Translating Operations into Money: Cases in Business Management
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Turnaround and Product Pricing Strategies,
Profit Improvement Plans,
Cost Reduction Initiatives,
Performance Improvement Initiatives,
Project Cost Monitoring,
Risk Based Internal Audit Techniques,
Cash Embezzlement Incidents.
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Translating Operations into Money - Tulasi S Sastri
Remarks
1
Journey with a Cigarette Manufacturing Company (1976–83)
I graduated in Science, with Chemistry, Botany & Zoology as optional subjects, from Andhra University, and opted for joining Chartered Accountancy, in 1970, in Chennai. While my performance in studies, up to college was just above average, in Chartered Accountancy, I managed to clear both the Intermediate and Final Examinations, in the first attempt, that too with ranks, awarded to the first 50 students in the country. Later on I realized that the betterment in performance was due to higher level of commitment, which God was kind enough to bestow upon me at that time.
I started my career with a company in the Machine Tools Industry in the year 1974. The company had good systems, though manual in operation. The Finance Director of that company released Policy &Procedure
circulars periodically, covering areas in Financial Operations, Reporting and Costing. I found them very useful to know how to proceed at work, but only later realized that it was an excellent means of communication, essential for good governance.
In 1976, I switched over to a company which was manufacturing and selling cigarettes. It had a well known brand. Employed in its Corporate Office, which also had its manufacturing base, and marketing head quarters, it gave me an opportunity to work in different areas in accounting. The company placed great emphasis on systems. It had an integrated system for Financial Accounting and Management Accounting. It recorded each transaction into two types of classifications. One set was used for preparing Statutory Accounts and the other for Management Accounting and Reporting.
The company computerized its accounting in four applications, namely Financial Accounting, Stores & Spares Accounting, Leaf Tobacco Purchase Accounting and Payroll. The company extended loans to farmers for growing tobacco, and later on recovered its dues when the farmers brought their produce for sale. It had more than 10,000 farmers who received such loans, and their dues extended to multiple years. Managing the recording and recovery of dues was handled through Leaf Tobacco Purchase Accounting.
The company did not own its computing facility and was hiring time on a computer called IBM 1401, with programs written in a language known as Autocoder. In the year 1978, the company decided to have its own computing facility and acquired ORG 2001, a mini-computer that came into the market then. The Financial Controller of the company felt that an accountant could be associated with systems, and gave me an option. I did take it, had a six week orientation in Baroda, and worked as a programmer for about two years, writing programs in a language called Macro Assembly Language. During that period, my colleagues in accounting thought that I had gone away from accounting. It was otherwise. I was actually looking at accounting concepts more closely than before. For example, pricing stores issues for a month, constructing the logic of taking opening balance quantity and value, adding receipts quantity and value, arriving at the average rate for the month, pricing issues for the month with the rate meant a much closer involvement with accounting principles. The EDP Manager of that company did not have any accounting background, and debit and credit were just positive and negative numbers to him. My association with systems at that time meant complementing his skills, and helped in implementation of good financial applications.
After a useful stint in EDP, I returned to my parent field, accounting. At that time, the Budget Accountant of the company left the organization, and I was asked to prepare the Company Plan for the year. Seeing an opportunity, to employ the computing techniques I had learnt, I agreed.
After the Budgeting exercise was successfully implemented, I left the organization to join an organization in the Auto Ancillary Industry. When I shared the details of this budget application, done by using my computing skills, with a colleague of mine, who just returned from the US, he said You are talking about Lotus.
Lotus 123 was the equivalent of today’s Excel, as a spreadsheet application. Thus my budgeting in the cigarette company was a spreadsheet application, before spreadsheet came to India!
Details of this application are covered in the following story, "Budgeting in a Cigarette Manufacturing Company."
I. Budgeting in a Cigarette Manufacturing Company
(The theme of this article is to describe how automation has been a solution to business problems, even from early days of employing computers in business.)
The budgeting exercise, once a year, starts with the marketing manager indicating the volumes he would be able to sell, in the following year, at specified prices for each brand. Since maximizing revenues is the objective to start with, the budget accountant chooses the combination of volumes and prices that would give maximum revenue, out of options indicated by the marketing manager.
The accountant then moves to the production manager who would say, Do not tell me which brand at which volume. Tell me how much is
filter and how much is
non-filter. How much is
shell & slide and how much is
soft cup." Since his capacities are organized in this fashion, independent of the brands, and he wants to maximize his capacity utilization, his response is on these lines. After exploring permutations and combinations, maximum revenue recognizing the capacity constraints is worked out.
Then the budget accountant goes to the leaf manager. It is the responsibility of the leaf manager to procure tobacco from the farmers, refine it, and store it for usage in production. Tobacco is kept in ageing for about 18 months before it is put to use. The leaf manager needs to get the planned production volumes translated into the blends
and grades
and relate it to the stock he is holding and its ageing, to be able to feed the production lines. For this purpose, he would say, Do not tell me filter / non-filter or shell & slide or soft cup. Tell me how much is SCN (sun cured natu), how much is FCV (flu cured virginia) or how much is White Burley.
The budget accountant translates production volumes into blends and grades of tobacco used. Tobacco is kept in storage before it is put to use, and loses weight in storage, called re-weighment loss. Similarly, raw tobacco, called kutcha gets refined into pucca, during which process it also loses some weight. The budget accountant makes assumptions on such losses, based on past trends or with inputs from the leaf manager. Once the quantities of different types of tobacco required as well as the time when they are required is ascertained, the leaf manager reviews and confirms his commitment to meet the production requirements.
With these details, the budget accountant works out a contribution statement, which is nothing but summing up revenue from sales and subtracting the cost of raw materials, like tobacco, cigarette paper, filters, packing cost in the form of shell & slide or soft cup and so on.
Suitable assumptions are made on the prices of all these raw materials. Tobacco is purchased from the farmers at the buying courts.
Though physically it gets issued for production 18 months later, the issue price for costing purposes, which determines the cost of production, is impacted in the months in which tobacco is purchased, since the company followed an average method for pricing issues, independent of actual usage period. Thus, the price at which next season’s tobacco purchase is expected to take place is an important assumption for budgeting raw material costs.
Apart from brand volumes and prices, variables that influence contribution are purchase price of tobacco, yield while converting from kutcha to pucca, re-weighment loss which could be to the tune of 13% in a year, length of the cigarette, circumference of the cigarette, grades of tobacco used, density of tobacco in the cigarettes, the type of filter used, whether tissue type or paper filter, packing type as well as wrapping like cellophane paper used.
When the budget accountant compiles the contribution statement with all the variables incorporated, the Board may say, the contribution is too low. Assume better brand prices, explore increasing volumes, assume tobacco purchase at the next season at 10 paise per kilo lower, assume re- weighment loss at 12% instead of at 13%, use grade II more and grade I less, replace tissue filter with paper filter, remove cellophane wrapper and so on. The budget accountant goes back and works for 2 days and 2 nights to produce a revised contribution