Category Archives: Finance & Accounting

Jargon: Consumer P&L

Consumer P&L is an analysis of the profit and loss from individual consumers/customers or a segment, for products & services they avail. This is extremely important, at least in the software business, because when you sell an additional CD or host another tenant, it does not affect your input cost, but it definitely adds to overheads such like the billing & support functions. So when undercutting prices and compromising on margins, one should note that these costs will continue to add up, even though infrastructure, RnD & production costs hold level. This is still possible if the business model & product packaging is well thought of – that is if you have something special for the  super consumers.

I first bumped into this idea when reading Eddie Yoon’s article title Why Verizon’s iPhone Could Be Good for AT&T where he highlighted the need to focus on loyal, super consumers who make a considerable impact on your bottom line rather the divas & deal chasers.

Do we kill our assets?

Yeah, I know its been quite some time since I wrote. Difficult time that made me look 20 years older. Naah, don’t get at my hair. Never mind. Things are better now. But some things haven’t changed. Traffic sucks with an average car buyer spending 7.5 lakhs (39% up since ’06), while we’re speculating the ill-effects of the Nano. Markets are volatile, gold is more valuable than ever. While the house buyer is speculative in the pretense of builders, BMC & the government fighting each other, property rates are only going north. Terrorism is testing our patience & resilience, while Kasab celebrates his birthday in a country that’s at the behest of robbers & killers. What are we doing? Creating circles on Google Plus, letting potholes break our spine, and gathering papers to file IT returns (btw, filling thru Sahaj takes less than 15 minutes & rupees) So here we are justifying while our assets are being killed & burnt in the name of tax.

But what are assets? Things that can make us happy & sad. Things in which we invest time, money & energy for a better future. Things we won’t let go easily. Gold, stock, property for example. But don’t you think assets cover people, promises? And as someone rightly argued, your own body (as a plant)? People & promises that have the power to make you smile, and reinforce confidence to audaciously embrace challenges. And so is your body, Continue reading Do we kill our assets?

Effect created by credits & debits on different account types

I’ve spent quite a bit of time trying to understand how transactions affect accounts. One should remember that the effects of Debit (dr) & Credit (cr) depend on the type of account you are dealing with. For example, receiving money into a bank account, i.e. debiting it, will increase its balance. Whereas, sale of goods, or crediting the sales account, increases its balance. Hope this illustration helps!

Effects on accounts
Effects on accounts

Jargon: Incoterms (with a brief on Payment terms & Delivery Terms)

Sales Orders (SO) & Purchase Orders (PO) are 2 key trade documents in any business. They usually two important fields: Payment terms & Delivery terms. After a brief on these terms, we go on to explain Incoterms: internationally accepted trade-terms used in international contracts.

Payment terms most often represent the payment instrument (cheques/collaterals), credit period and discounts, if applicable. In the simplest form, P30 indicates that payment will be made 30 days after receiving the bill/invoice. P30/2%20 is a more complex term indicating that if the payment is done within 20 days (instead of the 30-day credit period), the buyer is entitled tot a 2% discount on invoice value. Payment terms could also be based on collaterals like L/C (Letter of Credit) or Irrevocable credits that help minimize the seller’s risk.

Delivery terms are indicative of the agreement on delivery cost, responsibility (=risk) and ownership of transported goods/services. Costs include freight charges, taxes & duties and commissions to clearing agents. As a seller, I may choose to transfer ownership at my premises {ExWorks}, at my port {Free Carrier}, after loading cargo on board air/sea/road/rail vessel {Free On Board}, customer’s port {Delivered Ex Quay/Ship} or right up to ship-to address (address where goods are required to be delivered).

Incoterms are delivery terms standardized by the International Chamber of Commerce (ICC) for use in international trade. The abbreviations along with description & associated buyer/seller liability are mentioned here.

Talking about commission, in reality commission is a sweeter word for greasing charges at ports; needed an example of organized crime, take this! How would it look if I had a ledger account called Bribes? Doesn’t Agent Commission really sound decent? One of my uncles lives of this profession, so I won’t say another word 🙂 Continue reading Jargon: Incoterms (with a brief on Payment terms & Delivery Terms)

Jargon: Days Sales Outstanding (DSO) as a Financial Indicator

Days Sales Outstanding (DSO) is an important financial metric for evaluating the effectiveness of converting credit sales (money owed to you) to cash. Considering the time value of money, it indicates the age of an organization’s accounts receivables or AR (sum of all money owed by debtors) in days and the average time it takes to turn receivables into cash. Ideally, this should never exceed the standard payment terms. So for a 52 credit period offered by credit card to borrowers (which is us, debtors to the issuing company), best DSO for the company will be 52. A higher DSO would indicate inefficiency in their collection cycle (and in our payment which they will gladly oblige by slamming exorbitant interest or by delegating collection to recovering agents).

DSO (measured in days) is calculated for a period,

DSO = Accounts Receivables / Credit Sales for the period * 30 (days)

DSO can vary significantly over the course of a year on account of several reasons:
– Fluctuation in sales volume, due to seasonality, economy, etc
– Negotiated payment terms, promotional discounts
Since these situations are common in business, DSO is argued Continue reading Jargon: Days Sales Outstanding (DSO) as a Financial Indicator

Jargon: Evaluated Receipt Settlement (ERS)

Evaluated Receipt Settlement (ERS) is an EDI (Electronic Data Interchange) procedure, part of Supply Chain Management.  It was pioneered by GM to address the issues associated with payments against invoices (bills) for goods received. ERS is valid in India. Continue reading Jargon: Evaluated Receipt Settlement (ERS)

Jaffa Cakes & their VAT exemption

Jaffa Cake is a popular (& controversial type) of cake in Great Britain. McVitie’s (United Biscuits) is a notable brand selling Jaffa Cakes. It is controversial in the sense of its classification: it is produced as a cake and becomes hard like a (chocolate-covered) biscuit when stale. Incidentally, the former is exempt from VAT while the latter is charged at 15%. This story is about how McVitie’s proved that their product was a cake and never paid VAT.

Continue reading Jaffa Cakes & their VAT exemption