credit for input taxes that are paid across the value chain, which would result in efficiency, and overcast the retail prices as well.

Categories
Taxes

Selecting the Business Structure and the Process of Company Registration in India

To work legally, in India, every business has to register itself. The process of company registration starts by deciding the structure of it. By selecting the proper structure, a company can:

  1. Meet targets set easily.
  2. Operate at its highest efficiency.

A Business Structure – the Vital Necessity of it

The structure of a corporation determines two essential factors:

  1. The filing of Income Tax returns.
  2. The compliances that have to be adhered to.

To give a clearer picture take this example:

A business registered as a company has to file income tax returns along with annual returns to the Registrar of Companies. On the other hand, a firm registered as a sole proprietorship merely has to file income tax returns. Moreover, a company’s financial books need must be audited once a year which means extra expenses of:

  1. Auditors.
  2. Accountants.
  3. Tax filing authorities.

Another example of how a business composition can influence the company is:

Some structures like a PLC or LLP have the image of being investor-friendly because they are separate legal entities. It signifies that a business which hopes to get a monetary backup in the future would fare better as a PLC or LLP. If the owner chooses to register as a sole proprietor, he or she may face issues while looking for outside investors.

Essentially, it means consider many factors before electing the business structure because they impact the venture in the long run.

Four Primary Business Structures in India

The options an entrepreneur has when deciding the formation of business are:

  • OPC

One Person Company allots a single individual as the sole-proprietor of a firm. This type of structure is ideal for a company that has just one owner or promoter. It was introduced in 2013.

  • LLP

Limited Liability Partnership has more than one owner. Called partners, there is a restriction on the liability they have to bear. It is equal to the contribution they made. The LLP is a separate legal entity.

  • PLC

Private Limited Company is also a separate legal entity from its creator. The most common type of structure, it has directors and shareholders. The firm considers all of them as employees.

  • PLC

Public Limited Company also has a separate legal existence, and like an LLP, the liability of its members is restricted to their shares. This structure is formed by “a voluntary association of members.”

A Business Structure – How to Select the Right One While Applying a Company Registration Online

To pick the right choice of a business structure, ask the following questions.

  • What is the number of owners of the business?

An OPC is ideal when one individual is putting up the total initial capital. An LLP or a Private Ltd. Co. would be better suited for businesses that have 2 or more owners and are also looking for further investment by new entities.

  • Does the initial investment affect the structure?

Yes, it can influence the decision. For example, owners who don’t want a substantial investment at the starting can pick:

  1. A Partnership.
  2. Sole Proprietorship.
  3. A Hindu Undivided Family.

Entrepreneurs who are sure to recoup compliance and setup cost can choose:

  1. Private Limited Company.
  2. OPC.
  3. LLP.
  • How much liability can be borne?

Structures like PLC and LLP have a clause for restricted liability. It indicates that in case there is a default of loans the members will only repay the amount equal to:

  1. Their contribution.
  2. Value of shares held.

In other structures such as partnership, HUF, and sole-proprietor, the liability has no limit. They members or owners have to repay the entire cost which can put personal assets at risk.

  • What are the applicable tax rates of the business structures?

For an entity registered as a company or partnership, a flat tax rate of 30% is applicable. For HUF and sole-proprietorship, the slab rates applied are standard.

  • Will others be investing in the company?

Any business that hopes to get investments from venture capitalists or other parties should register it as a Private Limited company or LLP. They are measured as trusted entities and therefore easier to get financial backup.

The Process to Registering a New Business

A new company Registration or startup in India can now be easily registered easily online. The new process was incorporated by the Ministry of Corporate Affairs a few years back. The basic steps that need to be taken to register a business are:

  1. Get a Digital Signature Certificate, also known as DSC.
  2. Get a Director Identification Number, also called DIN.
  3. Accurately fill in the New User Registration form, also termed as eFrom.
  4. Submit the eForm.

The company is now registered and ready to work in India legally.

Categories
Wealth Building

The ABC Trust Structure Would Have Worked for Cinderella

Trusts, as we know them, have been around for hundreds of years and started under English law before America existed. However, trusts have only become popular with the American middle class for a couple of decades. Traditional structures don't always fit today's families.

An ABC trust is a very traditional trust structure that is used when a married couple wants to make sure that the children of the marriage or a prior marriage cannot be disinherited following his / her death. For example, if Cinderella's father had created an ABC trust, Cinderella would have been entitled to more rights and benefits of her father's inheritance, and the cruel stepmother could not have disinherited her.

The ABC stands for the three trusts that come into being at the first death: one is called "A", one is called "B" and one is called "C." The A Trust represents the surviving spouse's assets. The B trust represents the deceased spouse's assets and will pass estate tax free at the time of the surviving spouse's death. The C trust saves no taxes, but only exists for purposes of protecting the childrens' future inheritance. The B and C Trusts cannot be rewritten to disinherit anyone after the first spouse dies. The surviving spouse can usually use the assets of all three trusts during his / her lifetime, but cannot lose the assets of the B and C trusts to creditors or remarriage events.

However, in families that are not concerned about children from prior marriages or a spouse who cannot be trusted to protect the family assets, the ABC trust structure can backfire in a couple of ways:

1) Inconvenience . Imagine you have just lost your spouse and you go to the attorney to find out what you should do about the trust. The attorney tells you that you must divide the assets into two parts, your spouse's half and your half. You can do whatever you want with your half of the money, but you are limited to what you can do with your spouse's money for the rest of your life. Additionally, you must now file tax returns for two or three trusts instead of just one. Finally, you must answer to your children about how you are investing and spending their future inheritance. They can sue you if you break the rules.

2) Capital Gains Tax. Upon the death of the Surviving Spouse, the "A" and "C" Trusts enjoy a full step-up in cost basis which means that no one has to pay capital gains tax on the increase in value of the assets when they are sold. The "B" Trust does not get this step-up, so it may be exposed to capital gains tax upon the sale of the assets.

3) Irrevocable. The "B" and "C" Trusts are irrevocable. That means they cannot be changed without consent of all beneficiaries and a court order. If circumstances change, this could feel restrictive.

So what is the alternative? More and more married couples are using a more flexible approach. It is called a Disclaimer Trust . Disclaimer Trusts allow the surviving spouse to choose whether or not it makes sense to fill up the "B" Trust to avoid estate tax at the second death rather than being forced to do so. If we make that decision today instead of at the time of the first death, we do not have all the information we need. We don't know what the tax law will be or how much money we may have by then or even if we want to change the plan. This Disclaimer Trust requires the trustee to be responsible enough to make this important tax-driven decision within 9 months of the first spouse's death. It is not a great structure if the surviving spouse has gambling addictions or can't be trusted to handle money.