fbpx

 

This is my 4th article in my Corporate Governance miniseries. To recap, my first article is the introduction of corporate governance followed by Parts 1 and 2 on the red flags found in financial statements and the importance of financial statements as a management tool. In this article, I am sharing the benefits of incorporating corporate governance in the daily operation of your business.

 

In general, the operation functions of any business could be overlapping, interconnected and will not be easily separable into clear independent defined categories. However, it is still very important to ensure that the functions should be carefully framed to avoid conflict of interests that ultimately would bring detriment to the business in the long term.

 

A good business operation process is able to instill accountability and transparency. Hence, let us look at the 5 basic elements below.

 

Power of Executive

Executive here means directors and top management personnel who are entrusted to make decisions to grow the business, preserve its assets, ensure proper fund utilisation and to find ways to sustain the business in difficult times. Any power given to the Executive should incorporate a check & balance strategy. In the Start-Ups and SMEs environment where limited number of persons are operating the business, it is important to have an independent capable ethical advisor to be brought in to provide check and balance to safeguard the interest of the business.  Approving power should not rest upon one person unless it is a sole proprietorship. This is to prevent the wrongful use of power or undue influence on the board of directors.

 

Payment Approvals vs Payment Execution

Personnel with approving authority should not be involved in payment execution. This is a form of independent checking process and financial control transparency to ensure that payments are appropriately made.  Any questionable cash movement can be detected early.

 

Accounts Recording & Independent Auditor

Many business owners may view financial recording is only to fulfil Government requirement for taxation purpose. However, it is essential that business owners must understand that an up-to-date set of accounts serves as audit trails to detect wastage of resources, incorrect recordings, financial irregularities, revenue and expenses patterns and as a management tool to sustain the business, promote its growth and monitor the cash flow. An independent auditor serves as a helpful investigative eye and provides good insights into the business.

 

HR – Hire & Fire

Hiring is a very important process to ensure only people of the right fit in terms of qualifications, experience, ethics, work attitude, their expectation in career growth and wages will join the company. In a situation where termination of employment is unavoidable, separate HR personnel should be brought in to provide a fair assessment of the situation. This strategy provides a fair chance for the employee in question to present his side of the story. When an HR issue is carefully managed, potential wrongful dismissal claims against the Company may be avoided.

 

Legal Process

First, it is important to understand that the business legal structure you choose will affect your personal legal and financial liability on business debts accumulated during the course of the business if your business could not pay its debts. If your liability is unlimited, you may lose all your personal assets to settle the business debts or even be made bankrupt by your business creditors.

 

Second, a well-thought business structure should incorporate important legal documents which are properly placed to help the business to minimise the negative legal effect or any future unwarranted claims. Important clauses to protect the company should be incorporated into agreements such as the merger and acquisition, investment in subsidiaries, joint ventures, employment and consultancy agreements, inclusion or exit of investors and shareholder agreements.

 

Third, legal agreements should contain terms and clauses to protect the interests of stakeholders but fluid enough to allow the business to grow. Any legal clauses which are overly restrictive may pose challenges to business expansion. A good balance should be achieved depending on the risk appetite of the business owners.

 

I hope this article creates your interest to find out more to benefit your business venture.

 


Balance Sheet

  1. High Inventory Rate Vs Low Sales

When a high inventory rate is recorded, it means the turnaround of the stock is fast to produce the finished goods. However, it does not make sense with a high inventory rate but a registered low sales volume. Leakage in the supply chain could likely be one of the reasons.

 

  1. High Loan Amount to Directors

When excessive amounts of loan to the director(s) are recorded, lenders view this as the company is not using its cash inappropriate manner, or directors are misusing company funds or moving cash out of the company.

 

  1. High Receivables Vs Unhealthy Aging

Trade receivables are acceptable if it falls within 1-2 months or within the industry credit terms offers to clients. However, a high percentage of receivables for more than 4 months is showing signs of an unhealthy collection pattern.   

 

Cash Flow Statement

It is inaccurate to conclude that the total cash collected is the same as total revenue for the accounting period unless your business is based on hard cash received upon issuance of invoices in the same accounting period. 

 

  1. Cash paid out to questionable investment.

Cash has been paid out to invest in companies where directors have personal interests, for purchase of assets/properties/stock in individual names or assets which has no relation to the generation income for the company.

  

  1. High Revenue vs Low inflow of Cash

Such situations exist when a company has made lots of sales by issuing invoices but cash from sales is yet to be collected. Any uncollected cash from concluded sales of more than 6 months should require the attention of key executives.   

 

  1. High Paid Out to Directors/Key Management Vs Low cash for Business Operation

It is acceptable to pay out good remuneration but not when the business is facing tight cash-flow to pay the expenses of the business.  

 

As mentioned, this is not an exhaustive list. There are many other observations in financial statements that would benefit business owners. I hope the above 9 Red Flags help in your strategy to excel in your business or new startups. Don’t forget to follow me on my next article to get some insights on Red Flags revealed in Operation Process. 

 

This is a continuing article in my series on Corporate Governance (CG). This series is dedicated to Start-Ups and SMEs as issues of CG in large corporations are complex and require multivariate observation to understand. I would probably write a series for large companies sometime in the future.

 

The purpose of this series is to guide business owners and to-be-entrepreneurs to understand the critical areas in financial statements and use it as a management tool to strategize plans to sustain or grow the business. Do bear in mind that banks, government agencies, lenders and investors would analyse these areas to gauge the health of your company and to make their decisions to lend or invest in your company or otherwise.

 

This list is not exhaustive and is presented in short points without detailed explanation but sufficiently to serve as a preliminary guide. It is important to note that managing financial risk is the responsibility of directors and key persons. When auditors detect any irregularities in the financial statements and have signed them off as a qualified report, it may be a little too late to save the company from a black mark.    

 

Financial Statements are made of 3 key parts comprising Income Statement (P&L), Balance Sheet and Cash Flow. These parts should be read as ONE to understand the correlation between all three within the same accounting period, be it the same month, same reporting quarter or same financial year-end.

 

Let’s begin with the Income Statement.

  1. Aggressive Revenue Recognition

Usually, revenue is defined as actual sales invoiced and it does not include ‘agreed’ sales. It is always excellent news when a business is generating good sales. However, when sales surge unprecedentedly high as compared to previous accounting years or disproportionately with the industry benchmark, this should certainly invite a detailed look. Checking the reasons behind sudden high recorded sales should be high in your checklist.

 

  1. High Revenue vs Low Expenses

Cost of goods and other operating costs would increase proportionately with the increase of sales. When there is a big disparity between these figures, it may trigger suspicion that the numbers may be cooked up unless the disparity is justified.

 

  1. High Growth Profit Margin vs Low Industry Margin

Profit, profit margin, and profit margin growth rate, co-relate with price, sales and cost. When a business is growing with an increasing profit due to better margin which is not in line with industry performance, this will trigger suspicion. Certainly, there are businesses which have shown such a sudden increase in profit margin. This could be brought about by utilizing essential raw material acquired earlier at low costs, or by merger or business acquisition, or in the case of property development, and inherited land.    

 

We have Part 2 to be published on Friday, 19th Feb 2021. Do follow me in my next article.

 

The journey of a business commonly begins as a Start-Up. Whether it may progress to a Small Medium Enterprise or listed company or Multinational Corporations depends heavily on the business strategies and the capability of its owners or key persons. These 9 Red Flags serve as fundamentals for Start-Ups and SMEs to shape their strategies for growth and funding exercises.

Having Good Corporate Governance or Lack of it can make or break a business.

I am writing a series of short articles on how business owners can influence and improve business performance by adopting positive Corporate Governance. Adopting good corporate governance in their business can increase reliability and trust among suppliers, banks, investors, and customers.

 

This series will concentrate on the business environment of Startups and Small Medium Enterprises where most owners-managers are the key persons in managing their companies. In cases where the owners employ staff to take charge of the business’s day-to-day operation, these business owners will still heavily rely on themselves to make strategic business and important financial decisions to sustain the business’s longevity.

 

The Chartered Governance Institute defines corporate governance as the system of rules, practices, and processes by which a company is directed and controlled. In a nutshell, corporate governance refers to how a company governs itself, includes but not limited to who the decision-makers are internal approval structure, payment control processes, transparency & accountability, proper legal & financial documentation, and appropriate financial decisions.

 

Good corporate governance contributes to cash flow management in a positive manner. Cash flow is the main blood of a business. A business’s success depends on how companies source, allocate, use, and manage their funds. Good corporate governance minimizes waste of resources, curbs mismanagement, and reduces financial risk and corruption.

 

In my next article, I will explore how financial statements can reveal a business’s health and how investors/banks can read what is hidden behind the numbers. Stay tuned for my next article.

Writer: Alycia Lee Mie Sin

 

Alycia Lee unveiled the minds of financial

What a brilliant day to start 28th May 2019!

Speaking to a group of young aspiring enthusiasts – university students, young entrepreneurs, NGO representatives, business owners & representatives and incubates is delightful. A bucketful of good information was translated across the audience at the Money Talk event organised by Innovation Incubation Centre Technology Park Malaysia. Shades of funding product include factoring, SIRIM grant and unsecured loans by commercial banks were introduced.

 

 

Alycia Lee unveiled the minds of financial providers by speaking on “Secret to get Fund Applications Approved”. Many participants failed to understand the importance to understand the focus points how credit evaluators assess loan applications. These keys help business owners and start-ups to prepare themselves well before applying any loans/grants by working in their business models, business strategies, sustainability factors, financial document, how to build business cash flow and informative & creative corporate profiles.

 

Coming Event

Alycia Lee has been invited to attend the European Union Circular Economy on 11th June 2019. There will be twenty European Union delegates from various European countries, including 2 Investment Funding Corporates. She is looking forward to pen another interesting blog on this coming event to link local business partners to collaborate with business owners from the European Union.

Opportunity Networking

By Alycia Lee

 

We had a blast time on 16th May 2019 at H-Space Kota Damansara as our very first attempt to gather youth from the manufacturing industries for Business Opportunity Networking. It was driven by the idea of encouraging youth participation. This is an initiative by FMM SMI Youth Entrepreneurship led by Ir Ter as Chairman, Alycia Lee as the Organizing Chairperson, assisted by our young & dynamic charmers Brian Soo from Fire Fighter Industry & Stanley Siew from Dyno Klang with coordination from FMM Secretariat.

 

We were privileged to have John-Hans Oei, the co-founder of Microbs- a waste management solution company as our speaker. Came from a humble background, he is an epitome of young entrepreneurship. He believes that the limited time on earth motivates him to make a difference and bring justice via business.

 

 

We witnessed the contagious and enthusiastic young energy during our Q&A session and their mingling session. We hope this seed will spark on our next BON session to further forge new business partnerships among youth as manufacturing entrepreneurs.

FMM Selangor Business Opportunities Networking

By Alycia Lee

Joseph Schumpeter called the concept of replacing the old economic practice with a new one as Creative Disruption.  As Malaysia is going through the age of disruption, demographic transition, and economic progress into industrialisation, the youth is the main driver of economic growth.

 

FMM SYEC Chairman IrTer (Top-Mech Provincial Sdn. Bhd.) has big dreams to stimulate youth interest into the manufacturing industry. As the Organising Chair for BON, I would like to call all youth to be engaged, be empowered, be informed thinkers to be part of the Malaysia new age of economic disruption.

 

To all enterprising youth, do not miss this opportunity to be inspired by John-Hans Oei. This dynamic, young good looking entrepreneur started dabbling enterprising ideas since his college days. Don’t miss his insightful story to inspire you to reach greater heights!

 

Click https://app.evenesis.com/SITE/Event/Details/b312b88f-2160-4aa8-8972-1c0c847808a5/e  for more details.

Business Exploration Meeting with UAE Delegation at FMM

By Alycia Lee

 

February 12, 2019, is another exciting day! FMM received a courtesy visit from UAE delegation from Mohammad Omar Bin HaiderHolding Group (MOBH) PSC, a UAE based company. MOBH is one of Dubai’s leading business groups with diversified holdings spanning multiple industries and geographies.

 

Its CEO and Chairman; Mr. Mohammad Omar Bin Haider, a well-known public figure and businessman in various organizations in UAE, sent his representatives Mr. Abdo Kayali, General Manager for International Relations and Dr. Naji Bou Fakhreddine, Business Development Director to explore the potential business opportunities in Malaysia and other ASEAN countries. We had an excellent maiden discussion into their proposed sectors of interest which includes agriculture, healthcare, aerospace, pharmaceutical, steel, and hospitality.

 

I was among the representatives from SMI, Youth and Entrepreneurship Committee (SYEC) together with Dr.Yeoh, CEO of FMM to receive Dr. Naji and Mr. Abdu.

 

Committee Members of FMM SMI, Youth and Entrepreneurship

By Alycia Lee

On 31 Jan 2019, I had a great opportunity to meet with Mr. Adul Chotinisakorn, Director General of Department of Foreign Trade, Ministry of Commerce of Thailand and his team at Four Seasons Hotel in Kuala Lumpur. They introduce the Young Entrepreneurs Network Development Program (Yen D-Program) to the Federation of Malaysian Manufacturers (FMM) and other local chambers and leading trade associations. The event was relevant and meaningful to FMMSMI, Youth and Entrepreneurship which I was among the representatives of the FMM working committee.

 

During the briefing session, we were enlightened with its main objective which aims to develop the Thailand-Malaysia economy on the basis of building and supporting new young entrepreneurs. This platform leads to creating a competitive advantage among entrepreneurs within the network to operate their business in a collaborative manner.

Apart from building a strong network for young entrepreneurs, it also expands their business perspective to invest in emerging business opportunity and formulate competitive strategies in different market situations to increase trading and investing collaboration. This is proven after a series of successful collaboration with Cambodia, Laos, Vietnam and Myanmar, Thailand is currently seeking collaboration with us through working with local trade associations and explore in any potential that could be a foundation to work on.

YEN-D Plus

Another great point of this program is Thailand is sponsoring an All Expenses Paid to 30 young entrepreneurs to participate in this programme in Bangkok and Kanchanapuri Province. Those interested to register with Thai Embassy Kuala Lumpur and application ends on 26 April 2019. The programme helps to equip the participants’ frameworks and essential tools to their business strategy formulation in this digital era.  I strongly believe this great starter pack is definitely a not to be missed opportunity for our local entrepreneurs to be successful and thrive in this fast-changing environment.

For more info please write to info@treasureadvisory.com.