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Risk Management
for Manufacturing


        By
     Dick Lam
     May 9, 2009
     Hong Kong
Financial Crisis
Risk Management For Manufacturing
Risk Management For Manufacturing
Gordon Brown, 23 November 2008
                               CUT VAT by 2.5 per cent to encourage consumer spending.
I'll give help when
                               INCREASE the state pension by between £4 and £5 a
you need it
                               week.

                               INTRODUCE temporary tax cuts for low-income families,
                               who are more likely to spend and give the economy a boost.

                               CANCEL planned tax rises on cars and small businesses
                               and cuts in tax allowances.

                               INCREASE spending on schools, hospitals and transport
                               projects.




                 The rescue will increase national debt to record levels, with Britain set to
                 borrow up to £120 billion a year by 2011. Taxpayers already spend over
                 £300 a year EACH just on the interest on national debt.
Barack Obama, 25 November 2008

          • pump money into the battered
            economy
          • create 2.5 million new jobs
          • a tax cut to the poor and
            middle class
          • make massive government
            investments in energy-saving
            and other technologies
            designed to pay for themselves
            in the long run




              quot;will be about $500 billionquot;
George Bush, 25 November 2008

• US$800 billion to be spent

• unfreeze credit on student loans,
  credit cards and car loans be
  returned to normal levels

• stabilize the system and support
  the lending that is vital to our
  economy
金融海嘯下的日子……
  美國人賣血賣精子過活

經濟不景,失業人數飆升,越來越多美國人被迫
  出 賣 身 體 求 活 , 包 括 賣 血 ( 每 包 390 港 元 ) 、
  賣 精 子 ( 每 次 780 港 元 ) 、 賣 卵 子 ( 每 個
  54,600 港 元 ) 和 頭 髮 ( 一 條 馬 尾 值 1,560 港 元 )。
  以賣卵子為例,申請賣卵者由每天兩人增至
  20 人 。



                               美 國 Msnbc 網 站


                                    蘋果日報
                                    2008-12-07
Risk Management For Manufacturing
Cash is King
In retrospect,
• Was there a day in the past that I did not
  have any cash issue?
  – Yes.
• Why? When you have sufficient or
  more than enough cash, what did you
  actually do?
  – ………..
Where to get money?
• Stockholders

• Bank

• Business
  –   Profit
  –   Customers
  –   Suppliers
  –   Assets
  –   Employees??
Stockholders, do you have money?
• Yes
  – But, why don’t you invest?
  – No problem. Can I get back the money?
    And when?


• No
  – Then, what should we do?
  – Fight or Flight?
BANK

A bank is a place where they lend you an
umbrella in fair weather and ask for it back
when it begins to rain.
                        Robert Frost (1874 -1963), US poet
4C principles
• Capacity - the ability of the owner/manager/business,
  as lending to a project=lending to the person

• Capability - the feasibility for the project to make
  profit and cash flow to pay for the interest and
  repayment of principle

• Collateral - guarantee for the loan

• Condition - the market atmosphere on the business
  sector
It is all a matter of TRUST!


      Trust




    You &
Your Business


                But, why should I believe you?
Business
• Profit = Sales – Cost – Expenses

• Customers: A/R

• Suppliers: A/P

• Asset: True Value
Where to burn money?
• Operating Expenses

• Capital Expenditure

• Raw Material
Business takes risks,

Need to master the risks
Agenda

1. Financial body check-up
2. Re-identification of core competence
3. Risk management: A/R
4. Risk management: Production & Inventory
5. Risk management: Cash
6. Risk management: People
7. In-depth meaning on Risk Management
林楚祺 Dick Lam
• 香港浸會大學工商管理學士
• 香港城市大學電子商貿碩士
• 在讀香港工商管理博士(DBA)學位
• 香港會計師公會(HKICPA)會員
• 英國特許會計師公會(ACCA)資深會員

• 曾任職不同類型企業,包括港資、中資及美資公司,
  長期於國內工作,善於管理會計、供應鏈、財務策
  略、國內稅務計劃,有超過18年實戰經驗
• http://360.yahoo.com/lamchorki128
• dicklam128@hotmail.com
Agenda

1. Financial body check-up
2. Re-identification of core competence
3. Risk management: A/R
4. Risk management: Production & Inventory
5. Risk management: Cash
6. Risk management: People
7. In-depth meaning on Risk Management
What “finance 財務” means?


            管理會計
          Management
           Accounting


     財務會計           財務學
     Financial    Corporate
    Accounting     Finance
Relationship between Financial System and Financial
                      Reports

                     會計系統
                    accounting
                      system
                      管理會計
                    Management
                     Accounting




                      財務會計
                      Financial
                     Accounting
NOW




Know the Present,
Know what you “really” have
Balance Sheet

                        營業額
                        銷售成本
              流動        毛利
                        銷售費用
                        管理費用
                        營業利潤
流動                      財務費用
                        稅前利潤
                        所得稅
              長期
 資產     負債              稅後利潤
                        股息
        資本              本年保留利潤
固定           盈餘



              股本

 At a particular time
Balance Sheet

             流動


流動

             長期
 資產     負債
        資本
固定           盈餘      平衡點



             股本
Balance Sheet
Assets


         銀行結餘
         應收帳款
         存貨
流動

         投資

         設備
固定
         廠房
         商譽
Balance Sheet
Assets 自我控制


     銀行結餘
     應收帳款
     存貨
流動
                   資產隨時可以
     投資
                   增值或縮水
     設備
固定
     廠房
     商譽
Value of Assets
遊戲規則 Rules of Game?

     市場價格 market price
     公允價值 fair value

How to report Asset Value?
  – If long term, at cost
  – If short term, at market value
  – Who knows your intention?
Balance Sheet
資產   自我控制

     銀行結餘
     應收帳款
     存貨
流動

     投資

     設備
固定
     廠房
     商譽
Operation, Investment & Arbitration

營運,投資與投機

  我的控制能力有多少?
  How much do I control?


  佔我的資金比例有多少?
  What portion of my funding has been put in?
Controllable Cash Value

可操控的現金值
以審慎﹝悲觀﹞prudence的態度
去衡量現有的資產值
  應收賬款 A/R
  庫存 Inventory
    成品 F/G      歷史價值 historical value
                變現價值 net realizable value
    半成品 WIP     使用價值 usable value
    原材料 R/M
   投資物 Investment
PAST
Profit & Loss A/C

   營業額
  銷售成本
    毛利
  銷售費用
  管理費用
  營業利潤
  財務費用   For a period of times
  稅前利潤
   所得稅
  稅後利潤
    股息
本年保留利潤
Profit & Loss A/C

 營業額
銷售成本
        公司整體表現
  毛利    Overall company performance
銷售費用
A Paradox of Pricing Formula
• Price = Unit Cost + Mark-up %
• Cost: Variable Cost, Fixed cost
• Variable Cost: more output, fixed unit
  cost
• Fixed Cost: Lump Sum / Output
   – more output, less unit cost
   – less output, more unit cost

Solution: Convert fixed cost to variable cost
  as far as possible
產品分析 Product analysis

By each product type,
  changes in
                        審核核心競爭力
   – Quantity
                        core competence
   – unit price
                        發現浪費 wastage
   – cost elements
What big enterprises do

• 控制非增值性的費用﹝差旅費﹞cut
  expenses
• 凍薪 freeze salary
• 裁員 redundancy
• 拆賣 disposal
Understand costing structure
• 生產成本 vs. 費用
• Production cost vs. expenses

• 變動成本 vs. 固定成本
• Variable cost vs. fixed costs

• 產品盈虧平衡點
• Break-even point
The third report

現金流量表
Cash Flow Statement

        利润          现金
              =====
       PROFIT       CASH
The Future

      Forecast
Cash Flow Statement

現金流量表
                      賒銷
      估算
                      信貸
                      credit

                               晚點再討論
People we face

             供應商
             supplier


                 員工
                 staff


               客戶
             Customer
Decision & Behavior Model


                                                     預估結果
他人經歷                                                 Expected result
Others experience



                    自身體驗                 行為          實際結果
                    Self feeling         behavior    Actual result

本身經歷
Self experience




                                   What made me earn money in the past?
Risk Nature


 Financial Risk




 Operation Risk




     How much risk are you willing to take?
Alert!!
• Key Performance Indicators
  – The higher the index, the better the
    performance


• Key Risk Indicators
  – The lower the index, the more secured the
    business
Pause for Discussion
Agenda

1. Financial body check-up
2. Re-identification of core competence
3. Risk management: A/R
4. Risk management: Production & Inventory
5. Risk management: Cash
6. Risk management: People
7. In-depth meaning on Risk Management
What is your core competence?
•   Product vs. Service
•   Product Design?
•   Quality?
•   Cost?
•   Assembly?
•   Manufacturing?
•   Supply Chain?
What is your sales strategy in 2009?
• Selling product or services (what
  services?)
• Segmentation / Classification
  Market/Product
• Existing Business vs. New Business
  – Level of confidence
• Do you have the right people in place?
  – If no, then…..
• What is your sales expense budget?
           Finish your job; people in China is hungry for yours
Projection > Prediction

               2008 Gross     2008 2008 net   Inc/(Dec) in     New   (Lost)       X         Y        Z    Net     2009
 Customers       Forecast   Rebate Forecast Contract Price Program Program    Reason   Reason   Reason Change   Budget
A
B
C
D
E
F
G
H




      Total:




                                                           Critical Elements: Surprise and Fulfillment
Projection > Prediction

               2008 Gross     2008 2008 net   Inc/(Dec) in     New   (Lost)       X         Y        Z    Net     2009
 Products        Forecast   Rebate Forecast Contract Price Program Program    Reason   Reason   Reason Change   Budget
A
B
C
D
E
F
G
H




      Total:




                                                                     只要信, 不要問; 我办事, 你放心!?
                                                                     只要信 不要問        你放心!?
Keep the sales
  • Why customers loyal to your company?
  • Have you ever got the satisfaction score
    from your customers?
  • How do your customers look at you?
  • Exploration vs. Exploitation
      – Sales & Marketing / Customer Service
      – Product Engineering (PE)



Make your people happy so that they can make your customer happier
Any Derail?
In terms of:
• Products
• Services
• Functions



Who is going to answer the above
 question?
3 Stories to share
Derail because of windfall profit
• Building copper products

• Profit from Hedging of copper
  commodity

• Over-trading
Business Longevity
• Manufacturing to Assembly

• Injection, Stamping, Weaving,
  Electroplating, Processing & final
  Assembly

• Where is the focus?
Trust & Trustworthiness
• What is the basis for trust?

• Check & Balance

• What is the underpinnings of the
  business?
Agenda

1. Financial body check-up
2. Re-identification of core competence
3. Risk management: A/R
4. Risk management: Production & Inventory
5. Risk management: Cash
6. Risk management: People
7. In-depth meaning on Risk Management
Accounts Receivable
• Examine the current situation
• Spot out the customers
• Review the collection strategy and
  credit hold policy
• Re-connect with your customers (how
  much you know them?)
• Create forward-looking credit control
  policy
• Any way to generate more cash from
  A/R?
Examine the health of A/R
         • A/R Aging Report and its history

                                                                                               Gross
                                                                                                 A/R
Customer     Credit Terms   Current   Over 1   Over 7   Over 30   Over 60   Over 90 Over 120




 Total                           0        0        0         0         0         0        0       0
• What is the total overdue debt?
• What is the longest credit terms
  accepted by the company?
• Any credit terms > the standard term?
• For customers with overdue debts, do
  we still release delivery? If yes, why?
• How frequent do you read the aging
  report?
  – Monthly? Weekly? Daily? Or Never?
• Cash Projection
                                                          Collection according to credit term
                                              D+1wk   D+2wk        D+3wk        D+4wk         D+2mth   D+3mth
Customer   Credit Terms   Current   OverDue




 Total                         0          0       0         0            0            0            0        0
• Performance review of Collection
• Any follow-up actions?

                                                 Planned       Actual
  Customer   Credit Terms   Current   OverDue   Collection   Collection   Difference   Remarks




   Total                         0          0           0            0            0
• Forward-looking
  – Credit Limit Alert Report (Weekly)
     • Current Balance + Average Invoice Amount
       vs. Credit Limit
     • Report generated if it exceeds the credit limit,
       alert the customer & salesmen of this would-be
       credit hold situation
  – Know more about your customers
     •   From your salesman & staff
     •   From your suppliers
     •   From your competitors
     •   From your environment
• Local purchased materials for local
  sales
• Imported materials for export sales
• Consignment
  – Title of ownership
• Bank Draft
• Fixed cost vs. variable cost with spare
  capacity
Key Risk Indicators (KRI)
•   % of overdue debt / Total A/R
•   Top 10 delinquent A/R and amount
•   Late Payment customers and amount
•   ….
When is AR created?
• Sales on credit
  – Pass on ownership (擁有權) of the
    products
  – Pass the ownership risk


• Consignment goods
  – Pass on custody (保管權) of the products
  – Do not pass the ownership risk
Agenda

1. Financial body check-up
2. Re-identification of core competence
3. Risk management: A/R
4. Risk management: Production & Inventory
5. Risk management: Cash
6. Risk management: People
7. In-depth meaning on Risk Management
Inventory Holding
                                  • Inventory Aging Report
HKPC
Stock Aging Report
As at Jan 31, 2006
                                                                                                                                                                                     Cur: USD

Items                   Ttl Amt                            0-30              31-60            61-90          91-120           121-150           151-180           181-360                   >360
FG                       85,546                         133,435           (142,168)             -               -                 -                 -                 -                    94,278
Wire                    225,292                         210,939              2,405              618             129               492                 6               150                  10,553
Terminal                310,827                         195,365             67,066           30,556           2,534             3,611               100             3,169                   8,426
Housing                 221,425                         132,676             49,172            7,675           6,185             9,207               970             5,737                   9,803
Electrical parts        103,836                          17,170             18,155            3,331             -              41,730            23,431                20                     -
PVC (Moulding)           45,036                          27,769              1,307              227           6,720               -                 -               8,494                     519
Heat shrinkable tubings  38,073                          27,844              4,075              -               -                 -               1,395             3,097                   1,663
Other                    64,652                          40,215             14,824              799           2,040               863               363               569                   4,979
---------------------------------- ------------------ ----------------- ------------------ --------------- --------------- ----------------- ----------------- ----------------- ----------------------
 Total                                1,094,687           785,412              14,836          43,207          17,608             55,903            26,264            21,236               130,221
=================== ========== ========= ========== ======== ========= ========== ========== ========== ============
ACC
Stock Aging Report
As at Jan 31, 2006


  >360   181-360     151-180   121-150   91-120      61-90       31-60        0-30                                                                                   0-30   31-60    61-90   91-120   121-150   151-180   181-360   >360
                                                                                        Ttl Qty                                                  Ucost   Ttl Amt
                                                                                                  Terminals
                                                                                      1,889,028                                                   0.01    23,046
    -         -          -         -     29,028         -       840,000   1,020,000               8911415P01     TERMINAL HEYCO 5703                               12,444   10,248     -       354       -          -         -      -
    -         -          -         -        -           -       676,238   3,020,000   3,696,238   8911409-2C     TERMINAL AMP 350536-1            0.00    17,003   13,892    3,111     -       -         -          -         -      -
                                                                                        938,003                                                   0.02    16,321
    -         -          -         -     26,003         -       408,000     504,000               8911415P07     TERMINAL HEYCO5880                                 8,770    7,099     -       452       -          -         -      -
    -         -          -         -        -           -        33,242     418,000     451,242   8911404-F1     TERMINAL AMP 2-520334-2          0.03    12,003   11,119      884     -       -         -          -         -      -
                                                                                      1,118,340                                                   0.01    10,624
    -         -          -         -        -           -       152,340     966,000               TERM403-G81    TERMINAL AMP-JAPAN 170328-1                        9,177    1,447     -       -         -          -         -      -
    -         -          -         -        -     2,000,000         -           -     2,000,000   A-8911409-2C   TERMINAL AMP 350536-1            0.00     9,200      -        -     9,200     -         -          -         -      -
                                                                                        246,612                                                   0.04     8,903
    -         -          -         -        -           -           -       246,612               TERM404-K89    TERMINAL TYCO 521282-1                             8,903      -       -       -         -          -         -      -
                                                                                        227,878                                                   0.04     8,887
    -         -          -         -        -           -        17,878     210,000               TERM404-6Z     TERMINAL ETCO#PDF225FRTHB                          8,190      697     -       -         -          -         -      -
                                                                                        215,500                                                   0.04     8,405
    -         -          -         -        -           -         5,500     210,000               TERM404-LP     Terminal ETCO PDF224NFRTHB                         8,190      215     -       -         -          -         -      -
                                                                                        649,215                                                   0.01     8,310
    -         -          -         -        -           -       511,215     138,000               TERM405-80     TERM,MOLEX,43178-1001                              1,766    6,544     -       -         -          -         -      -
    -         -          -         -        -           -           -       235,317     235,317   TERM403-5A     TERMINAL ETCO#PD260NFRTHB        0.03     7,530    7,530      -       -       -         -          -         -      -
                                                                                        730,481                                                   0.01     7,261
    -         -          -         -        -           -        78,481     652,000               TERM409-P10    TERMIANL JST# SLM-41T-P1.3E                        6,481      780     -       -         -          -         -      -
    -         -          -         -        -           -           -     1,203,768   1,203,768   8911409-TZ     TERMINAL AMP 350416-1            0.01     6,380    6,380      -       -       -         -          -         -      -
                                                                                      1,906,875                                                   0.00     6,293
    -         -          -         -        -       592,875   1,314,000         -                 TERM409-DJ     MOLEX SOCKET 39-00-0038                              -      4,336   1,956     -         -          -         -      -
    -         -          -         -        -           -       389,336     867,500   1,256,836   8911409-F8     TERMINAL AMP 350537-1            0.00     6,033    4,164    1,869     -       -         -          -         -      -
                                                                                        680,520                                                   0.01     5,989
    -         -          -      32,520      -           -       216,000     432,000               TERM408-OW     TERMINAL MOLEX 43375-1001                          3,802    1,901     -       -         286        -         -      -
    -         -          -         -        -           -           -       296,292     296,292   8911403-I5     TERMINAL AMP 2-520183-2          0.02     5,955    5,955      -       -       -         -          -         -      -
                                                                                      1,141,662                                                   0.01     5,937
    -         -          -         -        -           -       406,662     735,000               TERM406-M63    TERMINAL GEM 99470BS-2                             3,822    2,115     -       -         -          -         -      -
                                                                                      1,000,000                                                   0.01     5,360
    -         -          -         -        -     1,000,000         -           -                 A-8911409-L2   TERMINAL AMP 350700-1                                -        -     5,360     -         -          -         -      -
                                                                                        792,048                                                   0.01     4,831
    -         -          -         -        -           -           -       792,048               8911409-K8     TERMINAL AMP 350687-1                              4,831      -       -       -         -          -         -      -
                                                                                        761,228                                                   0.01     4,720
    -         -          -         -        -           -       169,228     592,000               TERM406-M64    TERMINAL GEM 99475BS-2                             3,670    1,049     -       -         -          -         -      -
    -         -          -         -        -       752,000         -           -       752,000   A-8911408-A7   TERMINAL AMP 770642-1            0.01     4,437      -        -     4,437     -         -          -         -      -
                                                                                        138,260                                                   0.03     4,010
    -         -          -         -        -           -           -       138,260               TERM403-4D     TERMINAL ETCO#PD163NFRTHB                          4,010      -       -       -         -          -         -      -
    -         -          -         -        -           -        57,090      75,000     132,090   TERM408-WF     connector plug molex 40-06-20    0.03     3,963    2,250    1,713     -       -         -          -         -      -
                                                                                        680,177                                                   0.01     3,673
    -         -          -         -        -           -        80,177     600,000               8911409-L2     TERMINAL AMP 350700-1                              3,240      433     -       -         -          -         -      -
    -         -          -         -        -           -           -       124,581     124,581   TERM403-5B     TERMINAL ETCO#PD165NFRTHB        0.03     3,613    3,613      -       -       -         -          -         -      -
                                                                                        102,622                                                   0.04     3,612
    -         -          -         -        -           -         9,122      93,500               TERM404-ZK     TERMINAL AMP 3-520997-2                            3,291      321     -       -         -          -         -      -
    -         -          -         -        -           -           -       545,335     545,335   8911409-TB     TERMINAL AMP 350218-1            0.01     3,545    3,545      -       -       -         -          -         -      -
                                                                                        426,754                                                   0.01     3,474
    -         -          -         -        -        26,754     320,000      80,000               TERM408-R37    TERM,UTILUX,RE4820501-40                             651    2,605     218     -         -          -         -      -
    -         -          -         -        -           -           251     598,500     598,751   8911407-CS     TERMINAL AMP 63625-1             0.01     3,353    3,352        1     -       -         -          -         -      -
                                                                                        245,290                                                   0.01     3,238
    -         -          -         -        -           -       185,290      60,000               TERM405-81     TERM,MOLEX,43178-3001                                792    2,446     -       -         -          -         -      -
                                                                                        307,302                                                   0.01     2,612
    -         -          -         -        -           -       155,302     152,000               TERM408-OM     TERMINAL MOLEX 43375-0001                          1,292    1,320     -       -         -          -         -      -
    -         -          -         -        -       550,000         -           -       550,000   A-8911409-F8   TERMINAL AMP 350537-1            0.00     2,591      -        -     2,591     -         -          -         -      -
                                                                                         88,973                                                   0.03     2,367
    -         -          -         -        -           -        88,973         -                 8911404-F9     TERMINAL AMP 2-520128-2                              -      2,367     -       -         -          -         -      -
• Clearly identify what inventory can and
  cannot be used
• Why are there so many unusable
  inventory?
  – Re-visit the planning process…
  – Any reward for minimize inventory level
    without affecting order fulfillment
• Keep it or dispose it? Or sell back to
  the suppliers
• Deferred customization
Target Inventory
• What is your target inventory level?
• How do you measure it?
                          Dec-03
Stock Value                8,500
Stock Days                    91 days

                                        Jan-04   Feb-04   Mar-04   Apr-04
Cost of Goods Sold                      3,253     1,540    3,548   4,500




Stock Value                8,500

Cost of Goods Sold                      Days
              Jan-04      3,253            30
                     ------------
                          5,247
              Feb-04      1,540            30
                     ------------
                          3,707
              Mar-04      3,548            30
                     ------------
                            159
              Apr-04      4,500             1
                     ------------ ------------
                             -             91
Inventory Control

                    Target I-Week:       2
Item A

                  27-Feb    6-Mar    13-Mar   20-Mar   27-Mar   3-Apr
Opening             300      400       200       580    1,230   1,048
Incoming            600      250       700     1,000      160     480
Requirement         500      450       320       350      342     480
Closing             400      200       580     1,230    1,048   1,048

Inventory Weeks    0.89      0.63     1.67     2.78     2.08    1.88
Tools for reduction
• 7 Waste
  –   Rework
  –   Excessive Production
  –   Conveyance
  –   Excessive Motion
  –   Waiting
  –   Inventory in production area (pull system)
  –   Inappropriate processing
• Reward people for cost saving idea &
  action
Order Lead Time
• Time from the order placed by your
  customers to the time you deliver to
  them
     Day - O                                                                 Day - D




      Day - O                                                                Day - D
                                  e
                             d Tim




                                                       Time




                                                                        me
                        r Lea




                                                                   ad Ti
                                                  Lead
                    Orde




                                                                ry Le
                                            ction
                     rial




                                                                   e
                                      Produ




                                                              Deliv
                Mate
• Unquestionably, customers prefer short
  lead time to long
• What is the element in lead time?
• What is the bottleneck?
• How to shorten it?


            Inventory




                           Lead time
• Suppliers
  –   VMI
  –   Consignment Inventory
  –   Equalize MOQ to SPQ
  –   Order cancellation agreement
  –   Design-in to exploit opportunities
  –   Be transparent to the suppliers
       • Come to visit my factories
  – Go to visit your suppliers
  – Exploit new suppliers
New Project Evaluation …..
REQUESTED CAPITAL:                                        1,547,151
REQUESTED EXPENSE:                                           62,286

                    Capacity Expansion:                                    2008         2009          2010
                                                                      3,930,777    3,930,777     3,930,777
Total Gross Sales
                                                              0.0%            -            -             -
Payment Discount
                                                              0.0%            -            -             -
Rebate
                                                                      3,930,777    3,930,777     3,930,777
Total Net Sales

                                                      % Tot Cost                                               % Sales
                                                             89.0%    2,797,206    2,797,206     2,797,206       71.2%
Direct Materials
                                                              1.4%       44,755        44,755        44,755       1.1%
Material Adders
                                                              7.1%      224,044      224,044       224,044        5.7%
Labor/Overhead
                                                              0.0%             -             -             -      0.0%
Logistics/Whse
                                                              2.5%       78,616        78,616        78,616       2.0%
Import Duties
                                                            100.0%                                               80.0%
Total Incremental Cost                                                 3,144,621     3,144,621     3,144,621

 MARGIN on Incremental Sales                                           786,155      786,155       786,155 786,155
 MARGIN % Sales                                                          20.0%        20.0%         20.0%   20.0%
                   Cost Reduction:
Total Cost Reduction                                                         -            -             -
Requested Expense                                                       62,286       62,286        62,286
 COMBINED MARGIN                                                       723,869      723,869       723,869

Ul/CSA Expense                                                                                           -
 SG&A % Sales                                                               N/A          N/A           N/A

 EBITDA                                                                723,869      723,869       723,869

Depreciation: (Enter Depreciable Life) ----->                    7      221,088      221,088       221,088
 Taxable Income                                                        502,781      502,781       502,781
Tax Rate                                                                  0.00%       12.50%        12.50%
Tax Payments                                                                  0      62,848        62,848

Working Capital Items:
 DSO                          (Enter DSO) ----->                       (327,565)    (327,565)     (327,565)
                                                                30
 Inv Turns-Normal         (Enter Inv Turns) ----->                     (279,721)    (279,721)     (279,721)
                                                                10
 Freight             (Enter Days in Transit) ----->                     (61,145)     (61,145)      (61,145)
                                                                 7
 AP Days                  (Enter AP Days) ----->                        582,751      582,751       582,751
                                                                75
                   Total Working Capital                              (85,680.0)   (85,680.0)    (85,680.0)

EBITDA                                                                723,869.0    723,869.0     723,869.0
Tax Payments                                                                 0.0   (62,848.0)    (62,848.0)
Working Capital Change                                                (85,680.0)         0.0           0.0
NET CASH FLOW                                           (1,547,151)     638,189     661,021       661,021



 CASH FLOW ECONOMICS:
RRR                                                            13%
NPV $                                                       (6,585)
IRR                                                          12.8%
PAYBACK (Years)                                                 2.4
• Capacity
  – Indirect labor vs. Direct labor
  – Salaried labor vs. Direct & Indirect Labor
• What to save?
  – Let the employees to tell you
  – But don’t forget to motivate them
KRI
• Inventory Days
• Obsolete Inventory vs. Inventory
  Values
• Inventory with days > target
• Order Lead Time
• …..
When to produce for customers?
• Raw Material is converted to Finished
  Goods
• Conversion cost is labor plus
  production capacity



  Buying capacity reserve (预订供应商
  的生产能力)
Working with Customers

               The competition

                  Better design

                  Higher quality

                  Faster to market


Value engineering in the supply chain
• Share the supplier expertise and obtain long-term relationship
Pause for Discussion
Agenda

1. Financial body check-up
2. Re-identification of core competence
3. Risk management: A/R
4. Risk management: Production & Inventory
5. Risk management: Cash
6. Risk management: People
7. In-depth meaning on Risk Management
Cash Cycle
                          Stock Days                      Debtors Days
Cash Cycle


                                                                      Cash
                                  Creditors Days                      Days

                                    Actual Trends
                                    Inventory
                            DSO       Days        DPO    Cash Cycle
             Dec 2007         160         32        85         107

         Jan 2008             161         32        75         118

         Feb 2008              84         37        88          33

         Mar 2008             102         39        88          53

         Apr 2008             127         36        93          70

         May 2008              85         24        73          37

         Jun 2008              83         21        77          27

         Jul 2008              82         22        83          20

         Aug 2008              80         22        95           7

         Sep 2008             104         26       107          22
Cashflow template
Cashflow                                                                                                                   Cur: HKD'000
                              Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08                        Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08
Net Income                      157   (258)    45     22    166     72                            57    454    618   489     338    223
Add:
  Depreciation                  117        117        117       117        117        125        125        125       125        125        125        125

Change of WC
  A/R                          (545) 2,172 (1,816)             (249)       694    (374) (890) (1,246)                (854)    338           890     374
  Inventory                   1,274    (632)   10               474       (605) (1,160) (1,339) (622)                 574     880           453 1,156
  A/P                          (803) (1,233)  784              (702)       380 1,323 1,412       706                 (580) (1,063)         (579) (1,062)
  Others
                             --------- ---------- ---------- --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
                                 (73)      307 (1,022) (478)               469       (211) (817) (1,162) (860)                   155        764        468

Capex                            -         -          -          -        (200)        -      (1,200)        -         -          -          -          -

Cash (Surplus)/Loan Required
                           (50) (165)           861        339      (552)         15 1,836            583       118       (769) (1,227) (815)
                       --------- ---------- ---------- --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
                          150         -          -         -          -          -          -          -         -          -          -          -

Bginning Cash Balance          150   300   300   300    300   300   300   300  300   300   300   300
  Net Cashflow                 150    -     -    -      -     -     -     -    -      -     -     -
Ending Cash Balance            300   300   300   300    300   300   300   300  300    300  300    300
                             ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====



                                                                                                   Sweet lemon; Sour grape!?
Weekly cashflow forecast
Asia Harness                                     Week       Week 45     Week 46     Week 47     Week 48     Week 49    Week 50     Week 51      Week 52     Week 53     Week 54     Week 55
                                                 Actual     Forecast    Forecast    Forecast    Forecast    Forecast   Forecast    Forecast     Forecast    Forecast    Forecast    Forecast
                                                10/26/08    11/2/08     11/9/08     11/16/08    11/23/08    11/30/08   12/7/08     12/14/08     12/21/08    12/28/08     1/4/09     1/11/09
Beginning Cash                                        226        226         441         122         422         292        292           58         258         105         146         476

VAT Receipts                                          -          -           -           -           -           -          -            -           -           -           -           -
Other Receipts                                        -
Cash Receipts (A/R collections)                                 100         100         100          10                    100          100         100          41         100         138
 Total Cash Inflows                                   -         100         100         100          10          -         100          100         100          41         100         138

Cash Payments (A/P Checks and wire transfers)                 (1,197)     (1,919)     (1,100)     (1,100)                (1,277)      (1,200)     (1,713)     (1,000)     (1,270)     (1,100)
Payroll                                                                                 (200)        (40)                               (200)        (40)
Capital expenditures                                            (188)                                                       (57)
Other nonworking capital items
VAT Payments
Tax Payments
Other Payments
  Total Cash Outflows                                 -       (1,385)     (1,919)     (1,300)     (1,140)        -       (1,334)      (1,400)     (1,753)     (1,000)     (1,270)     (1,100)

Loan / (Excessive cash)                                        1,500       1,500       1,500       1,000                  1,000       1,500        1,500       1,000       1,500       1,000

  Total Intercompany                                  -        1,500       1,500       1,500       1,000         -        1,000       1,500        1,500       1,000       1,500       1,000

Interest                                              -          -           -           -           -           -          -            -           -           -           -           -
Principal                                             -          -           -           -           -           -          -            -           -           -           -           -
  Total Financing                                     -          -           -           -           -           -          -            -           -           -           -           -

Other                                                 -          -           -           -           -           -          -            -           -           -           -           -

Ending Cash                                          226        441         122         422         292         292         58          258         105         146         476         514
Weekly Projection
• Cash collection projection

• Cash payment projection
  – A/P
     • How much to pay and how much be delayed?
     • Not a good strategy of always paying your
       supplier late
  – Expenses
     • On time payroll release is a must!!
  – Capex
Pause for Discussion
Agenda

1. Financial body check-up
2. Re-identification of core competence
3. Risk management: A/R
4. Risk management: Production & Inventory
5. Risk management: Cash
6. Risk management: People
7. In-depth meaning on Risk Management
People
• This is you and me that usually expose
  the company to risky situation

• Why & How?

• Are you using the following assumption:
  – Manager’s job is to protect the company
    from the abuses of the workers?!
Control
                                              The Self


                                              The
                                              Employee

                                              The
                                              environment




Make your people happy so that they can make your customer happier
• Am I the only one that knows the
  company and its business?
• Do I welcome opposite comment?
• Do I continuously ask for negative
  opinion?
• Do I reward people for preventing me
  from doing bad deal which I originally
  thought it was good?
• How do I describe “Luck”?
• There is no repeated fluke
• Goodness & badness co-exist (yin &
  yang)
• The value of devil advocate (loyal
  opposition)
• The underlying principles of running
  the existing business
• The line between acceptable &
  unacceptable behavior
                   曲突徙薪亡恩澤,
                   曲突徙薪亡恩澤,燋頭爛額為上客
• Belief Systems
  – Systems to articulate the values and
    direction that senior managers want their
    employees to embrace
  – Draw employees’ attention to key tenets of
    to business:
     • how the organization creates value
     • The level of performance the organization
       strives for
     • And how individuals are expected to manage
       both internal & external relationships
                   What is your organization risk appetite?
• Boundary Systems
  – Management principle: power of negative
    thinking, minimum standards
  – Tell people what not to do only and let
    them figure out what to do
  – Of particular value when employees under
    pressures to achieve superior results being
    collided with stricter codes of behavior



                    Profit prioritize or Growth prioritize?
Who knows your business?
•   Yourself
•   Your employees
•   Your suppliers
•   Your customers
•   Your bankers
•   Your competitors
•   But not your investment consultants


                                  上下同欲者勝
It is all a matter of TRUST!

Trust




    You &
Your Business
                  Trust




                  But, why should I believe you?
Trust
• Is myself trustworthy?
    – To the bank and to the employees?
•   Is my business trustworthy?
•   Is my business philosophy trustworthy?
•   Do I trust my employees?
•   Do my employees trust me?
•   How do I earn the trust?
•   ………….
Some sidetrack
Trust:
• I cannot ask for it
• I can accept being trusted or give trust
• When I trust, I expect something
  happen
• When I trust, I take the risk
• It liberates and mobilizes human
  agency, release creative, uninhibited,
  innovative, entrepreneurial activism
  toward other people
To be trustworthy
• I need to be financially healthy
  – proved by the Balance Sheet & PNL
• I need to meet the expectation of the
  creditors, suppliers, customers &
  employees
• I need to be consistent with what I said
  and intended to do
Risk vs. Uncertainty
• Risk: I do not know the future

• Do I create uncertainty?

• Why?
Transparency - GIVE
• Goals

• Identity

• Values

• Emotion
5 R – Cost saving strategy
• Remove
  – Why does a particular expense need to
    incur? Is there a way to totally remove this
    expense?
• Replace
  – If not possible to remove this expense, can
    we replace the function with a cheaper
    one?



                           One to say Yes, Two to say No.
• Reduce
  – If not possible to remove it, is there a way
    to reduce the spending?
  – We should think about request for price
    reduction from supplier or source
    alternative supplier.




                              There is no repeated fluke!
• Redesign
  – If not possible to reduce, can we re-design the
    process to utilize the scarce resources?
  – Kaizen should be a continuous process.
  – There should be a regular review of existing
    process by freshman.
  – The old process creator should only act as a
    information provider but not member of new
    Kaizen group.




                                       沒有最好 只有更好
• Redistribute
  – If not possible to redesign the process, can
    we have the function to share its value to
    different functional area as well as the
    cost?
  – Maximization subject to constraint is
    maxim not only in economics but also in
    cost saving perspective.




               Great intelligence comes from heart, not mind
How to pay your staff
• Buy their time or their talent
• Treat them as staff or “working partner”
• Pay by fixed or portion in variable

YOUR STAFF ARE THE ONES DOING
 THE BUSINESS & GENERATING THE
 INCOMES
墨子 – 修身編
• 志不强者智不达;言不信者行不果

• 行不信者,名必耗。名不徒生,而誉不自长

• 务言而缓行,虽辩必不听

• 言无务多而务为智,无务为文而务为察

• 善无主于心者不留,行莫辩于身者不立

• 名不可简而成也,誉不可巧而立也
Pause for Discussion
Agenda

1. Financial body check-up
2. Re-identification of core competence
3. Risk management: A/R
4. Risk management: Production & Inventory
5. Risk management: People
6. Risk management: cash
7. In-depth meaning on Risk Management
No wastage
Utilize resources
 especially those unrecorded



                  人力資源
     人事                        人力資本
                   human
   personnel                 human capital
                 resources
Devil Advocate
•   Who are they?
•   Where are they?
•   When do we need them?
•   Financial risk management is not the
    sole responsibility of Finance
    Department, rather, every operation
    departments
Maxim
• I only earn money by manufacturing
  –   Better quality
  –   Lower price
  –   Higher productivity
  –   Higher return on lower equity capital
  –   And nothing more….
Do not only use memory
• The financial accounts remind you and
  give you an objective view

• Ask your Finance staff to explain

• Demand your Finance team to provide
  management accounting information
Be focus
• Core competence

• What is your strength?
  – You can think more but you can only do
    little


• Legal entity concept
Avoid Over-Trade
• Wear the right hat

• Continuous checking the size of your
  head and the size of your hat

• the measuring tools are
  – management accounting reports
  – numeric analysis from your finance staff
  – Regular meetings with management team
• Trust
  – Build the atmosphere of entrust
• Transparency
  – Everyone knows the norm, the way and its
    rationale within the organization explicitly
• Social Capital
  – Well-connected within the organization
Power
• How to demonstrate power?
• People who have it deny it
• People who want it try not to appear to
  be seeking it
• People who are good at getting it are
  secretive about how they got it
• People who have it may not know how
  they got it, and they do not know when
  they will lose it
The critical is
• Why don’t you define power explicitly?
  –   Knowledge and application is power
  –   Execution is power
  –   Power ≠ Complacency
  –   Power ≠ One voice
  –   Power ≠ Unidirectional communication
  –   Power ≠ Blind compliance
  –   Power ≈ Influence
  –   Power ≈ Humility
  –   Power ≈ Collaboration
  –   Power ≈ ……..
To be an authentic leader
•   Be bold to face our fears
•   Ready to challenge our assumptions
•   Be able to change our self-perception
•   Empowered to get the intelligence of
    everybody, not from thyself




                     Managing others by defining Yourself
The intelligence to raise Question
Techniques
• 5-Why
• Not a shame if not knowing the answer,
  what critical is no pretense of
  knowledge
• Extend the base of knowledge providers
• Empathy
• No rush for perfect answer

                         Management By Question
Business takes risks,

But measurement risks

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Risk Management For Manufacturing

  • 1. Risk Management for Manufacturing By Dick Lam May 9, 2009 Hong Kong
  • 5. Gordon Brown, 23 November 2008 CUT VAT by 2.5 per cent to encourage consumer spending. I'll give help when INCREASE the state pension by between £4 and £5 a you need it week. INTRODUCE temporary tax cuts for low-income families, who are more likely to spend and give the economy a boost. CANCEL planned tax rises on cars and small businesses and cuts in tax allowances. INCREASE spending on schools, hospitals and transport projects. The rescue will increase national debt to record levels, with Britain set to borrow up to £120 billion a year by 2011. Taxpayers already spend over £300 a year EACH just on the interest on national debt.
  • 6. Barack Obama, 25 November 2008 • pump money into the battered economy • create 2.5 million new jobs • a tax cut to the poor and middle class • make massive government investments in energy-saving and other technologies designed to pay for themselves in the long run quot;will be about $500 billionquot;
  • 7. George Bush, 25 November 2008 • US$800 billion to be spent • unfreeze credit on student loans, credit cards and car loans be returned to normal levels • stabilize the system and support the lending that is vital to our economy
  • 8. 金融海嘯下的日子…… 美國人賣血賣精子過活 經濟不景,失業人數飆升,越來越多美國人被迫 出 賣 身 體 求 活 , 包 括 賣 血 ( 每 包 390 港 元 ) 、 賣 精 子 ( 每 次 780 港 元 ) 、 賣 卵 子 ( 每 個 54,600 港 元 ) 和 頭 髮 ( 一 條 馬 尾 值 1,560 港 元 )。 以賣卵子為例,申請賣卵者由每天兩人增至 20 人 。 美 國 Msnbc 網 站 蘋果日報 2008-12-07
  • 10. Cash is King In retrospect, • Was there a day in the past that I did not have any cash issue? – Yes. • Why? When you have sufficient or more than enough cash, what did you actually do? – ………..
  • 11. Where to get money? • Stockholders • Bank • Business – Profit – Customers – Suppliers – Assets – Employees??
  • 12. Stockholders, do you have money? • Yes – But, why don’t you invest? – No problem. Can I get back the money? And when? • No – Then, what should we do? – Fight or Flight?
  • 13. BANK A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain. Robert Frost (1874 -1963), US poet
  • 14. 4C principles • Capacity - the ability of the owner/manager/business, as lending to a project=lending to the person • Capability - the feasibility for the project to make profit and cash flow to pay for the interest and repayment of principle • Collateral - guarantee for the loan • Condition - the market atmosphere on the business sector
  • 15. It is all a matter of TRUST! Trust You & Your Business But, why should I believe you?
  • 16. Business • Profit = Sales – Cost – Expenses • Customers: A/R • Suppliers: A/P • Asset: True Value
  • 17. Where to burn money? • Operating Expenses • Capital Expenditure • Raw Material
  • 18. Business takes risks, Need to master the risks
  • 19. Agenda 1. Financial body check-up 2. Re-identification of core competence 3. Risk management: A/R 4. Risk management: Production & Inventory 5. Risk management: Cash 6. Risk management: People 7. In-depth meaning on Risk Management
  • 20. 林楚祺 Dick Lam • 香港浸會大學工商管理學士 • 香港城市大學電子商貿碩士 • 在讀香港工商管理博士(DBA)學位 • 香港會計師公會(HKICPA)會員 • 英國特許會計師公會(ACCA)資深會員 • 曾任職不同類型企業,包括港資、中資及美資公司, 長期於國內工作,善於管理會計、供應鏈、財務策 略、國內稅務計劃,有超過18年實戰經驗 • http://360.yahoo.com/lamchorki128 • dicklam128@hotmail.com
  • 21. Agenda 1. Financial body check-up 2. Re-identification of core competence 3. Risk management: A/R 4. Risk management: Production & Inventory 5. Risk management: Cash 6. Risk management: People 7. In-depth meaning on Risk Management
  • 22. What “finance 財務” means? 管理會計 Management Accounting 財務會計 財務學 Financial Corporate Accounting Finance
  • 23. Relationship between Financial System and Financial Reports 會計系統 accounting system 管理會計 Management Accounting 財務會計 Financial Accounting
  • 24. NOW Know the Present, Know what you “really” have
  • 25. Balance Sheet 營業額 銷售成本 流動 毛利 銷售費用 管理費用 營業利潤 流動 財務費用 稅前利潤 所得稅 長期 資產 負債 稅後利潤 股息 資本 本年保留利潤 固定 盈餘 股本 At a particular time
  • 26. Balance Sheet 流動 流動 長期 資產 負債 資本 固定 盈餘 平衡點 股本
  • 27. Balance Sheet Assets 銀行結餘 應收帳款 存貨 流動 投資 設備 固定 廠房 商譽
  • 28. Balance Sheet Assets 自我控制 銀行結餘 應收帳款 存貨 流動 資產隨時可以 投資 增值或縮水 設備 固定 廠房 商譽
  • 29. Value of Assets 遊戲規則 Rules of Game? 市場價格 market price 公允價值 fair value How to report Asset Value? – If long term, at cost – If short term, at market value – Who knows your intention?
  • 30. Balance Sheet 資產 自我控制 銀行結餘 應收帳款 存貨 流動 投資 設備 固定 廠房 商譽
  • 31. Operation, Investment & Arbitration 營運,投資與投機 我的控制能力有多少? How much do I control? 佔我的資金比例有多少? What portion of my funding has been put in?
  • 32. Controllable Cash Value 可操控的現金值 以審慎﹝悲觀﹞prudence的態度 去衡量現有的資產值 應收賬款 A/R 庫存 Inventory 成品 F/G 歷史價值 historical value 變現價值 net realizable value 半成品 WIP 使用價值 usable value 原材料 R/M 投資物 Investment
  • 33. PAST
  • 34. Profit & Loss A/C 營業額 銷售成本 毛利 銷售費用 管理費用 營業利潤 財務費用 For a period of times 稅前利潤 所得稅 稅後利潤 股息 本年保留利潤
  • 35. Profit & Loss A/C 營業額 銷售成本 公司整體表現 毛利 Overall company performance 銷售費用
  • 36. A Paradox of Pricing Formula • Price = Unit Cost + Mark-up % • Cost: Variable Cost, Fixed cost • Variable Cost: more output, fixed unit cost • Fixed Cost: Lump Sum / Output – more output, less unit cost – less output, more unit cost Solution: Convert fixed cost to variable cost as far as possible
  • 37. 產品分析 Product analysis By each product type, changes in 審核核心競爭力 – Quantity core competence – unit price 發現浪費 wastage – cost elements
  • 38. What big enterprises do • 控制非增值性的費用﹝差旅費﹞cut expenses • 凍薪 freeze salary • 裁員 redundancy • 拆賣 disposal
  • 39. Understand costing structure • 生產成本 vs. 費用 • Production cost vs. expenses • 變動成本 vs. 固定成本 • Variable cost vs. fixed costs • 產品盈虧平衡點 • Break-even point
  • 40. The third report 現金流量表 Cash Flow Statement 利润 现金 ===== PROFIT CASH
  • 41. The Future Forecast Cash Flow Statement 現金流量表 賒銷 估算 信貸 credit 晚點再討論
  • 42. People we face 供應商 supplier 員工 staff 客戶 Customer
  • 43. Decision & Behavior Model 預估結果 他人經歷 Expected result Others experience 自身體驗 行為 實際結果 Self feeling behavior Actual result 本身經歷 Self experience What made me earn money in the past?
  • 44. Risk Nature Financial Risk Operation Risk How much risk are you willing to take?
  • 45. Alert!! • Key Performance Indicators – The higher the index, the better the performance • Key Risk Indicators – The lower the index, the more secured the business
  • 47. Agenda 1. Financial body check-up 2. Re-identification of core competence 3. Risk management: A/R 4. Risk management: Production & Inventory 5. Risk management: Cash 6. Risk management: People 7. In-depth meaning on Risk Management
  • 48. What is your core competence? • Product vs. Service • Product Design? • Quality? • Cost? • Assembly? • Manufacturing? • Supply Chain?
  • 49. What is your sales strategy in 2009? • Selling product or services (what services?) • Segmentation / Classification Market/Product • Existing Business vs. New Business – Level of confidence • Do you have the right people in place? – If no, then….. • What is your sales expense budget? Finish your job; people in China is hungry for yours
  • 50. Projection > Prediction 2008 Gross 2008 2008 net Inc/(Dec) in New (Lost) X Y Z Net 2009 Customers Forecast Rebate Forecast Contract Price Program Program Reason Reason Reason Change Budget A B C D E F G H Total: Critical Elements: Surprise and Fulfillment
  • 51. Projection > Prediction 2008 Gross 2008 2008 net Inc/(Dec) in New (Lost) X Y Z Net 2009 Products Forecast Rebate Forecast Contract Price Program Program Reason Reason Reason Change Budget A B C D E F G H Total: 只要信, 不要問; 我办事, 你放心!? 只要信 不要問 你放心!?
  • 52. Keep the sales • Why customers loyal to your company? • Have you ever got the satisfaction score from your customers? • How do your customers look at you? • Exploration vs. Exploitation – Sales & Marketing / Customer Service – Product Engineering (PE) Make your people happy so that they can make your customer happier
  • 53. Any Derail? In terms of: • Products • Services • Functions Who is going to answer the above question?
  • 54. 3 Stories to share
  • 55. Derail because of windfall profit • Building copper products • Profit from Hedging of copper commodity • Over-trading
  • 56. Business Longevity • Manufacturing to Assembly • Injection, Stamping, Weaving, Electroplating, Processing & final Assembly • Where is the focus?
  • 57. Trust & Trustworthiness • What is the basis for trust? • Check & Balance • What is the underpinnings of the business?
  • 58. Agenda 1. Financial body check-up 2. Re-identification of core competence 3. Risk management: A/R 4. Risk management: Production & Inventory 5. Risk management: Cash 6. Risk management: People 7. In-depth meaning on Risk Management
  • 59. Accounts Receivable • Examine the current situation • Spot out the customers • Review the collection strategy and credit hold policy • Re-connect with your customers (how much you know them?) • Create forward-looking credit control policy • Any way to generate more cash from A/R?
  • 60. Examine the health of A/R • A/R Aging Report and its history Gross A/R Customer Credit Terms Current Over 1 Over 7 Over 30 Over 60 Over 90 Over 120 Total 0 0 0 0 0 0 0 0
  • 61. • What is the total overdue debt? • What is the longest credit terms accepted by the company? • Any credit terms > the standard term? • For customers with overdue debts, do we still release delivery? If yes, why? • How frequent do you read the aging report? – Monthly? Weekly? Daily? Or Never?
  • 62. • Cash Projection Collection according to credit term D+1wk D+2wk D+3wk D+4wk D+2mth D+3mth Customer Credit Terms Current OverDue Total 0 0 0 0 0 0 0 0
  • 63. • Performance review of Collection • Any follow-up actions? Planned Actual Customer Credit Terms Current OverDue Collection Collection Difference Remarks Total 0 0 0 0 0
  • 64. • Forward-looking – Credit Limit Alert Report (Weekly) • Current Balance + Average Invoice Amount vs. Credit Limit • Report generated if it exceeds the credit limit, alert the customer & salesmen of this would-be credit hold situation – Know more about your customers • From your salesman & staff • From your suppliers • From your competitors • From your environment
  • 65. • Local purchased materials for local sales • Imported materials for export sales • Consignment – Title of ownership • Bank Draft • Fixed cost vs. variable cost with spare capacity
  • 66. Key Risk Indicators (KRI) • % of overdue debt / Total A/R • Top 10 delinquent A/R and amount • Late Payment customers and amount • ….
  • 67. When is AR created? • Sales on credit – Pass on ownership (擁有權) of the products – Pass the ownership risk • Consignment goods – Pass on custody (保管權) of the products – Do not pass the ownership risk
  • 68. Agenda 1. Financial body check-up 2. Re-identification of core competence 3. Risk management: A/R 4. Risk management: Production & Inventory 5. Risk management: Cash 6. Risk management: People 7. In-depth meaning on Risk Management
  • 69. Inventory Holding • Inventory Aging Report HKPC Stock Aging Report As at Jan 31, 2006 Cur: USD Items Ttl Amt 0-30 31-60 61-90 91-120 121-150 151-180 181-360 >360 FG 85,546 133,435 (142,168) - - - - - 94,278 Wire 225,292 210,939 2,405 618 129 492 6 150 10,553 Terminal 310,827 195,365 67,066 30,556 2,534 3,611 100 3,169 8,426 Housing 221,425 132,676 49,172 7,675 6,185 9,207 970 5,737 9,803 Electrical parts 103,836 17,170 18,155 3,331 - 41,730 23,431 20 - PVC (Moulding) 45,036 27,769 1,307 227 6,720 - - 8,494 519 Heat shrinkable tubings 38,073 27,844 4,075 - - - 1,395 3,097 1,663 Other 64,652 40,215 14,824 799 2,040 863 363 569 4,979 ---------------------------------- ------------------ ----------------- ------------------ --------------- --------------- ----------------- ----------------- ----------------- ---------------------- Total 1,094,687 785,412 14,836 43,207 17,608 55,903 26,264 21,236 130,221 =================== ========== ========= ========== ======== ========= ========== ========== ========== ============
  • 70. ACC Stock Aging Report As at Jan 31, 2006 >360 181-360 151-180 121-150 91-120 61-90 31-60 0-30 0-30 31-60 61-90 91-120 121-150 151-180 181-360 >360 Ttl Qty Ucost Ttl Amt Terminals 1,889,028 0.01 23,046 - - - - 29,028 - 840,000 1,020,000 8911415P01 TERMINAL HEYCO 5703 12,444 10,248 - 354 - - - - - - - - - - 676,238 3,020,000 3,696,238 8911409-2C TERMINAL AMP 350536-1 0.00 17,003 13,892 3,111 - - - - - - 938,003 0.02 16,321 - - - - 26,003 - 408,000 504,000 8911415P07 TERMINAL HEYCO5880 8,770 7,099 - 452 - - - - - - - - - - 33,242 418,000 451,242 8911404-F1 TERMINAL AMP 2-520334-2 0.03 12,003 11,119 884 - - - - - - 1,118,340 0.01 10,624 - - - - - - 152,340 966,000 TERM403-G81 TERMINAL AMP-JAPAN 170328-1 9,177 1,447 - - - - - - - - - - - 2,000,000 - - 2,000,000 A-8911409-2C TERMINAL AMP 350536-1 0.00 9,200 - - 9,200 - - - - - 246,612 0.04 8,903 - - - - - - - 246,612 TERM404-K89 TERMINAL TYCO 521282-1 8,903 - - - - - - - 227,878 0.04 8,887 - - - - - - 17,878 210,000 TERM404-6Z TERMINAL ETCO#PDF225FRTHB 8,190 697 - - - - - - 215,500 0.04 8,405 - - - - - - 5,500 210,000 TERM404-LP Terminal ETCO PDF224NFRTHB 8,190 215 - - - - - - 649,215 0.01 8,310 - - - - - - 511,215 138,000 TERM405-80 TERM,MOLEX,43178-1001 1,766 6,544 - - - - - - - - - - - - - 235,317 235,317 TERM403-5A TERMINAL ETCO#PD260NFRTHB 0.03 7,530 7,530 - - - - - - - 730,481 0.01 7,261 - - - - - - 78,481 652,000 TERM409-P10 TERMIANL JST# SLM-41T-P1.3E 6,481 780 - - - - - - - - - - - - - 1,203,768 1,203,768 8911409-TZ TERMINAL AMP 350416-1 0.01 6,380 6,380 - - - - - - - 1,906,875 0.00 6,293 - - - - - 592,875 1,314,000 - TERM409-DJ MOLEX SOCKET 39-00-0038 - 4,336 1,956 - - - - - - - - - - - 389,336 867,500 1,256,836 8911409-F8 TERMINAL AMP 350537-1 0.00 6,033 4,164 1,869 - - - - - - 680,520 0.01 5,989 - - - 32,520 - - 216,000 432,000 TERM408-OW TERMINAL MOLEX 43375-1001 3,802 1,901 - - 286 - - - - - - - - - - 296,292 296,292 8911403-I5 TERMINAL AMP 2-520183-2 0.02 5,955 5,955 - - - - - - - 1,141,662 0.01 5,937 - - - - - - 406,662 735,000 TERM406-M63 TERMINAL GEM 99470BS-2 3,822 2,115 - - - - - - 1,000,000 0.01 5,360 - - - - - 1,000,000 - - A-8911409-L2 TERMINAL AMP 350700-1 - - 5,360 - - - - - 792,048 0.01 4,831 - - - - - - - 792,048 8911409-K8 TERMINAL AMP 350687-1 4,831 - - - - - - - 761,228 0.01 4,720 - - - - - - 169,228 592,000 TERM406-M64 TERMINAL GEM 99475BS-2 3,670 1,049 - - - - - - - - - - - 752,000 - - 752,000 A-8911408-A7 TERMINAL AMP 770642-1 0.01 4,437 - - 4,437 - - - - - 138,260 0.03 4,010 - - - - - - - 138,260 TERM403-4D TERMINAL ETCO#PD163NFRTHB 4,010 - - - - - - - - - - - - - 57,090 75,000 132,090 TERM408-WF connector plug molex 40-06-20 0.03 3,963 2,250 1,713 - - - - - - 680,177 0.01 3,673 - - - - - - 80,177 600,000 8911409-L2 TERMINAL AMP 350700-1 3,240 433 - - - - - - - - - - - - - 124,581 124,581 TERM403-5B TERMINAL ETCO#PD165NFRTHB 0.03 3,613 3,613 - - - - - - - 102,622 0.04 3,612 - - - - - - 9,122 93,500 TERM404-ZK TERMINAL AMP 3-520997-2 3,291 321 - - - - - - - - - - - - - 545,335 545,335 8911409-TB TERMINAL AMP 350218-1 0.01 3,545 3,545 - - - - - - - 426,754 0.01 3,474 - - - - - 26,754 320,000 80,000 TERM408-R37 TERM,UTILUX,RE4820501-40 651 2,605 218 - - - - - - - - - - - 251 598,500 598,751 8911407-CS TERMINAL AMP 63625-1 0.01 3,353 3,352 1 - - - - - - 245,290 0.01 3,238 - - - - - - 185,290 60,000 TERM405-81 TERM,MOLEX,43178-3001 792 2,446 - - - - - - 307,302 0.01 2,612 - - - - - - 155,302 152,000 TERM408-OM TERMINAL MOLEX 43375-0001 1,292 1,320 - - - - - - - - - - - 550,000 - - 550,000 A-8911409-F8 TERMINAL AMP 350537-1 0.00 2,591 - - 2,591 - - - - - 88,973 0.03 2,367 - - - - - - 88,973 - 8911404-F9 TERMINAL AMP 2-520128-2 - 2,367 - - - - - -
  • 71. • Clearly identify what inventory can and cannot be used • Why are there so many unusable inventory? – Re-visit the planning process… – Any reward for minimize inventory level without affecting order fulfillment • Keep it or dispose it? Or sell back to the suppliers • Deferred customization
  • 72. Target Inventory • What is your target inventory level? • How do you measure it? Dec-03 Stock Value 8,500 Stock Days 91 days Jan-04 Feb-04 Mar-04 Apr-04 Cost of Goods Sold 3,253 1,540 3,548 4,500 Stock Value 8,500 Cost of Goods Sold Days Jan-04 3,253 30 ------------ 5,247 Feb-04 1,540 30 ------------ 3,707 Mar-04 3,548 30 ------------ 159 Apr-04 4,500 1 ------------ ------------ - 91
  • 73. Inventory Control Target I-Week: 2 Item A 27-Feb 6-Mar 13-Mar 20-Mar 27-Mar 3-Apr Opening 300 400 200 580 1,230 1,048 Incoming 600 250 700 1,000 160 480 Requirement 500 450 320 350 342 480 Closing 400 200 580 1,230 1,048 1,048 Inventory Weeks 0.89 0.63 1.67 2.78 2.08 1.88
  • 74. Tools for reduction • 7 Waste – Rework – Excessive Production – Conveyance – Excessive Motion – Waiting – Inventory in production area (pull system) – Inappropriate processing • Reward people for cost saving idea & action
  • 75. Order Lead Time • Time from the order placed by your customers to the time you deliver to them Day - O Day - D Day - O Day - D e d Tim Time me r Lea ad Ti Lead Orde ry Le ction rial e Produ Deliv Mate
  • 76. • Unquestionably, customers prefer short lead time to long • What is the element in lead time? • What is the bottleneck? • How to shorten it? Inventory Lead time
  • 77. • Suppliers – VMI – Consignment Inventory – Equalize MOQ to SPQ – Order cancellation agreement – Design-in to exploit opportunities – Be transparent to the suppliers • Come to visit my factories – Go to visit your suppliers – Exploit new suppliers
  • 78. New Project Evaluation ….. REQUESTED CAPITAL: 1,547,151 REQUESTED EXPENSE: 62,286 Capacity Expansion: 2008 2009 2010 3,930,777 3,930,777 3,930,777 Total Gross Sales 0.0% - - - Payment Discount 0.0% - - - Rebate 3,930,777 3,930,777 3,930,777 Total Net Sales % Tot Cost % Sales 89.0% 2,797,206 2,797,206 2,797,206 71.2% Direct Materials 1.4% 44,755 44,755 44,755 1.1% Material Adders 7.1% 224,044 224,044 224,044 5.7% Labor/Overhead 0.0% - - - 0.0% Logistics/Whse 2.5% 78,616 78,616 78,616 2.0% Import Duties 100.0% 80.0% Total Incremental Cost 3,144,621 3,144,621 3,144,621 MARGIN on Incremental Sales 786,155 786,155 786,155 786,155 MARGIN % Sales 20.0% 20.0% 20.0% 20.0% Cost Reduction: Total Cost Reduction - - - Requested Expense 62,286 62,286 62,286 COMBINED MARGIN 723,869 723,869 723,869 Ul/CSA Expense - SG&A % Sales N/A N/A N/A EBITDA 723,869 723,869 723,869 Depreciation: (Enter Depreciable Life) -----> 7 221,088 221,088 221,088 Taxable Income 502,781 502,781 502,781 Tax Rate 0.00% 12.50% 12.50% Tax Payments 0 62,848 62,848 Working Capital Items: DSO (Enter DSO) -----> (327,565) (327,565) (327,565) 30 Inv Turns-Normal (Enter Inv Turns) -----> (279,721) (279,721) (279,721) 10 Freight (Enter Days in Transit) -----> (61,145) (61,145) (61,145) 7 AP Days (Enter AP Days) -----> 582,751 582,751 582,751 75 Total Working Capital (85,680.0) (85,680.0) (85,680.0) EBITDA 723,869.0 723,869.0 723,869.0 Tax Payments 0.0 (62,848.0) (62,848.0) Working Capital Change (85,680.0) 0.0 0.0 NET CASH FLOW (1,547,151) 638,189 661,021 661,021 CASH FLOW ECONOMICS: RRR 13% NPV $ (6,585) IRR 12.8% PAYBACK (Years) 2.4
  • 79. • Capacity – Indirect labor vs. Direct labor – Salaried labor vs. Direct & Indirect Labor • What to save? – Let the employees to tell you – But don’t forget to motivate them
  • 80. KRI • Inventory Days • Obsolete Inventory vs. Inventory Values • Inventory with days > target • Order Lead Time • …..
  • 81. When to produce for customers? • Raw Material is converted to Finished Goods • Conversion cost is labor plus production capacity Buying capacity reserve (预订供应商 的生产能力)
  • 82. Working with Customers The competition Better design Higher quality Faster to market Value engineering in the supply chain • Share the supplier expertise and obtain long-term relationship
  • 84. Agenda 1. Financial body check-up 2. Re-identification of core competence 3. Risk management: A/R 4. Risk management: Production & Inventory 5. Risk management: Cash 6. Risk management: People 7. In-depth meaning on Risk Management
  • 85. Cash Cycle Stock Days Debtors Days Cash Cycle Cash Creditors Days Days Actual Trends Inventory DSO Days DPO Cash Cycle Dec 2007 160 32 85 107 Jan 2008 161 32 75 118 Feb 2008 84 37 88 33 Mar 2008 102 39 88 53 Apr 2008 127 36 93 70 May 2008 85 24 73 37 Jun 2008 83 21 77 27 Jul 2008 82 22 83 20 Aug 2008 80 22 95 7 Sep 2008 104 26 107 22
  • 86. Cashflow template Cashflow Cur: HKD'000 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Net Income 157 (258) 45 22 166 72 57 454 618 489 338 223 Add: Depreciation 117 117 117 117 117 125 125 125 125 125 125 125 Change of WC A/R (545) 2,172 (1,816) (249) 694 (374) (890) (1,246) (854) 338 890 374 Inventory 1,274 (632) 10 474 (605) (1,160) (1,339) (622) 574 880 453 1,156 A/P (803) (1,233) 784 (702) 380 1,323 1,412 706 (580) (1,063) (579) (1,062) Others --------- ---------- ---------- --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- (73) 307 (1,022) (478) 469 (211) (817) (1,162) (860) 155 764 468 Capex - - - - (200) - (1,200) - - - - - Cash (Surplus)/Loan Required (50) (165) 861 339 (552) 15 1,836 583 118 (769) (1,227) (815) --------- ---------- ---------- --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- 150 - - - - - - - - - - - Bginning Cash Balance 150 300 300 300 300 300 300 300 300 300 300 300 Net Cashflow 150 - - - - - - - - - - - Ending Cash Balance 300 300 300 300 300 300 300 300 300 300 300 300 ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== Sweet lemon; Sour grape!?
  • 87. Weekly cashflow forecast Asia Harness Week Week 45 Week 46 Week 47 Week 48 Week 49 Week 50 Week 51 Week 52 Week 53 Week 54 Week 55 Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast 10/26/08 11/2/08 11/9/08 11/16/08 11/23/08 11/30/08 12/7/08 12/14/08 12/21/08 12/28/08 1/4/09 1/11/09 Beginning Cash 226 226 441 122 422 292 292 58 258 105 146 476 VAT Receipts - - - - - - - - - - - - Other Receipts - Cash Receipts (A/R collections) 100 100 100 10 100 100 100 41 100 138 Total Cash Inflows - 100 100 100 10 - 100 100 100 41 100 138 Cash Payments (A/P Checks and wire transfers) (1,197) (1,919) (1,100) (1,100) (1,277) (1,200) (1,713) (1,000) (1,270) (1,100) Payroll (200) (40) (200) (40) Capital expenditures (188) (57) Other nonworking capital items VAT Payments Tax Payments Other Payments Total Cash Outflows - (1,385) (1,919) (1,300) (1,140) - (1,334) (1,400) (1,753) (1,000) (1,270) (1,100) Loan / (Excessive cash) 1,500 1,500 1,500 1,000 1,000 1,500 1,500 1,000 1,500 1,000 Total Intercompany - 1,500 1,500 1,500 1,000 - 1,000 1,500 1,500 1,000 1,500 1,000 Interest - - - - - - - - - - - - Principal - - - - - - - - - - - - Total Financing - - - - - - - - - - - - Other - - - - - - - - - - - - Ending Cash 226 441 122 422 292 292 58 258 105 146 476 514
  • 88. Weekly Projection • Cash collection projection • Cash payment projection – A/P • How much to pay and how much be delayed? • Not a good strategy of always paying your supplier late – Expenses • On time payroll release is a must!! – Capex
  • 90. Agenda 1. Financial body check-up 2. Re-identification of core competence 3. Risk management: A/R 4. Risk management: Production & Inventory 5. Risk management: Cash 6. Risk management: People 7. In-depth meaning on Risk Management
  • 91. People • This is you and me that usually expose the company to risky situation • Why & How? • Are you using the following assumption: – Manager’s job is to protect the company from the abuses of the workers?!
  • 92. Control The Self The Employee The environment Make your people happy so that they can make your customer happier
  • 93. • Am I the only one that knows the company and its business? • Do I welcome opposite comment? • Do I continuously ask for negative opinion? • Do I reward people for preventing me from doing bad deal which I originally thought it was good? • How do I describe “Luck”?
  • 94. • There is no repeated fluke • Goodness & badness co-exist (yin & yang) • The value of devil advocate (loyal opposition) • The underlying principles of running the existing business • The line between acceptable & unacceptable behavior 曲突徙薪亡恩澤, 曲突徙薪亡恩澤,燋頭爛額為上客
  • 95. • Belief Systems – Systems to articulate the values and direction that senior managers want their employees to embrace – Draw employees’ attention to key tenets of to business: • how the organization creates value • The level of performance the organization strives for • And how individuals are expected to manage both internal & external relationships What is your organization risk appetite?
  • 96. • Boundary Systems – Management principle: power of negative thinking, minimum standards – Tell people what not to do only and let them figure out what to do – Of particular value when employees under pressures to achieve superior results being collided with stricter codes of behavior Profit prioritize or Growth prioritize?
  • 97. Who knows your business? • Yourself • Your employees • Your suppliers • Your customers • Your bankers • Your competitors • But not your investment consultants 上下同欲者勝
  • 98. It is all a matter of TRUST! Trust You & Your Business Trust But, why should I believe you?
  • 99. Trust • Is myself trustworthy? – To the bank and to the employees? • Is my business trustworthy? • Is my business philosophy trustworthy? • Do I trust my employees? • Do my employees trust me? • How do I earn the trust? • ………….
  • 100. Some sidetrack Trust: • I cannot ask for it • I can accept being trusted or give trust • When I trust, I expect something happen • When I trust, I take the risk • It liberates and mobilizes human agency, release creative, uninhibited, innovative, entrepreneurial activism toward other people
  • 101. To be trustworthy • I need to be financially healthy – proved by the Balance Sheet & PNL • I need to meet the expectation of the creditors, suppliers, customers & employees • I need to be consistent with what I said and intended to do
  • 102. Risk vs. Uncertainty • Risk: I do not know the future • Do I create uncertainty? • Why?
  • 103. Transparency - GIVE • Goals • Identity • Values • Emotion
  • 104. 5 R – Cost saving strategy • Remove – Why does a particular expense need to incur? Is there a way to totally remove this expense? • Replace – If not possible to remove this expense, can we replace the function with a cheaper one? One to say Yes, Two to say No.
  • 105. • Reduce – If not possible to remove it, is there a way to reduce the spending? – We should think about request for price reduction from supplier or source alternative supplier. There is no repeated fluke!
  • 106. • Redesign – If not possible to reduce, can we re-design the process to utilize the scarce resources? – Kaizen should be a continuous process. – There should be a regular review of existing process by freshman. – The old process creator should only act as a information provider but not member of new Kaizen group. 沒有最好 只有更好
  • 107. • Redistribute – If not possible to redesign the process, can we have the function to share its value to different functional area as well as the cost? – Maximization subject to constraint is maxim not only in economics but also in cost saving perspective. Great intelligence comes from heart, not mind
  • 108. How to pay your staff • Buy their time or their talent • Treat them as staff or “working partner” • Pay by fixed or portion in variable YOUR STAFF ARE THE ONES DOING THE BUSINESS & GENERATING THE INCOMES
  • 109. 墨子 – 修身編 • 志不强者智不达;言不信者行不果 • 行不信者,名必耗。名不徒生,而誉不自长 • 务言而缓行,虽辩必不听 • 言无务多而务为智,无务为文而务为察 • 善无主于心者不留,行莫辩于身者不立 • 名不可简而成也,誉不可巧而立也
  • 111. Agenda 1. Financial body check-up 2. Re-identification of core competence 3. Risk management: A/R 4. Risk management: Production & Inventory 5. Risk management: People 6. Risk management: cash 7. In-depth meaning on Risk Management
  • 112. No wastage Utilize resources especially those unrecorded 人力資源 人事 人力資本 human personnel human capital resources
  • 113. Devil Advocate • Who are they? • Where are they? • When do we need them? • Financial risk management is not the sole responsibility of Finance Department, rather, every operation departments
  • 114. Maxim • I only earn money by manufacturing – Better quality – Lower price – Higher productivity – Higher return on lower equity capital – And nothing more….
  • 115. Do not only use memory • The financial accounts remind you and give you an objective view • Ask your Finance staff to explain • Demand your Finance team to provide management accounting information
  • 116. Be focus • Core competence • What is your strength? – You can think more but you can only do little • Legal entity concept
  • 117. Avoid Over-Trade • Wear the right hat • Continuous checking the size of your head and the size of your hat • the measuring tools are – management accounting reports – numeric analysis from your finance staff – Regular meetings with management team
  • 118. • Trust – Build the atmosphere of entrust • Transparency – Everyone knows the norm, the way and its rationale within the organization explicitly • Social Capital – Well-connected within the organization
  • 119. Power • How to demonstrate power? • People who have it deny it • People who want it try not to appear to be seeking it • People who are good at getting it are secretive about how they got it • People who have it may not know how they got it, and they do not know when they will lose it
  • 120. The critical is • Why don’t you define power explicitly? – Knowledge and application is power – Execution is power – Power ≠ Complacency – Power ≠ One voice – Power ≠ Unidirectional communication – Power ≠ Blind compliance – Power ≈ Influence – Power ≈ Humility – Power ≈ Collaboration – Power ≈ ……..
  • 121. To be an authentic leader • Be bold to face our fears • Ready to challenge our assumptions • Be able to change our self-perception • Empowered to get the intelligence of everybody, not from thyself Managing others by defining Yourself
  • 122. The intelligence to raise Question Techniques • 5-Why • Not a shame if not knowing the answer, what critical is no pretense of knowledge • Extend the base of knowledge providers • Empathy • No rush for perfect answer Management By Question
  • 123. Business takes risks, But measurement risks