FRIDAY, March 29, 2024
nationthailand

A new approach to a better bottom-line, higher profit

A new approach to a better bottom-line, higher profit

In the fierce business competition of today, most companies struggle to survive by trying to keep the profit margin thin as long as possible. In the marketplace where price competition is increasing, it is inevitable for a company to sacrifice its gross p

As a consequence, several cost control measures have to be introduced to cover the lost margin. In the long run, this practice will only hurt the company and cause it to be weaker and weaker – especially when man?agement decides to postpone or avoid necessary investment on capital expenditure or research and development projects.

The conventional financial statements consisting of balance sheet and profit-and-loss statement can only tell us the measurable business transactions based on the GAAP – generally accepted accounting principles. In fact there are still a number of items that require attention from management, especially the unreported losses embedded inside the financial report (see the picture below).

In fact, a company can improve its financial performance significantly by finding and understanding existing hidden losses. Then manage or eliminate them.

Apparently most of these losses are not obvious in standard financial statements. They are hidden inside the operations and practices of employees. By looking at the balance sheet or profit and loss statement, |we can only see the end result as listed by items according to the standard presentation format. It’s worth exploring inside the company’s financial records whether there are any losses that should be avoided. Some of these common losses noted here are:

n Long outstanding accounts receivable – Overdue accounts receivable means the negative cash flow impact and additional financial cost. Companies should monitor closely the status of collectable debt and ensure that settlement is made in a timely manner. An aging report of the accounts receivable balance is a good tool for this purpose.

n Slow-moving inventory – By keeping old inventory, either raw material or finished goods, companies incur disguised costs such as warehouse handling costs, interest expense on unwanted inventory, and associated administrative costs. This is a crucial item in the balance sheet that needs high attention from the management. Some action needs to be planned and taken fast.

n Unutilised or under-utilised assets – Many companies set up very tight control on investment approval such as for a new machine, a new warehouse or production facility, and equipment. Unfortunately, control after the acquisition of the asset is often weak. Inefficient use of an asset means the miss of return on investment. It’s important for management to ensure that existing assets are fully utilised to maximise the operational results. This also applies to intangible assets.

n Operational inefficiency – Under the manufacturing environment, productivity is a crucial factor in helping improve the bottom-line. Higher productivity means better factory cost absorption, resulting in positive operating result.

At the support functions such as administrative, accounting & finance, and so on, redundancy and non-value added activities should be identified and eliminated so that the overall company’s efficiency can be enhanced.

Certainly there are still a number of hidden losses around that can be identified if we seriously look into them. But the sooner the loss is detected, the more profitability can be improved. Therefore let’s try performing a self-check of your company and then work on both corrective and preventive actions to fix the hidden losses. You may see a big improvement to the bottom-line.

 

Dr Yanyong Thammatucharee, |the author, is Senior Vice President |for Accounting and Finance at |Central Marketing Group [email protected]

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