Finance Functions

Role Evolution
Historically the finance function ensured numbers generation, financial order and enforced management controls. While this is a integral part of the role, the expectations from the function have changed to include, inter alia
- Deep understanding of the business - Strong analytical focus - Knowledge of key operational drivers of success - Processes and systems design and redesign - Knowledge of IT

Value Pyramid:

Level 3 Value Augmenting

Level 2 Value Preserving

Level 1 Book Keeping and core function

Finance Managers Role in Olam

Responsibility

Role

Type of involvement Supervisory

Financial accounting Core Functional Activities Systems and Procedures Business Analysis and MIS Business and corporate strategy

Value Reporting

Value Preserving

Supervisory/ Direct

Value Augmenting

Direct

Level 1: Value Reporting and Core Functional Role

> Book keeping, Payroll > Day-to-day financial controls > Management, Group and Statutory Accounts and reconciliations > Adherence to internal and external accounting policies > Treasury

Characteristics of the Basic activities

> Enormous scope for

- - systemization - - delegation - - errors - - backlogs

> Involve a great degree of dependence on operations department for inputs and data > Controls and validations can be established mainly with reference to operations data

FMs Role in this

> Create a well structured accounts department
- mix of clerical and supervisory talent - adequate number of staff - clearly define tasks to individuals - set up unambiguous procedures - train and develop a reliable second line

> Implement check lists for routine and month close activities
> Clearly define boundaries for responsibilities between accounts and operations department
- supported by operating procedures - deadlines for inputs and outputs

> Systemize and streamline transactions on an ongoing basis

> Review financial accounts regularly for cleanliness and accuracy

Level 2 : Value Preserving

Defining and streamlining Systems and Procedures

Business Analysis and MIS

Regular review with operations team Control on costs, assets

Adherence to statutory regulations

FMs Role in this

> Staff Structure / support > Business Understanding and active involvement
For Systems definition and development for identifying critical areas to be analyzed

> An agreed review agenda with the operations team

> Corrective actions arising out of the review and personal visits to verify cash and stocks at various locations

> understand local laws and regulations and draw up procedures for timely compliance and monitor the same

Level 3: Value Augmenting Role

Involvement in strategy development Managing cost of capital Managing surplus funds and foreign exchange at organizational level Developing forward looking analysis and strategic measurements

Role of FM in these activities

Generate, analyze data in support of strategic decisions/plans Look for opportunities to lower cost of borrowings local finances, for instance Develop a great degree of understanding of local currency dynamics Understand the economy and government policies and keep himself update Understand linkage between his origin and global product strategy

Proactive and determining roles a caution

Migration to these roles is possible if and only if the basic roles are fulfilled effectively. Involves very close interface and constant touch with the operations team hands-off will not help Demands a great degree of understanding and a wider perspective of the product/origin in question Less possibility to systemize or delegate Opportunities for these do not come about often; yet the FM requires the initiative to look for them/sense the need for his involvement and launch himself

FMs Interface
Internal
- Profit center head/BCs - Country management RC/CH - RFC - PFC - PMH

External
Statutory authorities Auditors Bankers

FMs Interface with operations

As a service provider
accurate, reliable and timely outputs MIS/LBA balances,etc facilitate clarifications on CC MIS and accounts and projections articulate accounting policies and its implications field visits to verify procedure adherence and assets deliver agreed key efficiency reports champion systemization and streamlining efforts

As their customer
- Reliable documents and field reports on a timely basis - State funds requirements in advance changes in business impacting accounts outputs expected and time lines available for discussions and review

FMs Interface with RC/CH

As their service provider
- Vouch for origin level adherence to all applicable laws - maintain records and books of accounts in line with local regulations - preparedness for tax audits and controls - institutionalize reliable systems and procedures across profit centers - timely delivery of reports reliable to users - understanding of local economics and regulations affecting our businesses

FMs Interface with RC/CH

As their customer
- adequate manpower support for the department - guidance in staff training and development - support in implementing agreed systems and procedures - corrective action on highlighted problems - addressing FMs own training and development needs

FMs Interface with RFC

As their service provider
Vouch for origin level adherence to all applicable laws maintain records and books of accounts in line with local regulations preparedness for tax audits and controls institutionalize reliable systems and procedures across profit centers timely delivery of reports reliable to users assurance on financial integrity of accounts and MIS Group audit readiness

FMs Interface with RFC

As their customer
- update on new accounting policies in the organization - transfer learning from other origins in accounts and finance - technical support on accounting issues - support on resolving issues with country management team.

FMs Interface with PFC

As their service provider
- accurate and timely MIS/projections - tracking investments in the product - highlight credit, currency exposures - variance analyses - adherence to product related procedures

As their customer
- Accurate and timely consolidated MIS - facilitate clarifications on CC MIS - clarify specific product related requirements - transfer business related understanding

FMs Interface with PMH

As their service provider
- accurate and timely MIS/projections - tracking investments in the product - highlight credit, currency exposures - variance analyses - adherence to product related procedures

As their customer
- clarify specific product related requirements - transfer business related understanding

External interface
Statutory authorities Develop relationship with key persons in relevant government departments Keep abreast with developments timely submission of information maintain a state of readiness Auditors Develop relationship with key persons Maintain audit readiness

Bankers Broad direction/guidance from CC treasury maintain integrity and trust

Accounting Policies
1. Stock Valuation We have different policies for different products but most important aspects are Consistency and relevance

> Weighted Average > FIFO > Specific Identification

For example : > Timber Specific Identification > Rice/Cocoa / Coffee Bin Identity FIFO/Specific Idenfication/Average

Accounting Policies

2. Direct costs
Direct costs vs Indirects
Guidelines >Fixed for the campaign Overheads

Direct Costs Period vs Variables/Matching

> Period costs Book when incurred > Does it go against the matching concept ? > Variable Books when Sold

Finance Cost
Interest - Period cost Local Interest - Aim to keep separate Banks for different products - If common accounts, book based on the tracking mechnism - If no tracking mechnism, book based on the average investment for the month

Overseas Interest - Average Investment for the month - At actual Interest rates paid to respective Banks - 0.5% rate being added to cover Various Bank Charges - 0.5% for CCA

Bank Charges - Collection / Remittance / LC treated as direct costs cash basis - Bill Discounting Financing cost

Interest from Customers - Cash basis - Netted off from Interest cost CMA - Period Cost - Incidence : Origin / CC

Stock Provision
Trigger - Stock age over 6 months Classification : After 6 months : Moving,if atleast 10% of the stock is sold in the previous month, else Non Moving After 9 months :, At least 50% of stock left after 6 months is sold by end of 9 months..else Non Moving.
Age 6 9 Month Category Moving Treatment Lower of Cost and Market Price

Non Moving

Provision 25%of cost

9 12 months

Moving

Lower of Cost and Market Price

Non Moving Over 12 months Non Moving

Provision 50% of cost Provision 100% of cost

LBA / Trade Debtors / Advance Provision

Over 6 mths 100% Prov

Only exceptions being same being secured by realisable, enforceable collateral

Insurance Claims - Stocks

> Stock to be brought to realisable value immediately at the time of damage

> Insurance Claim to be recognised at our assessment value, limited to the actual loss

> Once a settlement offer is received from the Insurance Company, Claim to be revalued to the offer amount

> If there is no offer from the insurance company, Claims to be brought down to : - After 6 months 90% of the Assessment value - After 9 months 75% - After 12 months 50% - After 18 months - Nil

Consolidated Accounts
Local Accounts
Sales Sales Purchase Direct Costs Gross Contribution (Oigins Gross Contribution) Direct Costs Gross Contribution Bank Interest Bank Interest Net Contribution Overheads / Depreciation Bank Interest (Local Net Contribution Overheads/Depreciation (Origin) Salaries Indirects Corporate Charge Total Overheads Total Overheads Purchase (Origins Sale)

Consolidated Accounts

Net Investment Statement

Utilisation of funds
- LBA - Stocks - Prepaids - Deposits - + Allocation of CCAs

Sources of Funds
- Prepayments - Local Loans basis for charging Inter Product lending interest.

Net Investment Statement

Utilisation of funds
- LBA - Stocks - Prepaids - Deposits - + Allocation of CCAs

Sources of Funds
- Prepayments - Local Loans basis for charging Inter Product lending interest.

Treasury

> Clean Lines > Structured Lines > Post Shipment Finance > Local Lines > Warranting > CMAs

Treasury
> Determination of Clean and Structured Lines for the Campaign.. Agreeing the same with CC
- Procurement Qty and Value - Timing of Direct cost payments - Cash/Bank Balances in the system / in Transit - Stock warranting time - LBA Financing - Shipment Schedule - Bank Funding amount

> Getting the CMA in place > Coordination with operations team for weekly funds requirement > Coordination with CC for timely remittance of funds > Liaison with the Banks for timely credits keep in mind the Value date > Operational efficiency with the Banks and Transaction costs > Standby Local linen > Warranting management > Lines and Tenure tracking > Total Funds Tracking

Overview of Hedging
Example 1 : Day 1 : Bought stock at USD 1000 when the ruling price is USD 1100 and the Profit margin is USD 100. but the stock is not sold Day 30 : Selling price may be 1100 or 900 or 1300 resulting in a risk called Price position risk

Example 2 : Day 1 : Bought stock at USD 1000 when the ruling price is USD 1100 and the Profit margin is USD 100. but the stock is not sold.. PHYSICALLY Day 1 : Stock is hedged.. Ie sold on the Derivatives Market at market price of 1100. Day 30 : Selling price may be 1100 or 900 or 1300 Day 30 : Physical sale is made at the market prices and hedges are bought back from the derivatives market at market price Net result .. Profit of USD 100.

Overview of Currency Covers

Example 1 : Day 1 : Loan Euro 1000 taken Day 2 : Goods costing Euro 1000 bought Day 3 : Good sold for Euro 1100. Resultant profit Euro 100 Example 2 : Day 1 : Loan Euro 1000 taken Day 2 : Goods costing Euro 1000 bought. Market Price is USD 1000. Fx 1 Euro : 1 USD Day 3 : Good sold for USD 1100. Day 3 : Fx 1Euro : 1USD. USD 1100 converted to Euro1100. Resultant Profit USD/Euro 100. Example 3 : Day 3 : Fx 1 Euro : 1.20 USD USD 1100 conversion to Euro 917. Loss Euro 83

Solution
Our example : Day 1 : Loan Euro 1000 taken Day 2 : Goods costing Euro 1000 bought. Market Price is USD 1000. Fx 1 Euro : 1 USD Day 3 : Good sold for USD 1100. Day 3 : Fx 1 Euro : 1.20 USD USD 1100 conversion to Euro 917. Loss Euro 83

Currency Cover : Day 2 : Take currency Cover.. Sell 1000 USD, Buy 1000 USD for a future date @ 1:1

Structure at CC
Deptt Shipping Input / Tasks Purchases Deals and Invoices Sales Deals and Invoices Direct Cost System OPS Output Date Trfr to FAS for ORI and DCs Position Statements Responsibilty PMH/Trader

Trading

Currency Deals Futures Transactions

CCM FUT

Currency Register Futures P&L Futures Balances Report

Traders

Treasury

Bank Loans

TM

Loans Status Bank Recos On Line Interface w ith Banks Paym ent Status Paym ent Validation Overheads Reports

Treasury Head

Direct Costs / Overeads Paym ents

PATS

IDM

Accounts

Purchase Sales Data transfer from OPS Direct Costs Data Transfer from OPS and PATS Bank Receipts/Paym ents dow nload through TM and Receipts Application in FAS Payment Application

FAS

ORI Report Direct Cost Reports Debtors updation Trade Creditors/Suppliers advances System P&L / TB / Schedules

PFC

Origin Accounts

Excel

Consolidated Accounts

BRM Process
Deadline 5th 10th 13th 15th Activity Origin Accounts to CC CC Accounts to Origin BRM Files from Origin BRM File to Sunnys office

Functional Role : - Analysis of the actual Accounts - Vetting of M2Ms and EOY Projections - Variance Analysis from Last month M2M/Projections - Returns vis--vis Productivity Norms - Working Capital Analysis - Overhead Variances

M2M Exports
Local Stocks per MT Stock - MT Amt 693 Overseas Stock per MT Amt 265

Local M C Local D C Local Cost C urrency C overs Local Cost - U SD G /U C BP SD over Local Cost - G P B O verseas D C TOTAL FOB COST

N aira N aira N aira U SD U SD

220,514 6,270 226,784 140.13 1,618.42 1.7036

152,772,171 4,343,853 157,116,024 140.13 1,121,241 1.7036 658,146 7,145 665,291 GB P GBP GB P U SD 1,370.24 1.7036 804.30 9.92 814.22 363,179 1.7036 213,179 2,630 215,808

G P B G BP G P B

949.98 10.31 960.29

Average H edges Selling D ifferentials (FOB) R ealisable Value

G BP G BP G P B

967.00 0.46 967.47

669,938 322 670,260

GBP GBP GB P

967.00 (75.00) 892.00

256,302 (19,879) 236,423

G C M E R th nd ate G U C SD

G P B

7.17 1.6800

4,969 1.6800 8,347

GB P

77.78 1.6800

20,615 1.6800 34,633

U SD

12.05

U SD

130.67

Returns Parameters
Actual NC Overheads : : 100,000 60,000

PBT
Resources Overheads Working Capital VAR NC/OH NC / WC NC/VAR NC

40,000
Actual Tsat 50,000 500,000 25,000 200% 20% 400% 116,667 Tmin 62,500 625,000 31,250 160% 16% 320% 93,333

: : : : : :

60,000 550,000 30,000 167% 18% 333% 100,000

Key Task Areas

> Financial Reporting Management, Startutory and Group Consolidation

> Treasury Function

> Statutory Compliances

> Business Support - Systems and Procedures - Business Analysis and Reports - Exposures Flagging - Decision Making Supports - Determination Role

Imperatives
> Sound Understanding of the Business

> Understanding and being integral part of the operations team and not an outsider. > Planning, Organising, Administrative, Analytical skills, Systems overview and Problem Solving approach. > Sound and Reliable Local Staff Structure > Laid Down Standard Operating Procedures > Understanding of Local Laws and regulations > Support of the Team

Enclosed
> A note on Field Documents > Check List for an Upcountry Unit > A note on Capital Investments > Accounting Policies > A note Overheads Tracking and formats from tracking overheads > SOP for Accounting > Daily, Weekly and Monthly checklist > Covering Note to send to CC > Various Reports Formats, users and deadliness > Various MIS Reports Formats
Weekly Stock reconciliation LBA Exposure Tracking and Flagging Prepayment Reconciliations NIS M2Ms BRM Budgets Returns Parameters

- Expectations identified at the start of the program could we have handled some of these during induction? - Lack of an adequate or no hand-over - Lack of a compiled handout on systems and procedures - List of reports, formats, users and deadlines not clarified - Expectations from operations team at a mismatch with FMs priority - Actions planned
- Library of systems, procedures, reports and deadlines should be domiciled at each origin - FMs initial priorities and incubation time accounts, systems clarify and articulate - Handover standardize routines across origins - Improvements to training modules - Areas to work on, time line identified for each FM

To move forward
> Specific efforts from the Origin Management, Function and HR to make the new joinees comfortable
- Role clarity - ensuring that the handover is proper - ensuring that initial training is adequate - ensuring that Reports formats and deadlines are given

> Training modules to to formalised and to be handed over immediately after joining > A forum to be provided for the new joinees to take functional direction Functional support / hand holding in the initial phase.