Improving accounts receivable and accounts payable

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Improving accounts receivable and accounts payable performance and factoring of debt

First and foremost, we have to understand where the company cash flow currently stands and where it is likely to go in the future. Mr. Teng, the managing director of the company has foresighted that the economy will deteriorate and cash will be king in the next 15 months. By forming a team to work on analysis and forecast the cash flow of the company is a simplest solution to solve this question. The forecast could be as simple as paper and pencil for the company. A rolling 12-month forecast is the best method for the company. By mapping the cash flow week by week, we can know where to control our cash. For example, there is 1 immediate company and 2 subsidiaries, the team must include 3 company expertise to analyse the cash flow. Rose Sdn Bhd is projected to suffer a loss of RM 0.5 million in 2015, the team can analyse on the expenses of the company so that the loss can be minimize in the subsequent year.

Secondly, make sure that the customer term and supplier terms are balanced. Calculate the company average payable day and receivable day. If the average payable day is lower than receivable day, which means that company need to renew the customer term given. If not the company have to go out and get some new source for working capital. Discussing with the supplier on the payment term and get a discount advantage if we paid them on time. On the customer side, evaluate how the customers are performing to that term. For those customers who can pay on time can enjoy a 5% discount on the total bill. It seems in the wrong way for the company on shortening the receivables and payables gap, but the money involved might be worth it.

For the extent, enforce payment discipline of the customer. In order to shorten the receivables period, we must enhance our collection system. First we have to know a few things before starting the process that is how long the customers are taking to pay us, what is the company’s collection method, are the company getting the right level of contact with the customers and are the company identifying disputes fast enough.

Our concern is to keep an eye on the problematic payers to make sure they pay on time. Besides, enforcing payment discipline should be part of company payables operation. If we were to miss out on discounts and habitually paying late, it might hurt the company during the contract renewal as the other companies will lost faith in the ability to pay them.

Other than that, if company has difficulty on collecting those problem payers debt, factoring is one of the good solutions. According to Boundless Business, factoring is a type of debtor financing method which is the company sells their account receivable to third party at a discount (factor). Instead of writing off those bad debts, company can get present and immediate cash. This is a cost-effective way of outsourcing some of the company sales ledger. Instead of wasting time on chasing the debts from debtor, it can help to free up the time to manage the business. Company do not need to hire extra admin to chase the debts, this can help company to cut down the cost on human resources. It can assists in smoother cash flow of the company. Some customers may respect factors and pay more quickly. The company can get immediate cash as soon as the invoicing is done and the company is protected from bad debts.

Next, the company may negotiate with bank for extending the loan payable period for further payment in future. This can help the company to improve company cash flow and prolong the payment period. Other than that, company may negotiate with bank for refinancing the agreement of loan for a better interest rate.

Reduction of Tax Burden

Lily Sdn Bhd is one of the subsidiaries of Jasmine Sdn Bhd. This company was incorporated in 2002 and its main business involved in the manufacture of cosmetics and skin care products also engaged in Research and Development activity. This company is profitable and is taxable. Based on this case, this company have a cash balance of RM 5 million at the end 31 December 2014. This company might not face problem in their cash flow in current year but they want to find out the best solution to reduce the tax burden since the company need to pay income tax every year. The company’s regulation focus on how company may avoid from paying high tax to the tax authorities.

There are several ways to reduce the tax burden, first of all this company need to register Good Service Tax (GST) if the annual turnover is RM 500,000 in order to minimize tax payable. They can use input tax to offset output tax or they may choose to pass on the additional costs to its customer. This company needs to ensure that once they implement GST it will bring minimal impact to their cash flow. They need to restructure their cash flow in order to prevent having cash flow problems. For example, they need to upgrade the accounting software for GST invoice and recording system. Therefore, we suggest this company to charge GST for its end-product and may claim refund its input tax from the government.

Secondly, this company needs to implement double deduction in order to reduce their tax burden. We suggest Lily Sdn Bhd to execute the training programmes for employees in the manufacturing industry. Therefore, they may claim double deduction for expenditure incurred by companies on approved training in the manufacturing sector in order to reduce their tax payable. We suggest Lily Sdn Bhd to hire handicapped persons or disabled person in their production line. The remuneration to disabled employees who are unable to perform the work of normal person may claim for double deduction.

Thirdly, since this company exports the products to ASEAN’s customers and execute promotion for their product, they may claim double deduction for approved outgoings and expenses incurred for promotion of exports from Malaysia. We also suggest this company to join international trade fairs held in Malaysia for the promotion of export product so that they can claim for double deduction. Mostly, these companies carry out of Research and Development activity for manufacturing of cosmetics and skin care products. Their expenditure incurred on Research and Development activities must be incurred within 10 years from the date was incorporated so they may apply the double deduction.

Fourthly, we suggest this company to join in the collaboration with government under the scheme, Skim Latihan 1Malaysia Programme. This programme is one of the incentives of double tax deduction on allowances and training expenses incurred. Furthermore, this programme is a collaboration between the government and the private sector to enhance the employability of the underprivileged graduate. This company may claim expenses incurred for monthly allowance of not less than RM 1,000 paid to the graduates and expenditure incurred for the provision of training to the graduates except capital expenses.

Last but not least, this company may claim for the capital expenditure incurred on the construction since they received a certificate of completion for the new factory. In the year when expenditure was incurred, they may claim for the annual allowance and initial allowance due to the total cost of construction. Hence, they may claim tax relief on capital expenditure on this asset and may reduce their tax payment. The total cost of construction was RM 10,000,000 and we need to multiple 10% for initial allowance (RM 1,000,000) and 3% for annual allowance (RM 300,000) to claim the building allowance. At the same time, this company needs to be caution if any useless expenditure incurred cannot be claim for tax deduction. One of the criteria to classify the qualifying building expenditure from this company is the cost of construction of factory and subsequent capital expenditure on construction, extension, alteration also renovation. Therefore, from all this way may reduce the tax burden that is imposed to this group of company. The company’s regulation goals to increase the profitability and minimize the cost of production may be able to be achieved if they implement the double deduction to reduce the tax payable.

Sell off loss-making subsidiary, Rose Sdn Bhd

There are two alternatives to handle the loss-making subsidiary, Rose Sdn Bhd, that is either keeping or selling off Rose Sdn Bhd. If the group were to keep Rose Sdn Bhd, the company can deduct Rose’s business loss of RM 0.5 million in that year as group relief and this provides a tax savings of RM 0.5 million to the group. Therefore, if the group were to keep Rose Sdn Bhd more efforts would be needed such as controlling the expenditure, increase sales and be more aware of the market conditions to improve the company’s position.

As Mr Teng has forecasted that the economy will deteriorate in the next 15 months, so one possible way to get cash is by selling off Rose Sdn Bhd. This is because to retain Rose Sdn Bhd would involve spending more cash on marketing activities and research costs on product development so that Rose Sdn Bhd can turnaround. Since the company seems lacking marketing skills for example, in advertising activities, Rose Sdn Bhd (marketing company), it should be divested as a result of poor management.

Instead of improving on that, the company should focus on its strengths instead, such as on R&D and other products that generate income to the group. With that, the company can obtain RM2.5 million cash after disposing Rose Sdn Bhd.(Note: The estimated RM2.5 million cash proceeds from the disposal of Rose Sdn Bhd is obtained by deducting the projected loss RM0.5 million in 2015 from its capital of RM3 million). The company can then focus on its main operations such as selling hypoallergenic cosmetics and skin care products that are suitable for all persons even those with sensitive skin by its parent company, Jasmine Sdn Bhd, and the manufacturing of cosmetics and skin care products by Lily Sdn Bhd (a wholly-owned subsidiary of Jasmine Sdn Bhd).

As for the marketing of imported brands of cosmetics currently undertaken by Rose Sdn Bhd, the group can outsource the support activities to third parties. This is because outsourcing its marketing activities to marketing specialists will enable the group to be more attentive to the needs of the customers who know the target market well. They are also able to retain customer’s loyalty towards the product with their good marketing strategy. Using the wrong marketing strategy will only cause the company to lose the potential customers and ultimately sales. We should only get those marketing consultants who have proven track records before outsourcing our marketing activities to them. At the same time, the group needs to be cautious in that marketing specialist may present the group with an impressive sales presentation but whether in works or not is uncertain as the group will never know the result once they are used on the target market as the consumers may react differently. However, outsourcing its marketing activities to a third party will be costly to the company and hence will not be undertaken.

Besides, the company can also network or create a new marketing niche with facial treatment shops to introduce their products. This enables the company to save some time by not having to use marketing strategies to promote the products to the consumers but instead the facial treatment shop will have the products promoted to the consumers. This can also widen its consumers base by networking with facial treatment shops and this can be done with minimal costs in terms of time and travelling expenses. Ultimately, this can boost its sales. Also, the company can focus on its core businesses.

In addition, the group should divest Rose Sdn Bhd because its activities are closely related to Jasmine Sdn Bhd’s activities, which is the selling of products and it is not necessary to set up another subsidiary (Rose Sdn Bhd) just for the marketing of imported brand of cosmetics. The marketing activities can be easily taken over by Jasmine Sdn Bhd and this would not involve large marketing outlays.

It is not wise to keep its subsidiary (Rose Sdn Bhd) as it is loss making and drains the cash resources of the group. In order to get more cash, selling the subsidiary will be the best choice as they can improve the cash flow by RM 2.5 million instead of the tax savings of only RM 0.5 million.