Today,we continue the serialization of Enterpreneur which was suspended last Tuesday due to some technical hitches.

ctoring It is convenient to say that the oldest method of commercial lending is factoring. This is a variation of accounts receivable financing in which the bank (or a factoring company) buys receivable outright. The practice of raising funds for a business through the sale of accounts receivable is referred to as factoring. Under this arrangement, a small business either sells its accounts receivable to a finance company outright or uses the receivables as collateral for a loan. The bank or factoring company assumes credit risks and takes on collections responsibilities, receiving payments directly from your customers. The purchase price of the receivables (or the amount of loan) is discounted from the face value of what the business owed, to allow for potential losses (in the form of unpaid accounts) and for the fact that the finance company will not receive full payment of the loan until sometime in the future.MEDIUM-TERM LOANS Forecasting helps entrepreneurs to develop a financial plan. This plan specifies the amount of funding the company will need over various time periods and the most appropriate sources of obtaining those funds. Short-term loans tend to be granted by banks without too much concern for collateral since these loans are usually self-liquidating from sales made in the ordinary course of business operations. Medium-term loans are loans with a duration of one to five years, which are the usual way to finance machinery and equipment, including plant alteration, and expansion. The company’s assets financed are usually serves as the collateral for the loan, but the bank may ask for additional collateral, particularly if the entrepreneur is just starting the business. The bank will, however, expect the asset to serve as the source of repayment, in terms of generating increased revenues. Let’s examine two major types of medium-term loans as listed below.Term loanMost term loans providing about 80 percent of total costs are written either for five years, with a refinancing clause, or for the useful life of the asset. In practice, repayment may be quarterly or half yearly depending of the terms and conditions in the loan agreement. The typical repayment schedule calls for instalments of principal plus interest. Principal payments remain constant, but interest, computed over the term of the loan. Consequently, instalments are highest at the start, although the company can arrange to tailor the repayment schedule to meet its anticipated cash flow.Promissory noteSimply put, promissory note can be referred to as a contract to pay money to a person or organisation on a specified date for a good or service received. The entrepreneur borrows money from a person or an institution, signing a promissory note. The note is a commitment to make regular payments on the loan, including interest. Medium-term loans are usually repaid within 3 to 5 years but may extend to 7 or 10 years. For such loans, a business may sign what is called a term-loan agreement. A term-loan agreement is a promissory note that requires the borrower to repay the loan in specified instalments (e.g. monthly). In other words, some banks offer a variation permitting the company (borrower) to make approximately equal monthly payments over the entire loan period. In contrast to short-term loans, the bank may impose operating restrictions on the company. The bank may insist that the company maintains a certain level of working capital or current ratio (current assets/current liabilities); or limits may be imposed on the distribution of dividends or on other debt.LONG-TERM LOANSLong-term loans are loans of five or more years, least often sought and probably the hardest to get, will be linked to specific business purposes. In setting long-term financing objectives, financial managers generally ask three major questions:What are the organisation’s long-term goals and objectives?What are the financial requirements needed to achieve these long-term goals and objectives?What sources of long-term capital are available and which will best fit the organization needs?In business, long-term capital (loans) is used to buy fixed assets such as plant and machinery, office equipment, to develop new products, and to finance expansion of the organisation.Term loansMost term loans providing about 80 percent of total costs are written either for five years, with a refinancing clause, or for the useful life of the asset. In practice, repayment may be quarterly or half yearly depending on the terms and conditions in the loan agreement. The typical repayment schedule calls for instalments principal plus interest. Principal payments remain constant, but interest, computed over the term of the loan. Consequently, instalments are highest at the start, although the company can arrange to tailor the repayment schedule to meet its anticipated cash flow.Personal loanMost bankers believe an owner’s personal assets should provide much of the financing for major expansion and acquisition; the entrepreneur may have to think about including a secured personal loan in the business long-term financing plans. Any property in entrepreneur own name could be used as collateral, along with marketable securities, savings account balance, and certificates of deposit. It is worthy of note that such collateral is readily acceptable, and a personal loan may be easier to negotiate than a business loan.Start-up loanStarting up parallels expansion and acquisition, in the bank’s view, which means that the entrepreneur will have to commit much of his/her own money into the project. In addition to funds raised by personal loans and partners’ investments, he/she may be able to get a term loan from the bank.Asset-based loanThe degree to which a company funds the growth of the business by debt is known as leverage. Asset-based loan has been long used by big corporations, but not commonly used by small companies. Leverage is often perceived as the most cost-effective route to capitalization because the interest that companies pay on debt is a tax-deductible expense in most countries of the world, whereas the dividends paid to investors are not. Leverage is the raising of needed funds through borrowing to increase the firm’s rate of return. Obviously, debt increases the risk of the company; it also enhances the company’s ability to increase profit. This takes us to leverage buyout (LBO), which is an attempt by employees, management, or a group of investors to purchase an organisation. A leveraged buyout occurs when an entrepreneur (or any employee group) uses borrowed funds to purchase an existing venture for cash. It is interesting to note that the target company’s assets are used to finance the takeover; virtually every asset (such as receivables, raw materials, inventory, machinery and equipment) can be used. In other words, leverage financing is a method of corporate funding in which a higher proportion of funds is raised through borrowing than stock issue.3.5 How to Write a Loan ProposalThe heart of most lending decisions is company value. Every banker wants to hear how his/her loan will improve the worth of the company. The entrepreneur or business manager should address his/her presentation to the question which invariably will improve the chances of the loan being approved. The underlisted are guidelines to write a loan proposal.A loan proposal consists of nine parts. It is virtually written already, though, if the entrepreneur or business manager has an up-to-date business plan on hand, a simple shift of emphasis toward the new audience will convert a business plan into a loan proposal.SummaryOn the first page, the entrepreneur or business manager should give his/her name and title, company name and address, nature of business, amount sought, purpose, collateral security and source of repayment.Top Management ProfilesIn order to sell the company’s top executives to the bank, the entrepreneur or business manager must develop a paragraph or two on each of the executive, touching on background education, experience, skills, areas of expertise, accomplishments. Bankers seek their ultimate security in experienced management.Business DescriptionThe entrepreneur or business manager must give details of his/her company’s legal structure and age, number of employees and union status, and current business asset. Define the company’s products/services and markets, identifying customers and competitors. Describe the inventory in terms of size, rate of turnover, and marketability. Bankers favour established and conventional merchandise, as opposed to trendy and perishable items. Report the status of the company’s accounts receivables and accounts payable. Bankers look for accounts to be less than 60 days old and for receivables to be spread among many customers, not concentrated in a few big one. If there are “contingent liabilities”, or potential expenses, acknowledge them here.Management Accounts (Projections) It is exceedingly important that the projections should be based on the company’s current share of the market, explain the growth opportunities and describe how the plan to exploit these opportunities for the next one year and five years. List the alternative and fallback plans. Work out a realistic timetable for achieving the goals. Bankers judge the business plans and goals in terms of the industry’s practices and trends.Financial StatementsThe entrepreneur or business manager should get together balance sheets and income statements for the past three years, including current figures, and make projections for the next three years. Bankers are more comfortable with audited statements. If the entrepreneur or business manager can’t afford a full audit, ask the accountant for a financial “review”. While less convincing than an audit, this new intermediate procedure gives the banker more assurance than unaudited statement. Prepare two sets of projected balance sheets, and income and cash flow statements, one predicated on receiving the loan and the other on going forward without it. Although critical to proving that the loan will increase company worth, the projections must be realistic. Bankers match projections against published industry standards, searching for padded earnings and meager cost estimates. Personal financial statements, including tax returns for the past three years, must also be submitted, since the company networth is a factor. Bankers usually check the entrepreneur or business manager personal rating, as well as the company’s.Purpose The entrepreneur or business manager needs to pinpoint the proposed use of the loan. A request for “working capital” will elicit questions, not money. Instead, explain what the working capital is for, e.g., “To build up Christmas inventory by increasing production, starting in the last quarter of the year.Amount Ask for the precise amount needed to achieve the purpose, and support the figures with estimates from suppliers, for example, and previous years’ cost figures. Don’t ask for too much, expecting that the request to be trimmed, or for too little, hoping that the smaller the request, the more likely an approval. Bankers know costs. They’ll suspect the costing process is faulty, if an inappropriate amount is being sought. Repayment PlansThe pivotal aspect of the proposal is repayment plans, which should be formulated in the light of several banking axioms. First asset must match loan. Any asset that needs to be financed must last at least as long as the loan period. Second, the asset should generate the repayment funds, by increasing sales, cutting costs, or heightening efficiency. Third, the projected balance sheet should clearly clarify the company’s capacity to meet interest as an expense, and to repay principal from net profits. Finally, the entrepreneur or business manager must provide “two ways out”, or two different sources of repayment. The banks wants assurance that if the first way – the asset and the company is blocked, there’s a second, ordinarily comprising the entrepreneur or business manager own and perhaps others’ guarantees, validated by an accountant.Collateral Security Collateral refers to assets owned by the entrepreneur that can be pledged as security for the repayment of the loan. The value of collateral is not based on the assets’ market value, but rather the discounted value having taking into consideration the value that would be lost if the assets had to be liquidated. Collateral can be described as insurance against loss that can occur if the loan is not repaid; the lender will dispose off the pledged assets.Suffice it to mention at this juncture that it may be bad to lack financial information, it is even worse to try to hide anything that may the entrepreneur or business manger fears may damage the chances of getting the loan. The watch word here is “be candid” as the bankers and customer good relationship is rooted in trust, On a final note, a bank is a business like any other, and will go to some lengths to satisfy customers most especially now, as competition for the small business market heats up. 3.6 Government Intervention Funds for MSMEs in NigeriaMicro, Small and Medium Enterprises (MSMEs) are critical to the development of any economy as they possess huge potentials for job creation, improvement of local technology, output diversification, development of indigenous entrepreneurship and forward integration with large-scale industries. MSMEs account for the majority of businesses worldwide, however, access to finance is a key constraint to MSME growth, it is the second most cited obstacle facing MSMEs to grow their businesses in emerging markets and developing countries. Obviously, the shortage of finance occupies a central position as commercial banks which remain the biggest source of funds to MSMEs are not well disposed towards granting loans to the sub-sector because of perceived risks and uncertainties.Research studies revealed that there has been gross under performance of the MSMEs sub-sector and this has undermined its contribution to economic growth and development. The dominant issues affecting the MSMEs in Nigeria can be categorized into namely: low managerial skills, inadequate funding, unfriendly business environment and lack of access to modern technology. Today, MSMEs are less likely to be able to obtain bank loans than big corporations; instead, they rely on personal savings, friends and family to raise funds to enable them launch and run their enterprises. It is on this pedestal that Federal Government of Nigeria has made concerted effort to create an enabling environment for MSMEs in the country to access Government MSMEs intervention funds and grants.There are two ways businesses get funding namely: equity and loans. The Federal Government of Nigeria in an attempt to grow and sustain the MSMEs sub-sector has made available several intervention funds, grants and loans to the small businesses. Suffice it to mention that most MSME owners do not have an ideal that these means of funding are in existence. Presently, the Central Bank of Nigeria (CBN) has 37 intervention funds targeted at stimulating the economy and addressing the issue of unemployment. In this section, we will consider five major government intervention funds for MSMEs in Nigeria.Five Major Government Intervention Funds for MSMEs in NigeriaMicro, Small and Medium Enterprises Development Fund (MSMEDF)The CBN launched the Micro, Small and Medium Enterprises Development Fund (MSMEDF) on August 15, 2013, with a share capital of N220 billion. The Fund was established in recognition of the MSME sub-sector to the economy and the existing huge financing gap. The CBN’s N220 billion MSMEDF fund creates more opportunities for borrowers. The sum of N85.190 billion has been disbursed to 746 beneficiaries as at May 28, 2021.Suffice it to mention that 10% of the fund has been dedicated to developmental objectives including capacity building, grants, and administrative costs. The remaining 90% is being released to Participating Financial Institutions (PFIs) at two percent for on-lending to MSMEs at a maximum interest rate of 9% per annum. Objectives of the MSMEDFThe broad objective of the Fund is to channel low interest funds to the MSME sub-sector of the Nigerian economy through PFIs to:Enhance access by MSMEs to financial services;Increase productivity and output of micro enterprises;Increase employment and create wealth; and Enhance inclusive growth.Benefits of the MSMEDF to stakeholdersPFIsThe developmental components will be utilized for capacity building of staff of PFIs, research and provision of other financial services infrastructure.MSMEsAvailability of long term single digit loans at 9% per annum. This has resulted in reduced cost of borrowing which will impact positively on the earnings of the MSMEs.Microfinance sub-sectorThe Fund will provide liquidity for the sub-sector and result in general improvement of the financial system stability.General PublicEmployment generation and wealth creation.What are the activities that can be financed under MSMEDF scheme?Agricultural value chain activities,Manufacturing and cottage industries,Artisans,Services,Trade and general commerce,Renewable energy or energy efficient products and technologies, andAny other income generating projects as may be prescribed by the CBN.It is worthy of note that only 10% of the commercial component of the fund shall be channeled to trade and commerce.Bank of Industry (BOI) Intervention FundsThe Bank of Industry Limited (BOI) hitherto known as Nigerian Industrial Development Bank (NIDB) was established in 1959. It is the oldest, largest, and most successful development financing institution in Nigeria. The BOI has one aim, to provide business and financial support services to Nigerian enterprises with attendant goal of achieving a transformation of the Nigerian industrial sector. There are various intervention funds under the Bank of Industry which include:N235 billion CBN Intervention Fund for manufacturing re-financing and restructuring facilities of banks’ loans.N300 billion CBN power and airline intervention fund (PAIF).FGN Special Intervention Fund for MSMEs (National Enterprise Development Programme).The BOI catchment areas include: youths, micro enterprises, small and medium enterprises and large enterprises.Intervention Funds Available to Youths A Graduate Entrepreneurship FundThe Graduate Entrepreneurship Fund (GEF) scheme was launched in October, 2015 and is implemented by the bank in partnership with National Youth Service Corps (NYSC) Directorate. The initiative is specifically targeted at youths undergoing the mandatory one year national service programme. Obviously, the aim is to change the job-seeking mindset of Nigerian youths to entrepreneurship and self-reliance by encouraging them to develop skills for self-employment, which invariably will contribute to the accelerated growth of the national economy.The objectives of Graduate Entrepreneurship Fund (GEF) are thus:To encourage graduates of tertiary institutions currently undergoing the compulsory one-year NYSC programme, to venture into business and become employers of labour rather than job-seekers.To address the entrepreneurship capacity gap of the young NYSC members.To deepen financial inclusion by de-risking the NYSC members and making them eligible for small business loans to be provided by BOI.Ensure sustainability of the business of the young graduates through effective monitoring of the corps members by the NYSC Directorate and BOI.Youth Entrepreneurship Support ProgrammeThe Youth Entrepreneurship Support (YES) programme is BOI’s effort at addressing the worrisome phenomenon of youth unemployment in Nigeria by building the capacity of the youths and funding their business ideas. The YES programme is aimed at equipping young people with the requisite skills and knowledge to be self-employed by starting and managing their own business. The YES programme is opened to young aspiring entrepreneurs between the ages of 18 and 35 years, with innovative ideals who must have a minimum education qualification of an Ordinary National Diploma (OND).FGN Special Intervention Fund for MSMEsThe FGN Special Intervention Fund for MSMEs (National Enterprise Development Programme) is a Federal Government of Nigeria initiative to provide subsidized loans to Micro, Small and Medium Enterprises (MSMEs) at single digit (9% per annum) all inclusive interest rate. The Fund is also to cater for applications received from SMEDAN under the National Enterprise Development Programme (NEDEP) scheme.Agric Small Medium Enterprise Investment Scheme (AGSMEIS)The Agri-business Small and Medium Enterprises Scheme (AGSMEIS) has been designed specifically by the Federal Government to promote agricultural businesses of micro, small, medium enterprises (MSMEs). The AGSMEIS is one of the initiatives of the CBN and Bankers’ Committee for supporting NSMEs financially. It also provides support to other NSMEs to facilitate employment generation and sustainable economic development. NSMEs can assess loan up to N10 million at a rate of 9% per annum (all charges inclusive). The objectives of the scheme include:Provision of finance to Nigerian NSMEs.Creation of wealth and generation of employment opportunities for Nigerian youthTo facilitate sustainable agricultural practices and develop an efficient agricultural value chain.To boost managerial capacity in NSMEs and agri-businesses so that they can grow to become huge organisations.Features Eligible Sector/BusinessesAgricultural sector.Real sector including manufacturing, mining, health, fashion, software development, movie production and petrochemicals.Service sector including restaurants, hospitality, tourism, information and communication technology (ICT) and creative industry.Other businesses as determined by the Central Bank of Nigeria.It is important to note that the applicant must have been trained by a CBN accredited Entrepreneurship Development Institute (EDI) and a Certificate of Training issued to the trainee. The Entrepreneurial Development Training Programme (EDTP) is created to provide an alternate route to gainful employment for economically disadvantaged individuals through the establishment of their own business.4. Development Bank of Nigeria LoansThe Development Bank of Nigeria (DBN) loans is another Federal Government intervention fund that majority of MSME owners do not know of its existence. The DBN exists ostensibly to alleviate the financing constraints that micro, small, and medium scale enterprises face in Nigeria. The bank was established by the Federal Government of Nigeria in collaboration with other global partners, which include the African Development Bank and World Bank. Currently, it has 27 PFIs onboard, and it has assisted 95,000 MSMEs in disbursement of N151 trillion.Qualification for a DBN loanApplicant must be involved in productive enterprises.Applicant must be a customer of a certified financial institution.The loans are to be accessed through the PFIs, therefore, applicant’s bank. The PFIs include commercial banks, development finance institutions, and microfinance banks. The loan tenor is up to 10 years with a moratorium of 18 months.5. CBN Creative Industry FundThis is another Federal Government Loan 2020 that can be accessed through the applicant’s bank. The apex bank developed the Creative Industry Financing initiative in conjunction with the Bankers’ Committee. This intervention fund is targeted at assisting youth in the following sectors:fashion, movie, information technology, and music.These are just a few of the Government NSME intervention funds that an entrepreneur can access in Nigeria.CBN COVID-19 Targeted Credit Facility LoanThe outbreak of COVID-19 pandemic had severe consequences on households’ livelihoods and business activities, resulting from drop in global demand, declined consumer confidence and slowdown in production. It is against this background that the Central Bank of Nigeria (CBN) introduced the N50 billion Targeted Credit Facility Loan in April 2020 as a stimulus package to support households and Micro, Small, Medium Enterprises (NSMEs) affected by the COVI-19 pandemic. It features the Households and NSMEs loans, and disbursed by the NIRSAL Microfinance Bank at 5% interest rate for the first year and 9% interest rate for subsequent years of not more than three years. Eligibility for COVID-19 Targeted Credit Facility HouseholdsHouseholds with verifiable evidence of livelihood adversely impacted by COVID-19MicroenterprisesExisting enterprises with verifiable evidence of business activities adversely affected as a result of the COVID-19 pandemic.NSMEsEnterprises with bankable plans to take advantage of opportunities arising from the COVID-19 pandemic.The CBN claimed that N253 billion has been disbursed to 548,969 beneficiaries comprising 470,969 households and 77,376 MSMEs in Nigeria as part of its responses to the COVID-19 pandemic.3.7 Small Business Grants and Funding for Entrepreneur and Business ownersStarting a new business venture in Nigeria or anywhere in the world is a route full of many challenges to surmount. In Nigeria, one of the easiest and cheapest ways to get funds for business is by applying for small business grants. Incidentally, there aren’t actually many federal or state grants available for small businesses. Business loans are repayable with interest at an agreed rate, but grants do not have to be repaid. It is important to note that there is a requisite qualification for business grants.The underlisted are top small business grants in Nigeria organised by government agencies and private individuals.1. Tony Elumelu Entrepreneurship Programme (TEEP)The Tony Elumelu Entrepreneurship Programme (TEEP) is a brain child of Mr. Tony Elumelu, a consummate banker and business guru via Tony Elumelu Foundation (TEF). The programme launched in 2015 is aimed at providing US$10,000 seed funding for entrepreneurs across African continent. Annually, the programme selects 1,000 entrepreneurs across Africa from a pull of over 50,000 applicants. Each programme cycle begins from January 1st to March 1st.Eligibility for the grantBusiness must be domiciled in Africa.Business must be for profit.Business must be 0-3 years old.Applicants must be at least 18 and a legal resident or citizen of an African country.2. YouWIN Connect NigeriaYouWIN Connect is a multimedia programme of the Federal Ministry of Finance. The programme is aimed to promote entrepreneurship, employment generation and wealth creation via enterprise education for young Nigerians. In light of the foregoing, Nigerian entrepreneurs will enhance their productivity through relevant NSME development tools. These ventures are promoted by young Nigerians in target sectors that align with the government’s objective of diversifying the economy and promoting competition and transparency.Eligibility for the grantApplicant must be a graduate from a higher institution.Applicant must be between the ages of 18 and 40.Applicant must be Nigerians and resident in Nigeria.Applicant businesses must be resident in Nigeria. Applicant must be able to communicate effectively (speaking and writing in English language).Applicant must be willing to attend all training and mentoring exercises organised by the programme.Applicant must not be an employee of the Nigerian civil service.Previous YouWIN awardees are not eligible to apply.3. Bank of Industry (BOI)The Bank of Industry (BOI) recently launched a youth empowerment programme for young and talented entrepreneurs looking to venture into various sector of Nigeria’s economy. The Youth Entrepreneurship Support (YES) programme is BOI’s effort at addressing the youth unemployment in Nigeria by building the capacity of the youths and funding their business ideas. The YES programme is aimed at equipping young people with the requisite skills and knowledge to be self-employed by starting and managing their own businesses.Eligibility for YES programmeThe applicant must be a Nigerian.The application applicant must have a viable business idea within the 40 identified clusters that is operated, or will operate in Nigeria.The applicant must be within the age of 18 and 35 with a valid identity, such as International passport, Driver’s license, National ID, Voter’s card.The applicant must possess a minimum educational qualification of Ordinary National Diploma (OND).The applicant must be able to carry out the application process online.4. GroFin FundGroFin is a pioneering development financier specializing in finance and supporting small and growing businesses (SGBs) across Africa and the Middle East. GroFin combines patient capital and specialised business support to grow emerging market enterprises. GroFin focus on Small and Growing Business (SGBs) that are grossly underserved by other funds or financiers. It delivers a unique integrated solution for patient risk capital and end-to-end business support to start-up and growing businesses at the MSMEs base. GroFin has fund in the region of US$100 million to fund Nigerian MSMEs across the country.Eligibility for GroFin FundThe applicant’s business must be in one of the following countries: Nigeria, Ghana, Zambia, Egypt, South Africa, Kenya, Tanzania, Rwanda, and Uganda.The business must be for profit.The business must have a turnover of less than US$15 million and assets less than US$6 million.The require financing is between US$100,000 and US$1.5 million.The business is owner-operated and/or the owner is substantially involved in running the business.5. AYEEN Financial Grants African’s Young Entrepreneurs (A.Y.E) is committed to empowering young entrepreneurs across Africa by creating platforms that facilitate intra-trade on the continent. AYEEN is dedicated to developing the next generation of outstanding African entrepreneurs, who will shape the economies and political landscapes of their home countries. They are looking to finance small business in various sectors of the economy. The business owners and businesses will be duly monitored for a period of one year.The only criteria for eligibility for the programme are that the applicant must be a Nigerian and the business must be located in any of the 36 states of the country.6. Lagos State Employment Trust Fund (LSETF)The Lagos State Employment Trust Fund (LSETF), a brainchild of Governor Akinwumi Ambode was established by Lagos State Employment Trust Fund Law 2016 to provide financial support to residents of Lagos State for job and wealth and to tackle unemployment. LSETF serves as an instrument to inspire the creative and innovative energies of all Lagos residents and reduce unemployment across the state. The Fund has the mandate to directly invest N25 billion in assisting Lagos resident grow and scale their MSMEs or acquire skills to get better jobs.3.8 The Importance of Financial InformationAccounting reports and financial statements are produced periodically to measure how well an organisation is performing. These sets of financial information provide an invaluable insight into business performance. Business managers need to have accurate financial information to know the health of their business. Therefore, financial information is the heartbeat of competitive business and proper accounting keeps heartbeat stable. The 21st century business managers must know basic accounting terms and understand the relationship of bookkeeping to accounting and how accounts are kept if they want to succeed. In the context of this study, booking keeping is the process of recording data relating to accounting transactions in the accounting books. It is important to note that smaller organisations are still using handwritten books in spite of the reality of today’s modern information systems whereby computers are being used to record and store accounting data electronically. Accurate accounting is crucial to business survival and growth. Experience has shown that small and large businesses often fail because they do not follow good financial procedures. In this chapter, we shall examine the process of obtaining needed financial information using basic accounting principles. Today, it is important for business managers to understand how accounting statements are computed and more importantly, to know their relevance to the business.What is accounting?Accounting is generally used to qualify all the activities conducted by accountants, which involve the classification and recording of monetary transactions. Accounting is defined as “the process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of the information”. Frank Wood simply defined accounting as the recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions. Financial information is primarily based on information generated from accounting. The accounting system helps to convert raw data from source documents such as invoices, sales receipts, bills and cheques into useful information that aids a manager in making business decisions.Figure 3:8:1 The Accounting SystemIn Figure 3:8:1 above, it shows that the inputs to an accounting system include sales documents, expenditure documents, etc. The data are recorded, classified and summarized at the processing stage. The summarized outputs is financial statements such as the balance sheet, income statement, statement of cash flows, annual reports and management accounts. The method used to record and summarize accounting data into reports is called an accounting system as illustrated in Figure 3:8:1.The origin and brief history of accountingThe history of accounting dated back to 3500 BC according to available records indicating its use at the time in Mesopotamia. Between 1130 and 1830, an annual description of rents, fines and taxes due to the king of England were recorded in the “Pipe Roll”, which is the oldest surviving accounting record in English language. In 1494, an Italian monk and mathematician named Fra Luca Pacioli (C.1445 – 1517) wrote and published a 27-page school textbook and reference manual for merchants on business and mathematics (summa de arithetica, geometria, proportioni et proportionalita – Everything about Arithmetic, Geometry and Proportion) in Italy. Around the time, a brand of accounting known as book keeping was standardised and acknowledged as a process or procedure for maintaining records. Double entry bookkeeping of business records was described by Pacioli and the method is being used universally today. The major purpose of accounting is to assist managers evaluate the financial condition and operating performance of their business to enable them arrives at well informed decisions. In the same vein, it provides financial information and useful reports to people outside the firm such as owners, investors, bankers, competitors, suppliers, customers, and tax authority.Users of accounting information and reports Many types of organisation use accounting information to make business decisions. The reports needed vary according to the information each user requires as indicated in Table 3:8:1 below.Table 3:8:1. Users of Accounting Information and ReportsAccounting Concepts and Underlying AssumptionsThis section is concerned with basic accounting concepts and underlying assumptions which provide the parameter for preparation and presentation of financial statements and reports. There are certain fundamental concepts and assumptions such as materiality, going concern or viability, comparability through consistency, prudence, accruals, substance over form and other accounting principles and assumptions that affect the recording and adjustment of accounting data and the reporting of accounting information. These accounting principles are very vital in order to have an indepth understanding of how the information in the financial statements is prepared and presented.Accounting conceptsThe preparation and presentation of financial statements is governed by strict legal requirements and more informal guidelines created by the accounting profession. A number of accounting concepts have been applied ever since financial statements were first produced for external reporting purposes. Additional rules may also apply to certain businesses, depending on company size, ownership and listing rules of stock exchange. The principles and the influences have increasingly shaped the way in which accounts are prepared over the years. The Companies and Allied Matters Act 2020 established the primary rules for producing accounts for incorporated companies in Nigeria. It states further what must be done in creating, running, and closing down a company.The historical cost conceptThe historical cost concept emphasizes that assets are normally shown at cost price, and that this is the basis for valuation of the assets.The money measurement conceptIt means that accounting is concerned only with facts measurable in monetary terms, and most people will agree to the monetary value of the transaction. It is erroneously assumed that accounting and financial statements reveals everything about a business. This is not true in the sense that it will not tell:Whether the managers are good or bad.Whether the workers are not well remunerated.Whether a competitor is about to launch a product that will take away sizeable numbers of their customer.Whether there is an imminent legislation that will affect the business in the future.In view of the foregoing, accounting cannot reveal everything about a business.The business entity conceptIt means that only transactions that affect the firm and not the owner’s private transactions will be recorded. In other words, the business entity concept stresses that the affairs of a business are to be treated separately from the non-business activities of its owner(s). At this juncture, it is important to note that personal resources of the owner(s) will affect the accounting records of the business whenever they introduce new capital into the business or draws out of it.The dual aspect conceptIt is the concept of dealing with both aspects of a transaction. It states that there are two aspects of accounting, which are always equal to each other. One represented by the assets of the business and the other by the claims (liabilities) against the business.The accounting equation is thus: Assets = Capital + Liabilities 6,000,000 = 4,630,000 + 1,370,000The dual aspect concept hinges on double entry method of recording transactions.The time interval conceptThis underlying principle of accounting emphasizes that financial statements are prepared at regular intervals of 12 months. Companies and Allied Matter Act 2020 made it mandatory for all incorporated companies to publish their annual accounts and submit same to the Corporate Affairs Commission. Management accounts are often prepared on monthly or quarterly basis for internal management purposes. A listed company on the stock exchange can publish financial statements within the accounting year, which is commonly referred to as ‘interim statements’.The underlying assumptionThe International Accounting Standards Board (ISAB) listed two assumptions that must be applied if financial statements are to meet their objectives. They are the accrual basis (or accrual concept) and the going concern concept (or viability).Accrual basisThe principle of accruals or matching sets out the exact time a transaction should appear in the accounts. In other words, the effects of transactions are recognized when they occur and they are recorded in the books as well as reported in the financial statements of the period to which they relate. That is to say, an item is always recorded when revenue and costs are both reported during the period to which they relate and not during the period when payments are received or made. The accrual concept emphasizes that profit is the difference between revenue and the expenses incurred in generating such revenue.It can be stated thus: Revenue – Expenses = Net Profit N7, 550,000 – 5,300,000 = 2,250,000Going concern or viabilityIt is assumed that the organisation will continue in business or a going concern in the foreseeable future.There are three instances when the going concern assumption should be rejected.When the business is about to be closed down.When there is acute shortage of cash, which makes trading impossible.When a substantial part of the business have to be closed down owing to shortage of cash.However, rejection of the going concern assumption is exceptional rather than the rule. Fundamentals of Financial Statements There are certain attributes that make the information provided in financial statements useful to multiple users. These attributes are embedded in four principal qualitative characteristics: understandability, relevance, reliability and comparability.UnderstandabilityThe essence of preparation and presentation of financial statements is to provide information to users. Therefore, information in financial statements should be readily understandable by all the users.RelevanceThe financial statements provide information for making decisions by various users; therefore the information must be relevant to the needs of the user groups. It must be able to influence the economic decisions of users by aiding them to evaluate past performance, present and future vents.MaterialityInformation should be included in the financial statement if it would be of interest to at least one of the stakeholders who make use of the financial accounting statements. More importantly, information is material if its omission or misstatement could influence the economic decisions of users.It should be borne in mind that accounting information will only serve a useful purpose if only the effort of recording a transaction in a certain way is worthwhile. For example, the cost of a padlock should be charged as an expense in the period when it was bought, even though it could be used beyond the accounting period. The price of a padlock is so little that it is not worth recording it as an asset. A delivery van would be qualified as a material item in a distributive business. As it will be seen later in this chapter, the cost price of the van is charged each accounting year with the cost consumed in each period of its use.ReliabilityThe recent high profile of corporate scandals have brought to fore the inherent dangers of creative accounting. Business stakeholders are now quick to probe the quality of audit reports, financial statement and auditor reputation is increasingly at stake. In the last few decades, there were series of allegations about financial misappropriation in the annual accounts and reports of companies in Nigeria. The cases of Lever Brothers Nigeria Limited (now Unilever Nigeria Plc) and Cadbury Nigeria Plc readily come to mind, where the sitting managing directors were sacked following discoveries of irregularities in their financial statements and reports.It is on this pedestal that information in financial statements must be reliable for it to be useful, which invariably must be free be reliable for it to be useful, which invariably must be free from material error and bias. This will guarantee its dependability and true representation, i.e. it must represent truly what it claims to represent. True representationThe balance sheet is effectively a listing of the transactions and other event that give rise to assets, liabilities and equity of the business at the reporting date.Substance over formSubstance over form is the accountability and presentation of transactions and other events in accordance with their substance and economic reality and not merely their legal form. In hire purchase transaction, the substance of the transaction has precedence over legal form of the transaction in the presentation of the financial statements. In the legal form, for example, a car acquired under a hire purchase does not belong to the business until all the instalments have been paid, and an option to take legal possession of the car has been executed. Whereas, in an economic point of view, the business will show the car in its ledger accounts and balance sheet as though it were legally owned by the business, but also showing separately the outstanding amount still owned on the car. This means that accounting in this instance will not reflect the exact legal position concerning that transaction.Neutrality Information in financial statements must be objective and free of bias.PrudenceInformation in the financial statements must be prudently presented, which means that profits must not be overstated, and that assets are not shown at too high a value.Prudency emphasises the neutrality of accounting information, in the sense that neither the neutrality of accounting information, in the sense that neither profits nor losses are understated or overstated. The theme is prudence governs fair accounting.Realisation conceptIt stresses that only profits and gains realised at the balance sheet date should be included in the income statement.CompletenessIn order to be reliable, information in financial statements must be complete and in conformity with materiality and cost concepts.Comparability – ConsistencyComparability is central to consistency. Accounting information should be produced using consistent assumptions and treatments. Consistency means that an organisation should use similar principles over time, so that account information can be compared sensibly. The users of the financial statements must be informed of the accounting policies used in preparation of the financial statements. Changes to assumptions and treatments can be made but the financial implications must be highlighted and qualified 3.9 Branches of AccountingIn the preceding section, we learnt that one of the major purposes of accounting is to report financial information to different users. In the light of the foregoing, accounting is being referred to as the language of business. It is also the language used to report financial information about non-profit organisations such as universities, mosques, churches, and social clubs. The accounting profession is divided into five major working areas as stated below.AuditingManagerial accountingFinancial accountingTax accountingGovernmental and non-profit accountingAuditingAuditing is a systematic examination of the activities and status of an entity, based primarily on investigation and analysis of its systems, controls, and records. It is a process of reviewing and evaluating the records used to prepare a company’s financial statements. Internal audit is an essential part of business life, but not all companies are large enough to have a designated internal audit function. In medium/large organisations, accountants often perform internal audits to ensure that proper accounting procedures and financial reporting are being carried out within the company. Internal auditing is defined by the Institute of Internal Auditors as an independent appraisal function established within an organisation to examine and evaluate its activities, the objective being to assist staff in the effective discharge of their responsibilities.The Companies and Allied Matters Act 2020 requires that all companies other than dormant companies (i.e. companies that have not traded during the year) and small private companies be audited every year. Accounting firms (such as Akintola Williams Deloitte, PriceWaterhouseCooper, etc.) also conduct independent audits of accounting and related records. These external financial auditors do not only examine the financial health of an organisation but also look into operational efficiencies and effectiveness. The auditors are appointed each year by the shareholders at the company annual general meeting (AGM) in the case of listed companies on the stock exchange. The external auditors conduct independent audit of the organisation, which involves an evaluation and unbiased opinion about the accuracy of the financial statements. Internal financial controls and regulatory compliance is very important for firms of any size. It is erroneously assumed that auditors will discover any fraud that may have occurred in an organisation. That is not what the audit is for. But after accounting scandals involving high-profile companies such as Enron, Worldcom, Tyco, Lever Brothers Nigeria Limited (now Unilever Nigeria Plc) and Cadbury Nigeria Plc a lot of pressure had been exerted on the accounting firms to reconsider its position regard the discovery of fraud when auditing the financial statements of a company.Managerial accountingManagerial accounting also known as management accounting is used to provide information and analysis to managers within the organisation to aid them in decision making. In other words, it is the application of the principles of accounting and financial management to create, protect, preserve, and increase value so as to deliver that value to the stakeholders of profit and non-profit organisations, both public and private. It goes further to say that management accounting is an integral part of management, requiring the identification, and use of information relevant to formulating business strategy; planning and controlling activities; decision making; efficient resource usage; performance improvement and value enhancement; safe-guarding tangible and intangible assets; and corporate governance and internal control.Management accounting is concerned with measuring and reporting costs of production, marketing, and other functions (cost accounting); preparing budgets (planning); checking whether or not units are staying within their budgets (controlling) and designing strategies to minimize taxes (tax accounting). Today’s business would is anchored on global competition, outsourcing, flexible and lean manufacturing production, company rightsizing, and organizational cost-cutting requires managers to be well grounded in management accounting.Fundamentals of Management AccountingThe underlisted themes apply approximate the major role played by management accounting in any organization.Future orientationEconomic realityGoal congruenceInformation systemsStatistical and operation research techniquesUncertaintyFuture orientationA significant chunk of the work of the management accountant is centred on future events, which include provision of information for policy formulation and planning. It involves forecasting future costs and revenues, estimating the impact of taxation forecasting the reaction of market competitors extending to the introduction of new product. The management account operates on the future orientation basis.Economic realityManagement accounting probes into financial records and activities such as procurement of materials, sales of products or services, manufacturing and the financing of operations so as to serve as guide for future planning and decision making in line with the economic realities. Many times, managers are confronted with choice to make or buy components. An organisation would buy if the advantages far overweight outright production of the components. In the same vein, it may also extend to a decision to delete a product from the product lines on account of persistently low returns except it is a loss leader. The bottom line is facing the reality of the situation.Goal congruenceThis underlying theme simply means that the management accounting system should encourage all employees, including management cadre to act in a manner that will contribute to the overall objectives of the organisation. In other words, management must synchronize its objective (profit maximization) with the various needs of the workers for both the former and the latter to optimise the mission of the company.Information systemsIt is the roles of the management accountant to develop a network of information systems and integrate the sub-systems to facilitate a compilation of relevant data on production costs, sales over head, human resource, etc. A totally integrated information systems is vital for planning, control and decision making.Statistical and operational research techniquesThis theme of management accounting is the application of scientific methods to the solution of managerial and administrative problems, involving complex systems or processes with a view to obtaining a quantitative basis for arriving at a best solution. In essence, operational research strives to find the optimum plan for the control and operation of a system or process. It is interesting to note that operational research is used in certain aspects of planning and decision making. Today’s manager has to be sufficiently familiarized with numerous areas where the techniques have been found to assist management accounting. These areas include: statistical forecasting for cost and sales extrapolations, linear programming planning, economic order quantity models to proffer solution to inventory control problems. These techniques are implemented by means of computer software and the accountant’s role is to provide relevant input data and to interpret and present the results produced. UncertaintyThis underlying theme is a common variable where there are various possible outcomes or values. Risks and uncertainty are a very prominent phenomenon in management accounting particularly in areas of budget preparation and forecasting. The management accountant must be quick to recognise all pervasive influence of uncertainty and incorporate their effects into the analysis of problem. For example, budget slacks should take care of large and unwanted drop in sales figures.Financial accountingFinancial accounting is primarily concerned with financial record keeping and preparation of final accounts. Financial accounting differs from managerial accounting in the sense that the information and analysis it generates are for users outside the organisation. These external users include owner(s) and prospective owner(s), suppliers, customers, creditors, and lenders, tax authority and general public who are interested in the organisation’s profits and ability to meet various financial obligations.It is critical for companies to keep accurate financial information. Much of the information derived from financial accounting is contained in the company’s annual accounts and report. This is a yearly statement of the financial condition, progress, and expectations of an organisation.Tax accountingTaxes affect almost every individual and business in Nigeria. Taxes are the means government (federal, state, and local) used to raise money primarily to finance it various operations and programmes. Indirectly, taxes are the price the citizens pay for plying the roads, using the parks, enjoying police and other security protection, and other social functions provided by government. Government at various levels requires submission of tax returns that must file at a specific times and in a prescribed format. There are professional accountants who are specifically trained in tax law and relevant matters. The accountants keep abreast of change in tax policies, which make their role increasingly important to the organisation or entrepreneur. Government and non-profit organisation accountingThis branch of accounting involves working for organisations (such as government Ministries, Departments and Agencies) whose purpose is not generating a profit but serving the taxpayers and others according to a duly approved budget. The primary users of government accounting information are legislative bodies, creditors, citizens, and special interest groups. These users are very much concerned and interested on how the government is using the taxpayer’s money as well as fulfilling its obligations.Non-profit organisations (such as universities, mosques, churches, social clubs, charities etc.) also require accounting professionals to keep records of their incomes and expenditures. The benefactors of these non-profit organisations are interested to know exactly how and where the funds they contribute are being spent.3.10 The Impact of Computerized Accounting Systems The 21st century enterprises need to be responsive to changing in information technology as it’s a business tool that can radically improve the way information is communicated with key audiences. Although, financial information and transactions may be recorded by hand or by computer, but much of the routine aspects of accounting is dealt with by computers. Computers greatly simplify the mechanical tasks involved in accounting, enabling managers and other interested users to get financial report exactly when and how they want them. Today’s accounting packages offer ease of use, customization, and efficient interactions with the Internet. Most businesses including the small and medium enterprises are now using computers to capture and store their accounting data. The methods adopted in computer-based accounting adhere to the fundamental principles of accounting discussed earlier in Chapter 3.5.1Obviously, as a business grows, the number of customers and suppliers increase and the accounting reports that need to be generated expand in scope. It is therefore imperative that managers becomes fully conversant with computers and understands the impact of computerized accounting system on the organisation. Apart from a need for knowledge of accounting principles in order to best convert a business from manual to computer-based accounting, some accounting knowledge is required to aid understanding of the outputs from a computerized accounting system as it is required in the case of manual accounting system too. Whatever the level of use of computers in accounting, manager should understand how data is being captured and processed to enable them understand and have absolute reliance on the outputs. Although, auditors have special computer programs designed to test the reliability of computerized accounting systems but it is obviously better to ascertain that the computers are being used appropriately and correctly with a view to saving auditor’s time in discovering and correcting the errors.The type of computer softwares to be used in an accounting system will vary in size to meet the volume of data processing required by the business. The software may be customized and tailored to meet exactly what the business wants which is commonly referred to as ‘bespoke’ system. The cost of computer hardware and software has been radically falling in real terms for many years. Consequently, computerization is now affordable for all businesses. Accounting software packages include programs that handle tasks involving general ledgers, sales processing, purchase orders, accounts receivable, accounting payable, cash flow analysis, and inventory control. Amongst the accounting packages in use are Peachtree, QuickBooks, Spread Sheet, Mind Your Own Business (MYOB Plus), Simply Accounting, etc. which addresses the specific needs of small businesses.The benefits of a computerized accounting systemIt is important to remember, though, that no computer yet has been programmed to make good financial decisions by itself. Evidently, a computer is a wonderful tool for entrepreneur and organisation alike to use. But then, there is a need for business owners to understand exactly what computer system and which programs are best suited for their particular needs.There are many benefits of using a computerized accounting system. The greatest benefit is that a computerized accounting system can do the same things as a manual system but computers often do them faster, more accurately, and more efficiently.Speed and accuracy The use of computers to record and analyze data and to print out financial reports allows manager to obtain up-to-the-minute financial information for the business. The major aim of computerizing an accounting system is to perform the processing stage electronically, much more quickly, consistently and accurately than if it were done manually. It’s time-saving in regard to transaction processing, increased accuracy and the production of timely reports, such as customer statements of account, purchase analysis, cash and bank statements, and other useful reports which can be produced automatically and on a request.Error detection Computerized accounting system affords the users opportunity to efficiently detect error which invariably improves decision-making process. For example, a computerised accounting system should be capable of alerting the user when a customer exceeds the approved credit limit, thereby taking appropriate remedial action. Furthermore, a computerized accounting system should be capable of performing ‘exception reporting’, a process of giving a warning message to managers when something unexpected is happening. For example, when funds expended on a project is higher than approved budget figure. Suffice it to mention that in a manual accounting system, such situation can occur unnoticed until it is too late resulting in unnecessary costs.Avoiding monotony of accounting workThe task of producing reports on a regular basis can be time consuming and stressful but the use of a computerized accounting system speeds up the process to the point, in some cases, where it is done automatically thereby help ease the monotony of bookkeeping and accounting work.3.11 Understanding the Key Financial StatementsFinancial statements is the summaries of accounts to provide information for interested parties such as the shareholders (the owners of the company), banks and creditors (people and institutions that lend money to the company), employees, and the Internal Revenue Service. The following are the key financial statements of a business:In order to fully understand important financial information, the managers need to understand the purpose of an organisation’s financial statements. We will explain each statement in more detail in this section.The balance sheetThe balance sheet is a financial report stating the total assets, liabilities, and owners’ equity of an organisation at a given date, typically at the end of a calendar or fiscal year. The balance sheet provides a concise snapshot of a company’s financial position. It’s divided into three sections in line with strict accounting rules.The accounting equation is thus: Assets = Liabilities + Owner’s equity. Year 1 N159, 000 = 30,000 + 129,000 Year 2 N109, 000 = 24,000 + 85,000AssetsAssets are economic resources (things of value) owned by a firm. Assets include productive tangible or intangible items to which a value can be assigned. Samsung, LG Electronics, Sony, Panasonic, Sharp, etc. are examples of electronics and household appliance manufacturers with good brand name. Goodwill is the value that can be attributed to factors such as reputation, superior products and after sales service. It is included on the balance sheet when a firm acquiring another firm pays more than the value of that firm’s tangible assets. Classifications of assetsAssets are classified and listed on the balance sheet according to their liquidity, i.e. how quickly they can be turned to cash. The most liquid are called current assets. Those that are hard to sell quickly are called fixed assets such as land, properties, equipment. Intangible assets include goodwill, trademarks, copyrights and patents.Current assets are short-term assets that can or will be converted into cash within 12 months. Current assets include cash in hand, bank credit balance, cash anticipated (account receivables), inventory (stock) of supplies and materials.Fixed assets are long-term assets used by a business on a permanent basis to create wealth in the normal course of operations. Fixed assets are generally grouped into tangible and long-term investment. It includes land, properties, equipment, and whatever else the company uses to conduct business. For example, a car hire service company will consider its fleet of vehicles as fixed assets so also haulage and logistics company will view its fleet of delivery vehicles as asset. Long-term investment covers monies or share held outside the company. Assets also need to reflect depreciation in the value of equipment because machinery as well as motor vehicle has a limited expected useful life.Intangible assets are long-term assets that have no real physical form which can be touched but do have value. Goodwill, trademarks, copyrights, and patents are examples of intangible assets. Although, intangible assets have no real physical form but it is included on the balance sheet when a company acquires another business at a higher price than the value of its assets.Liabilities and owners’ equityLiabilities are debts owed in the course of business and payable in a future period. They are either current (payable within 12 months) or long-term (amount payable by a business more than 12 months from the balance date) debt. The long-term liabilities consist of debts and loans, mortgages, and debentures. Current liabilities include pending payments to suppliers and creditors, and other unpaid expenses due within 12 months. Shareholders’ funds is the total resources invested and left in a business by its owner. Simply put, share capital is essentially the money that shareholders have put into the business. It also includes retained profits or retained earnings which is accumulated earnings from the company’s profitable operations that were kept in the business and not paid out to shareholders in dividends (distributions of company profits). When the value of aggregate liabilities is subtracted from the value of aggregate assets the value of owners’ equity (capital) is revealed. Ideally, it should be positive. Owners’ equity consists of capital invested by owners over the years and profits (net income) or externally generated capital, which is often referred to as “retained profits” or “retained earnings”; these funds are set aside for future operations.Accounting equation for owners’ equity: Total asset – Liabilities = Owners’ equity159,000 – 56,000 = 103,000109,000 – 66,000 = 66,000Table 3:11:1 A Balance SheetIncome StatementIn this section, we shall examine briefly the difference between private and public limited companies with a view to gaining an invaluable insight into the preparation and presentation of limited companies income statement. In Nigeria, companies listed on the Nigerian Stock Exchange (NSE) often referred to as ‘Public Liability Companies’ (PLC) came into existence owing to the growth in the size of businesses, which prompted a lot of people to invest in the business through public share subscription. Ordinarily, the investors would not be able to take active part in the day-to-day management of the company. It is against this background that the Companies and Allied Matters Act 2020 made provisions governing companies’ formation and duties relating to their members, directors, auditors and officials.There are two main classes of company in Nigeria: the public limited company and private limited company. A private company is one which by its articles of association, restricts the right of members to transfer their shares, prohibits any invitation to the public to subscribe for its shares or debentures, and limits the number of its members to fifty, excluding present and past employees of the company. It may have as few as two members. A public limited, company which must have at least seven members, but there is no upper limits. The shares of public limited companies are traded on the Stock Exchange, which does not suggest that shares of all public companies are traded on the Stock Exchange. The ones whose shares are traded on the Stock Exchange are known as “quoted companies” (or “listed companies”) meaning that their shares have prices quoted (or listed) on the Stock Exchange. In addition to strict compliance with Companies and Allied Matters Act 2020 and accounting standards, the companies have to comply with Stock Exchange requirements.Income statement or profit and loss account is the financial statement that reveals a company’s profit after costs, expenses, and taxes; it summarizes all of the resources that have come into the company (revenue), all the resources that have left the company, and the resulting net income. Put simply, income statement is company’s statement of earnings; it shows all the income less expenses over the year. It measures various levels of profit (gross profit, profit before taxes and profit after taxes). It is the easiest way to tell if a business has actually made a profit or less during a given month or year. The accounting formula to prepare an income statement is stated thus: Revenue (or turnover) – Cost of goods sold = Gross profit (or gross margin)Gross profit – Operating expenses = Net income before taxesNet income before taxes – taxes = Net income (or loss)The income statement provides valuable financial information, ostensibly for the consumption of the shareholders, bankers, trade creditors, investors (or potential investors), and employees. In view of the importance of this financial report, we would look at how the income statement is computed in accordance with the standard set of rules known as General Accepted Accounting Principles (GAAP): N Revenue (Turnover) xx Less cost of goods sold xx Gross profit XXX Less operating expenses xx Net income before taxes XXX Less taxes xx Net income (or loss) XXXThe GAAP guidelines are intended to create financial statement formats that are uniform across industries. Obviously, business is complex; flexibility in GAAP methods is acceptable as long as consistency is maintained with business.RevenueRevenue also known as turnover is the financial value of what is received for goods sold, services delivered, and other financial earnings. It is important to note that there is a difference between revenue and sales. Revenue is not synonymous with sales because there could be other sources of revenue, such as interest earned on investments, rents received, royalties, and other income earned that is included in reporting revenue. Moreover, gross sales are not the total sales. Net sales are gross sales minus return inwards, discounts, and allowances.Table 3:11:2 An Income StatementCost of goods soldThe cost of goods sold is a measure of the cost of raw materials and supplies used for producing goods or cost of goods purchased for resale. It is economically wise to calculate how much a business earned by selling goods over the period being evaluated, compared to how much it spent to purchase the goods. The cost of goods sold include purchase price plus any carriage inward charges paid and ancillary charges incurred to put the goods in saleable condition.When cost of goods is subtracted from net sales, it reveals the gross profit (or loss). Gross profit (gross margin) relates to how much a business earned by purchasing (or producing) and selling goods. In a service organisation, it’s necessary to get accurate cost of goods sold; therefore, net revenue could equal gross profit. In a manufacturing business, however, it’s necessary to get accurate cost of goods manufactured in order to determine the net profit or loss by subtracting all the operating expenses from the gross profit. Operating expenses and net profit or loss In any form of business, either selling of goods or services there are certain operating expenses incurred to bring the goods or service to a saleable condition. Operating expenses are the costs involved in operating a business which include rent, office supplies, salaries and wages, utilities, insurance, bad debt charges, depreciation, and also carriage or freight charges. Operating expenses can be classified into two categories: selling and general expenses. Selling expenses related to cost incurred in marketing and distributing the company’s goods or delivering services (such as advertising, carriage outwards, salaries for sales crew, and sundry expenses). General expenses are administrative expenses of the company (such as office salaries, depreciation, insurance, rent, utilities and sundry expenses). The expenses are aggregated and deducted from the company’s net income before taxes is determined. After the taxes have been applied, the resultant is the net income (or net loss) as illustrated in Table 3:8:2. Net income can also be referred to as net earnings or net profit.The business managers should keep track of the company’s earnings and expenses and also pay serious attention to handling of cash inflow and outflow of their business in order to stay afloat.Cash Flow StatementCash flow statement is the financial statement that reports cash receipts and disbursements related to a company’s three major activities: operations, investments, and financing.Operations are cash transactions associated with running the business.Investments are cash used in or provided by the firm’s investment activities.Financing is cash raised from the issuance of new debts or equity capital or cash used to pay business expenses, past debts, or company dividends.The cash flow statement provides useful information on the cash changes that have occurred from operating, investing, and financing to determine the company’s net cash position. It also gives the company some insight into how to handle cash better with a view to forestalling cash flow problems (e.g. acute shortage to run operations). Table 3:11:3 A Cash Flow StatementIn the Table 3:11:3 above, the cash flow statement provides answers to such questions as: How much cash came into the business from current operations? How much money was realised in issuing shares or debentures? It can be deduced that the cash flow statement is key to understanding how well cash, which is the lifeblood of a business is being managed. Cash flow from trading or delivering services. In order to arrive at net cash generated from operating activities, the operating profit (from the income statement) must be adjusted. Firstly, non-cash items, such as depreciation, which had already been deducted on the profit and loss, must be added back as depreciation does not involve movement of cash. Depreciation is the systematic write-off of the cost of a tangible asset over its estimated useful life. The next item is net current assets (or working capital) from the current and previous year’s balances are to be adjusted with increase in inventories, debtors, and creditors being the difference between the two. Obviously, if there is more inventory now than a year ago, it means cash must have been paid out. If debtors owe more, it means there will be less cash in the business. If the business owed suppliers, it means that there is more cash in the business.The importance of cash flow analysisThe income statement shows the profits made in the fiscal year, but profits are not cash, therefore it is imperative to know how much actual cash has been received or paid out. As blood is essential for human being existence so also cash is important for keeping the business afloat. When cash stops circulating, a business will die. Understanding cash flow is an integral part of financial reporting as there is two possible outcomes that require effective management. Profits do not necessary translate to cash, therefore the successful manager will review and establish the actual cash position on a regular basis before making any commitment in order to stay afloat and prevent financial crisis. It’s possible that a business can increase sales and increase profit, and still experience cash flow problems. Poor cash flow constitutes a major operating problem for many businesses, mostly small and middle enterprises. A well thought out cash flow analysis is greatly helpful to seasonal business (such as farming, promotional and gift items, etc.) in which the flow of cash into the business is sporadic.In view of the foregoing, controlling cash flow is management’s core function; therefore it is critical that managers understand where cash flow comes from and how it is disbursed to guarantee smooth operation and averting financial disaster. When operating cash flow is negative, the business may pursue the path of making more profit, reduce inventory, decrease account receivables by tightening credit sales, and solicit longer credit terms from suppliers. The cash flow statement is a good barometer to measure the cash position within a company. Cash flow analysis brings to fore that an enduring and mutually rewarding business relationship with the company’s banker(s) is critical in managing cash flow. The 21st century business managers should maintain a good working relationship with their banker(s) to provide key insights into how, when, and where to obtain funds to meet the company financial needs.In sum, the key financial statements discussed above are very crucial and topical issues on the agenda of quoted companies during their annual general meeting (AGM). The annual report and accounts is a document prepared each year to give a true and fair view of a company’s state of affairs. Annual reports and accounts are issued to shareholders and filed at Securities and Exchange Commission (SEC) in accordance with the provisions of company legislation. Contents include an income statement (profit and loss account), balance sheet, and a cash flow statement, directors’ report, auditor’s report, and where a company has subsidiaries, the company’s group accounts.Analysing Financial StatementsThe ability of users of financial statements to make sound financial decisions will largely depend on how well they can analyze, interpret, and understand the use of information contained in company’s annual report and accounts. It is evident that financial statements would be large informative to all users except for the few financially intelligent ones without analyzing and interpreting the accounting statements. Calculation of financial ratios can also be extremely valuable as an analytical and control mechanism to test the financial well-being and performance of the reporting entity.Ratio analysisRatio analysis is the assessment of a company’s financial condition and performance through calculations and interpretation of financial ratios developed from the company’s financial statements. Financial ratios, therefore are measures of an organisation’s financial status that can be compared with industry standards, and they offer a convenient way of gauging an organisation’s financial health. It provides key insights into how a company compares to other companies in its industry in the important areas of short-term solvency (or liquidity ratios), long-term solvency (or financial leverage ratios), asset management (or efficiency ratios), profitability ratios, and market value ratios. The financial ratios are especially useful in analyzing the actual performance of the company compared to its financial objectives.Short-term solvency (or Liquidity ratios)As the name suggest short-term solvency refers to how fast an asset can be converted to cash. Short-term solvency or liquidity ratios are used to measure a company’s ability to meet its short-term obligations to creditors as they become due. The solvency of a business hinges on both its own ability to settle its debt when due and the ability of its debtors to pay their debt to the business. For obvious reasons, liquidity ratios are particular interesting to short-term creditors. The primary concern is the company’s ability to pay its debts over the short run without undue stress. As a result, these ratios focus on current assets and current liabilities. There are two important liquidity ratios: current ration and quick (or acid-test) ratio.Current ratioThis ratio is commonly used to measure the short-term solvency of the business or its ability to meet its short-term debts. The current ratio assumes that both account receivable and inventory can be easily converted to cash. Current ratios of 1.0 or less are considered low and indicative of financial difficulties. Current ratios of more than 2.0 often suggest excessive liquidity that may be adverse to the company’s profitability. Current ratio is calculated thus:Current ratio = Current assets Current liabilitiesUsing the data in Table 3:11:1 balance sheet, the company current ratio is computed as follows:Year 1 30,000 = 1.57 Year 2 24,000 =1.71 19,000 14,000The business can cover its current liabilities 1.57 times with its current assets in Year 1 and 1.71 times in Year 2. It can be deduced that the business has N157 of current assets for each N100 of current liabilities in Year 1 and N171 of current assets for each N100 of current liabilities in Year 2. It suggests that the business is well positioned to meet its current financial obligations.Quick (Acid-test) ratioAnother key liquidity ratio is the quick (or acid-test) ratio which measures the company’s ability to meet its current obligations with the most liquid of its current assets. Inventory is often the least liquid current asset. A relatively large inventories are often sign of short-term trouble. The company may have overestimated sales and purchased too much goods or overproduced as a result. Obviously, a substantial portion of its liquidity has been tied up in slow-moving inventory. The quick ratio is computed as follows:Quick ratio = Current assets – inventory Current liabilitiesUsing the data in Table 3:11:1 balance sheet, the company quick ration is computed thus:Year 1 30,000 – 8,300 = 1.14 Year 2 24,000 – 6,300 = 1.26 19,000 14,000The company has N114 in liquid assets for each N100 of current liabilities in Year 1 and N126 in liquid assets for each of current liabilities in Year 2. It still suggests that the business is capable of meeting its current financial obligations.Other liquidity ratiosThere are two other measures of liquidity: Cash ratio and Net working capital to total assets.Cash ratio = cash Current liabilitiesUsing the data in Table 3:11:1 balance sheet, the company cash ratio is computed thus:Year 1 10,200 = 0.54 Year 2 9,200 = 0.66 19,000 14,000A supplier might be interested in the cash ratio. The cash ratio indicates that the business has N54 in cash to cover each N100 of current liabilities in Year 1 and N66 in cash to cover each to meet its urgent financial obligations.Net working capital to total assets = Net working capital Total assets Year 1 30,000 – 18,500 = 0.07 Year 2 24,000 – 15,000 = 0.08 159,000 109,000A relatively low value might indicate relatively low levels of liquidity. Here the ratio is 7% in Year 1 and 8% in Year 2.Long – term Solvency MeasuresLong-term solvency ratios (or financial leverage ratios or just leverage ratios) are intended to address the company’s long-run ability to meet its obligations, or more generally, its financial leverage. Financial leverage ratios measure the extent to which a company uses debt as a source of financing and its ability to service that debt. The term leverage refers to the magnification of risk and potential return that comes with using other people’s money to generate profits. Three important financial leverage ratios are the total debt ratio, times interest earned and cash coverage.Total debt ratio This ratio takes into account total cash assets that is acquired with borrowed funds. The ratio compares the total debts total assets. Suffice it to mention that a high ratio indicates a more aggressive approach to financing, which lends credence to a high-risk, high-expected-return strategy. While a low ratio indicates a more conservative approach to financing. It can be defined in several ways, the easiest of which is:Total debt ratio = Total assets – Total equity Total assetsUsing the data in Table 3:11:1 balance sheet, the debt ratio is computed thus:Year 1 159,000 – 103,000 = 0.35 times Year 2 109,000 – 66,000 = 0.39 times 159,000 109,000This ratio indicates that the company has financed 35 per cent of its assets with borrowed funds in Year 1 and 39 per cent in Year 2. In other words, N35 of each N100 of funding has come from debt in Year 1 and N39 of each N100 in Year 2. The debt owners’ equity ratio measures the degree to which the company is financed by borrowed funds that must be repaid.Debt-equity ratio = Total debt Total equityUsing the data in Table 3:11:1 balance sheet, the debt-equity ratio is computed thus:Year 1 56,000 = 0.54 times Year 2 43,000 = 0.65 times 103,000 66,000Anything above 100 per cent shows that a business has more debt than equity. A company that takes on too much debt could experience problems repaying lenders or meeting commitments made to shareholders.Time interest earned (or interest cover) ratioAnother common measure of long-term solvency is the times interest earned (or interest cover) ratio. There are several definitions but we will confine our computation to the most traditional:Interest cover ratio = Earnings before interest and tax (EBIT) InterestUsing the data in Table 3:11:2 Income Statements, the interest cover ratio is computed thus: 353,000 = 28.24 times 12,500The ratio measures how well a company has its interest obligations covered. The interest charges is covered 28.24 times over.Cash coverage ratioThe times interest earned ratio has a structural problems in the sense that is based on earnings before interest and tax, which is not really a measure of cash available to pay interest. The reason is that depreciation; a noncash expenses has been deducted from the numerator. In view of the fact that interest is most definitely a cash outflow (to creditors), the best way to compute the cash coverage ratio is thus:Cash coverage ratio = EBIT + Depreciation Interest 353,000 + 7,500 = 28.84 times 12,500The cash coverage ratio is a measure of the company’s ability to generate cash from operations, which is frequently used as a measure of cash flow available to meet financial obligations.Asset management (or efficiency) ratiosAsset management (or efficiency) ratios often referred to as activity ratios that measure the speed with which various resources are converted into sales or cash. These ratios measure the effectiveness of a company’s management using the assets that are available. We will look at four important activity ratios thus: inventory turnover, average collection period, fixed asset turnover, and total asset turnover.Inventory turnoverThe ratio measures the liquidity of the company’s inventory as in how quickly goods are sold and restocked. The higher the inventory turnover, the more times the company is selling, or “turning over” its inventory. Obviously, a high inventory ratio implies efficient inventory management. A low inventory turnover can mean that the business is slowing down resulting in a huge unsold inventory that can lead to a liquidity crisis. Inventory turnover is computed as follows:Inventory turnover = Costs of goods sold InventoryUsing the data in Tables 3:11:1 and 3:11:2, the inventory turnover is computed thus: 500,000 = 60.24 times 8,300It means that the company restocked its inventory 60.24 times in the accounting year. A lower-than-average inventory turnover ratio in an industry often indicates obsolete goods on hand or poor purchasing practices. A higher than average ratio may signal lost sales because of inadequate inventory.The inventory is turned over 60.24 times during the year, then we can figure out how long it took to turn it over in average. The result is the average day’s sales in inventory.Day’s sales in inventory = 365 days = 365 days = 6 days Inventory turnover 60.24This tells us that inventory sits 6 days on average before it is sold. Managers need to be aware of proper inventory control and expected inventory turnover to ensure proper performance.Average collection periodThis ratio indicates the average number of days it takes to convert a credit sale into cash. Companies that extend credit must compute ratio to determine the effectiveness of their credit-granting and collection policies. Money tied up unnecessary in accounts receivable is unproductive money. High average collection periods usually indicate many uncollectible receivables, whereas low average collection periods may indicate stringent credit-granting policies. The average collection period can be computed thus:Average collection period = Accounts receivable Average sales per dayUsing the data in Tables 3:11:1 and 3:11:2, the average collection period is computed thus: 8,300 = 2.5 days 1,218,000/365It means that the company collects its receivable in fewer than three days.Fixed asset turnover This ratio measures how efficiently the firm is using its assets to generate sales. The higher the ratio, the more effective the company’s asset utilization. A low ratio often shows sign of ineffective marketing effort or that the company’s core business areas are increasingly not feasible. The fixed asset turnover ratio is calculated thus:Fixed asset turnover = sales Net fixed assetsUsing the data in Tables 3:11:1 and 3:11:2, the fixed asset turnover is thus: 1,218,000 = 9.44 times 129,000The company turns over its fixed assets 9.44 times in the year.Total asset turnoverIt measures how efficiently the company uses all of its assets to generate sales. Therefore, a high ratio generally reflects good overall performance, while a low ratio may indicate poor marketing efforts, or improper capital expenditures, or poor implementation of the company’s overall business strategy. Total asset turnover is calculated thus:Total asset turnover = sales Total assetsUsing data in Tables 3:11:1 and 3:11:2, the total assets turnover is thus: 1,218,000 = 7.66 times 159,000The company turns over its assets over 7.66 times in the year.Profitability (Performance) ratiosProfitability (Performance) ratios are used to measure how effectively a company is using its various resources to achieve profits. It is important to note that management’s performance is often measured by the company’s profitability ratios. The three most important profitability ratios are thus: return on sales (or net profit margin), return on assets and return on equity (or earnings per share).Return on sales (or net profit margin)A reliable indicator of performance is obtained by using a ratio to see if they are doing as well as their competitors in generating income from goods sold or services delivered. Return on sales is calculated by comparing a company’s net income to its total assets. It is pertinent to mention that the net profit margins ratio vary greatly by industry, a low ratio indicates that expenses are too high relative to sales. It can be calculated thus:Return on sales = Net income Net salesUsing the data in Table 3.11.2, the return on sales ratio can be calculated thus: 63,000 = 5% 1,218,000The company generates N5 of after-tax profit for each N100 of sales.Return on assets (ROA)The return on assets, also known as result on investment is a profitability ratio that indicates the company’s effectiveness in generating profits from its available assets. Of course, the higher the ratio the better. A high ratio implies effective management and good chances for future growth. It can be defined in this way:Return on assets = Net profit after tax Total assetsUsing the data in Tables 3.11.1 and 3.11.2, the return on assets is thus: 290,000 = 1.82 159,000The company generates N182 of after-tax profit for each N100 of assets the company has at its disposal.Return on equity (ROE)This ratio measures the return the company earned on its owner’s investment. Risk is a market variable that concerns investors. The higher the risk involved in an industry, the higher the return investors expect on their investment. Therefore, the return on equity is the true bottom-line measure of performance. The higher the ratio, the more beneficial the shareholders will be. In view of the foregoing, the level of risk involved in an industry and the return on investment of competing companies is important in comparing the company’s performance. It’s calculated by comparing a company’s net income to its total owners’ equity.Return on equity (ROE) = Net income after tax Total owners’ equityUsing the data in Tables 3.11.1 and 3.11.2, the return on equity can be calculated thus: 290,000 = 2.81 103,000The company generates N281 of after-tax profit for each N100 of owner’s equity. It’s important to remember that profits sustain business survival and growth; therefore the profitability ratios are considered vital measurement of company growth and overall management performance.Market value (shareholder) ratiosThese ratios are mostly relevant to quoted companies on the Stock Exchange; therefore the ratios can only be calculated directly for public traded companies. In part, the information is not necessarily contained in the financial statements, i.e. the market price per share. The market ‘price’ means the price of the shares on the Stock Exchange.Earnings per shareThe earnings per share can be reported in two ways: basic and diluted. The basic earnings per share (basic EPS) ratio helps determine the amount of profit earned by a company for each share of outstanding share. The diluted earnings per share (diluted EPS) ratio measures the amount of profit earned by a company for each share of ordinary share issued, but this ratio also takes into consideration ordinary share options, warrants, preference share, and convertible debt securities, which can be converted into ordinary share. The common method of calculating basic earnings per share is thus: Earnings per share = Net income after taxes Number of ordinary shares issuedEPS is a very vital ratio for a company because earnings help stimulate growth and also guarantee payment of shareholders’ dividends. It is the most basic measure of the value of a share, and also is the basis for calculating several other important investment ratios.Price /earnings ratio (P/E)Price /earnings ratio is a company’s share price divided by earnings per share (EPS). As earlier discussed EPS is an actual amount of money, usually expressed in kobo per share, the P/E ratio has no units, it is just a number. Thus if a quoted company has a share price of N100 and EPS of N14 for the last published accounting year, then it has a historical P/E ratio of 7.1Price/earnings ratio = Price per share Earnings per share 100 = 7.1 times 14If analysts are forecasting for the next year EPS of, say N16, then the forecast P/E ratio is thus: 100 = 6.25 times 16The P/E ratio is predominantly useful in isolation. The greater the P/E ratio, the greater the demand for the shares.Dividend yieldDividend yield is a share’s expected cash dividend by its current price. This ratio measures the real rate of return by comparing the dividend paid to the market price of a share. Dividend yield can be calculated thus: Dividend yield = Gross dividend per share Market price per valueIf the company has a gross dividend of N15 per share, and the market price is N45 per share, dividend yield is: 15 = 0.33 45Dividend coverDividend cover is the number of times a company’s dividends to ordinary shareholders could be paid out of its net after-tax profits. This ratio measures the likelihood of dividend payments being sustained and is a useful indication of sustained profitability. Dividend cover is calculated by dividing earnings per share by the dividend per share:Dividend cover = Earnings per share Dividend per shareIf a company has earnings per share of N12, and it pays out a dividend of 3.5, dividend cover is: 12 = 3.43 3.5A dividend cover ratio of 2 or higher is usually adequate, and indicates that the dividend is affordable. A dividend cover ratio below 1.5 is risky, and a ratio below 1 indicates a company is paying the current dividend with retained earnings from previous years.Table 3.11.4 Summary of Commonly Used Key Financial RatiosUsing the Key Financial RatiosIn the main, financial ratios by themselves tell users very little, unless the ratios are compared with other ratios of other companies in the same industry or against the industry standard ratios. Mostly, investors and interested parties use the financial ratios of quoted companies to see how key organisations are performing and to make comparisons between similar businesses in the same industrial sector. There are two types of ratio to aid corporate performance comparison namely: cross-sectional analysis and time series analysis.Cross-sectional analysisCross-sectional analysis is used to compare different companies’ ratios at the same point in time. In other words, it often used to compare company’s ratios against the standard ratios for the company’s industry. Such industry ratios may be found in resources available from financial research firms amongst are Standard and Poor’s, Dun & Bradstreets, Augusto and Co., Phillips Consultings, etc.Time series analysisTime series analysis is a series of measurements, observations, and recordings of a set of variables at successive points in time. The time series analysis technique is purposefully used to track long-term trends and seasonal fluctuations and variations in data or statistics. Moreover, it can be applied in an economic context in the review of production, sales, and investment performance. Obviously, if there is potential trouble in any of the five main areas of analysis (liquidity, leverage, efficiency, profitability and market value), managers will have ample time to take necessary corrective measures to forestall the occurrence of the problems. The ratios bring to light the possible solutions, for example, if the time series analysis indicates that a company’s liquidity is diminishing, the managers will promptly take action to boost the company’s liquidity position.There are many possible solutions such as borrowing cash through a long-term loan, get a cash injection from the company’s shareholders (or owner(s)), or dispose off some fixed assets for cash. In the alternative, the company may reduce current liabilities by restructuring short-term debt into long-term debt. Furthermore, the proceeds of the sale of a fixed asset to settle some accounts payable in order to boost the company’s liquidity.Accompany Notes to the Financial Statements of Quoted CompaniesThere are some notes that the Companies and Allied Matters Act 2020 required quoted limited companies to accompany their audited financial statements and report. In addition, the International General Accepted Accounting Principles (GAAP) of International Financial Reporting Standards (IFRS) and Securities and Exchange Commission (SEC) requires some certain disclosures in the published financial statements of public limited companies. It is pertinent to mention that the larger the organisation, the greater the scope for information to be disclosed.The Auditors’ reportThe external auditors play a pivotal role in the preparation and presentation of annual financial statements. The external auditors is to report whether financial statements have been properly prepared in accordance with the company law and guidelines of other regulatory institutions such as International Financial Reporting Standards (IFRS), International Accounting Standards (IAS), Nigerian Accounting Standard Board (NASB), etc. The major requirements are as follows:Disclosure of full information about the related undertakings of the company unless such disclosure would be inimical to the success of the business.The particulars of the employees must be disclosed. This involves the classification of the employees into groups such as directorate, management and operation. Furthermore, the wages and salaries paid to these categories of employees and pension costs must be disclosed.The directors’ reportThe directors’ report for a fiscal year must disclose the following information:the particulars of the directors of the company; andthe principal activities of the company in the course of the year.environmental matters, which should include the impact of the company’s activities on the environment. This concerns companies that engaged in oil exploration and mineral extractive industry;the company’s employees; andthe social and community issues such as giving back to the host community and society at large in form of corporate social responsibility. analysing the company financials using key performance indicators; and where necessary, analysis using other key performance indicators, including information relating to environmental and employee matters.It is exceedingly important to note that the director’ report must be approved by the board of directors and signed on behalf of the board by a director (usually the Managing Director/Chief Executive Officer) and the secretary of the company.Charges to be shown as notesThere are myriad charges to be shown as notes as listed below:Auditors’ remuneration, including expenses.Hire of plant and machinery.Interest payable on loanable funds and other credit facilities repayable by instalments or within five years.Depreciation: amounts of provisions for both tangible and intangible assets; its effect on change of depreciation method and revaluation of assets.Income from quoted investmentIncome received such as interests, dividends, and royalties from investments in other quoted companies must be fully disclosed.Rents receivable from land after deducting outgoingsRent income from land must be fully disclosed.TaxationAll taxes including income tax, petroleum tax (where appropriate) value added tax (VAT), deferred tax and any other special circumstances affecting tax liability must be stated.Prior period adjustmentsThe accounting policies, changes in accounting estimates and errors must be disclosed.Redemption of liabilities must be disclosedRedemption of shares, debentures and loans must be disclosed.Earnings per sharePublic limited companies listed on the Stock Exchange (such as Nigerian Stock Exchange, London Stock Exchange, New York Stock Exchange, etc.) must show their earnings per share in the audited financial statements.The Importance of Corporate GovernanceAs discussed earlier in Chapter 1.8, corporate governance is the combination of internal and external control mechanisms put in place to safeguard the assets of a company and protect the rights of the shareholders. It is vital for the external auditors to ensure that users of financial information are provided with accurate and reliable accounting figures. Corporate governance is concerned with the manner in which company directors carry out their job assignments.In the early 2000s, there were series of accounting scandals involving high-profile companies such as Cadbury Nigeria Plc, Enron, WorldCom, Tyco and Parmalat, etc. which impacted negatively on the reputation of these companies external auditors. The United States Congress promptly responded to the spate of corporate scandals and accounting irregularities by signing into law the Sarbanes-Oxley Act 2002 which make it more difficult for managers to engage in self-dealing and information manipulation. Moreover, the Securities and Exchange Commission (SEC) is responsible for making sure listed companies comply with the financial reporting standards. If a company violates these rules, the penalties may be severe. For example, the SEC took a stern action against Cadbury Nigeria Plc and its auditors (Akintola Williams Deliotte Nigeria) in 2008 in connection with the overstatement discovered in the company’s 2005 financial statements.In view of the global massive and monumental accounting frauds and irregularities, a set of guidelines has been developed over the last decade known as Combined Code on Corporate Governance. The combined code contains a set of guidelines which can be used to determine whether a company directors have performed their duties adequately and in an appropriate manner, and in the best interest of the shareholders. The combined code has been exhaustively discussed in chapter 7 under SEC’s Code on Corporate Governance and Best Practice.In Nigeria, the Securities and Exchange Commission and the Corporate Affairs Commission jointly issued a code of Best Practice in 2003 (The Peterside Code) which is applicable to listed companies in Nigeria. The Combines Code has been imposed on listed companies as a result of high profile incidence of massive financial irregularities that heightened public concerns about financial reporting, auditors’ reputation and remuneration of directors.3.12 Linking Organisation’s Annual Budget and Strategic PlanningThe managers most likely to succeed in today’s business environment are those who can plan ahead in terms of their activities and their available resources. Therefore, small and large companies should prepare such plans in the form of a budget. A budget acts as a control against which actual performance can be evaluated. In an attempt to make a wise business decision, the management of company must have a vision about its future. The Bible in the book of Proverbs chapter 29 verse 18 confirmed this saying “where there is no vision, the people perish: but he that keepeth the law, happy is he” King James Version. Vision in this context means “revelation”. In the absence of a vision, the decision made now may prove to be harmful to the company in the long run. Forecasting and planning is the process by which managers decide on major overall issues concerning what the business is going to do and how it is going to do it. What is needed is a strategy for the foreseeable future, which can be called the long term plan. Evidently, long term planning such as product development, management succession, market expansion and so forth need to be flexible and reviewed regularly.Major capital investment decisions such as those concerning new production line and product development must be compatible with the company’s overall strategy. It involves an assessment of information about the future activities which is produced through a process known as budget. Budget can be defined as “a quantitative statement, for a defined period of time, which may include planned revenues, expenses, assets, liabilities and cash flows”. A budget provides a focus for the organisation, aids the coordination of activities, and facilitates control. Planning is achieved by means of a fixed master budget, whereas control is generally exercised through the comparison of actual costs with a flexible budget. Put simply, a budget is a quantitative statement expressed in monetary terms which is prepared in advance of a defined period of time (usually 12 months) and usually showing planned income and expenditure and the capital employed to achieve a given objective. It is the barometer by which an organisation’s performance is measured against actual result. First and foremost, managers must choose between goals and average expected performance when preparing an annual budget. A budget based on goals which are tight is a device for encouraging improved performance. The conventional budget used extensively in business today is to control the operations and make appropriate plan for the available resources to enhance effective and efficient performance of the organisation. The use of budgets is vital for the planning and control of any organisation.Budgets help management to coordinate the activities of different departmental managers which invariably ensure their full commitment to achieving desired results. In view of the fact that budgets provide benchmarks against which actual activities are measured, budgets are a reliable way of analysing actual business performance.3.13 Budgeting As a Business Strategy The process of converting plans into budgets is known as ‘budgeting’. The budgeting process may be very formal as obtainable in most large organisations. Budgeting creates a framework within which employees, departments, and whole firms can operate. The annual process of budgeting is seen as stages in the progress fulfillment of the long-term plan for the firm. It steers the firm towards the long-term objectives defined in the corporate plans.Business strategy is the long-term vision of where an organisation wants to be and how to get there. The process involves setting overall objectives, scanning the internal and external environment using the SWOT analysis, which is an assessment of the business strengths, weakness, opportunities, and threats and identify appropriate courses of action. Budgeting is the tactical implementation of the business strategy on short-term basis, which is incorporated in the business planning and control processes. Budgeting is an iterative process which forms an integral part of the overall strategic plan for the organisation. The management should employ the strategic options that will produce the best result in achieving the organisation’s objectives and create long-term plans to implement these strategies. The long-term plans can be transformed into the department’s budgeted annual operating plans. The organisation must consider appropriate planning procedures to fashion out what to do, when to do it and the necessary controls which include budgeting to ensure that desired results are actually achieved. The budgeting process required that feasible and detail budgets are developed covering each activity, department or function in the organisation. This can only be done if the budgeting process permits coordination of the activities, departments and functions of the organisation. For instance, sales and production activities have to be compatible with each other and have to be possible in terms of physical resource available to the organisation so that each aspect of the operation contributes to the overall strategic plan.Budgetary ControlBudgetary control is the planning in advance of the various functions of a business so that the business as a whole can be controlled. Budgetary control has been defined as “the establishment of budgets relating the responsibilities of executives to the requirements of a policy, and the continuous comparison of actual with budgeted results, either to secure by individual action the objectives of that policy or to provide a firm basis for its revision”. The main aim of budgetary control is to provide a formal basis for monitoring the progress of the organisation as a whole and of its component parts, towards the achievement of the objectives specified in the planning budgets.The full budgetary process involves liaison and discussion between all levels of management. Therefore, the comparison of actual results with planned or budgeted results and reporting upon variations is the principle of budgetary control that sets control mechanics for the accomplishment of the plans within agreed expenditure limits. The future is uncertain, therefore managers must grapple with any uncertainties early enough, and prepared to be flexible in their approach to budgeting. The budgetary control system provides some of the feedback necessary to be able to make corrections to current operations and activities in order to meet the original objectives and plans.A system of budgetary control is used by large and global corporations. Budgeting control is operated with a system of standard costing because both systems are interrelated, but they are not interdependent. It must be borne in mind that budgetary control is certainly facilitated where standard costing is in operation. On the other hand, it would be difficult to operate a system of standard costing if budgets were not in use. Budgets relate to a forecast amount of money to be received or incurred in respect of a certain function, while standards relate to the cost price or sales value of a unit of product or service.Suffice it to mention that in some large companies, budgetary control is an integral part of corporate planning system. It is a system that coordinates setting of company objectives, preparing budgets and plans, establishing strategies, preparing policy statements and monitoring results.The objectives of budgetary controlThere are three major objectives of a system of budgetary control thus:Budgetary control helps to plan the policy of an enterprise.It helps to coordinate the activities of a business so that each is part of an integral whole.In addition, it also helps to control each function so that the best possible results may be attained.Computerised BudgetingToday, one of the most important tasks of top level management is concerned with budgeting. Small and large companies are using computers to produce budget plans. They either use software specifically written for the budget purpose, or spreadsheets package. A spreadsheet package is an electronic worksheet in which data can be stored, retrieved and manipulated at any time. The spreadsheet is a simple matrix of cells arranged in rows and columns which can contain values, formulae for calculations and relationships between data. The main feature is that all elements in the matrix are changed automatically when one or more of the key assumptions are changed. Spreadsheets can be of great assistance in establishing the effect on a budget of different values and assumptions, which invariably give the manager more allowance to make effective decisions. Effective use of a spreadsheet enables the manager to organise, analyse, and present data in the budget plans. For example, a series interrelated departmental operating statement (such as production, sales and finance) culminating in an overall projected income statement may have been prepared on the spreadsheet. If occasion arises that one or more of the variables (such as salaries, sales, output levels, absorption rate, etc.) need to be altered then the new value needs only to be entered once and the alteration will reflect in the whole of the matrix instantaneously with all relationships. The computer will automatically produce the budgets, and provide answer to “what if?” questions with a view to amending the budgets within a very short space of time. This enables the manager to use the results that would be expected from many separate business proposals thereby enhancing the chance of selecting the best solution in setting the most acceptable budget.Cash budgets are good examples of routine and essential reports which need frequent updating to reflect both current and forecast conditions, changes in credit behaviour, projected gains or expenditure, and so forth. Changes that occur in the period and up-to-date information are input into the file data, the cash budget will be automatically projected forward by the spreadsheet program indicating surpluses and/or deficiencies.Cash BudgetA cash budget is an estimate of a firm’s projected cash inflows and outflows that the firm can use to plan for any cash shortages or surpluses during a given period. In other words, this represents the cash receipts and payments, and the estimated cash balances for each month of the budget period. Cash budgets are important guidelines that assist managers in anticipating borrowing, debt repayment operating expenses, and short-term investments.Its main functions are:to ensure that sufficient cash is available when required;to reveal any expected shortage of cash, so that action may be taken e.g. a bank overdraft or loan arranged;to reveal any expected surplus of cash, so that if the management desire, cash may be invested or loaned.Many small business owners do not make effective use of cash budget. They are often faced with shortage of cash in running their businesses. Bank managers are not favourably disposed to approve loan or an overdraft on a short notice without prior arrangement. If a cash budget has been prepared, the customer would have known well in advance that there would be need for additional funds, how much is needed and on which particular date. The cash budget can reveals that the finance needed is not a short-term credit facility but a long-term facility that can only be satisfied by an issue of shares, debentures, or leasing facility.Figure 3.13.1 Cash budget in tabular and graphical formatFrom the Figure 3.13.1 above, it is observed that there will be a deficiency of cash in April to the tune of N100, 000 and also in August amounting to N125, 000. This will require additional cash in form of excess overdraft facility; therefore an advance notice must be given to the bank to facilitate early approval.BudgetsAs discussed earlier, a budget is a plan of anticipated activity expressed in monetary terms, which is often referred to as fixed budget. One problem associated with fixed budget is that it is based on an assumption about the coming level of activity. Since the actual level of activity may be significant different, there can be occasions when it is difficult to interpret variances between the fixed budget and actual result. In order to avoid the wide discrepancies which may emerge when comparisons of actual results are made with a fixed budget, the use of flexible budgets is absolutely appropriate. As changes in internal or external variables occur, so also actual results begin to diverge from the budget. In view of the foregoing, budgets may be adjusted using a process called ‘flexible budgeting’. A budget which allows for changing levels of activity is called a flexible budget.For example, if budgeted sales were 10,000 units of Dell personal computers, yet only 8,000 units were sold; in a fixed budget all the cost variances would be unfavourable. In an attempt to address the variances, a flexible budget is designed to adjust the budgeted cost levels to suit the level of activity actually attained. It shows the expected revenue and expenditure for the actual volume produced and sold i.e. 8,000 units of personal computer, which gives a more valid comparison of real activity against budget. In this way an estimate can be made of the expected costs for the actual activity level experienced.Budgets are used for guiding activity and for control. A flexible budget is useful for the control aspect of budgeting but as it is an important part of the planning process to consider what control procedures will be necessary and adequate.3.14 Fundamentals of Cost AccountingThis section sets out to explain in brief the basic features of cost accounting, since these are the key to all the cost systems employed in today’s industrial world. It is therefore imperative for the 21st century managers to fully understand cost accounting to enable them produce a more accurate budget that contains better predictions and provide a better basis for analysis and decisions.Cost accounting is defined as “the process of measuring, analysing and reporting to management the costs and benefits of actions of management”. Eddy O. Omolehinwa (1985). The purpose of cost accounting is to assist management in planning, controlling and decision making. Planning involves evaluation of all possible alternative courses of action and subsequent selection of one on the basis of benefits and costs information available. Control means the managerial supervision of ongoing operations with a view to ensuring compliance with the set standard. It should be borne in mind that all decisions on future courses of action involve making estimates of future revenues and costs. Therefore, actual results are compared with the budgets and any significant deviation requires immediate corrective action.The elements of costThe process of converting raw materials into finished products require some inputs upon which some costs have been incurred. A ‘cost’ in the accounting sense is generally assumed to mean the expense of following some particular course of action, which can be the payment for some material or salaries paid to workers. It could even be some estimated part of the expenditure on assets which are of benefit for a long period e.g. depreciation. This idea constantly needs to be reviewed to suit the types of decisions which are being made with some aids from cost information.The cost is referred to as total cost which can be classified under three broad headings namely: materials, labour and overhead, and these three groups of expenditures are known as the element of cost. Total cost fall into two general categories: fixed cost and variable cost. Total cost = Fixed cost + Variable cost. Some of the cost can be direct or indirect which accounts for the behaviour of cost in a general sense. Cost behaviour is closely related to changes in activity level and this explains why a rigid categorisation of costs into fixed and variable becomes important. The addition of direct cost and administration, selling and distribution, and finance expenses made up of total cost.Direct cost (or prime cost)Direct costs (or prime costs) are those costs obviously traceable to a unit of output or segment of the business operations. Such as direct material, direct labour and direct expense.Direct materialAny used material that can be traced in an economically feasible manner to a product or job is direct material. It means that minor items such as printed label on pet bottle should be classified as indirect material which forms part of overhead. Examples of direct materials are stated below.All material and component parts specifically bought for a job, process or order.Semi-processed material which is scheduled for further use in the next process.Primary packaging materials such as pet bottle for table water, Tetra Pak container in which milk or juice drinks are sold.Direct labourDirect labour cost is traceable to a product or job in an economically feasible manner. A fork lift driver, quality control inspector, etc. are good examples of direct labour.Direct expenseDirect expenses are all other direct costs outside direct materials or direct labour. They include:High-tech equipment or tool acquired purposely for a particular job or product.Costs of special layout, designs or drawings.Manufacturing overheadsThe three elements of cost described above constitute direct cost (or prime cost), which is incurred for the benefit of a single product or service. All expenses over and above direct cost is manufacturing overhead, which is incurred for the benefit of many products or services. These are the costs incurred on the following items.Rent, water rate, and insurance, depreciation, repairs and maintenance of factory tools and production lines.Salary of production managers, factory workers, etc.Power supply (electric, gas, etc.) and other services in aid of production; process fuel, etc.Administrative overheadsThese are indirect costs incurred in the direction, control and administration of an organisation. This consists of expenses in maintaining the general office, e.g. office rent, light, cooling system and salaries of support staff, management team and auditors’ remunerations.Marketing overheadsMarketing overheads is made up of three components, such as selling overheads, publicity overheads and distribution overheads.Selling overheadsThese are the indirect costs incurred in soliciting, securing and keeping orders for the firm’s product or service. The selling overheads include the cost of preparation tenders and estimates for special sales project (such as trade fares, exhibition, etc.), salaries and commission of sales manager, sales crew and sales representatives, after sale services, etc.Publicity overheadsThese are the indirect costs incurred in advertising and promotion, printing of catalogues and price lists that aids eventual sales of goods or services.Distribution overheadsThese are the indirect costs incurred in warehousing and delivering finished products to customers, such as insurance of warehouse, carriage inwards, maintenance of delivery vehicle, despatch clerks and loading cost. Recognizing Different Cost Behaviour PatternsFrom planning and control standpoint, perhaps the most useful way to classify costs is by behaviour. Cost behaviour means how a cost will react or respond to changes in the level of business activity. Managers are faced with so many challenges in quest of information for planning and decision making. They must understand every aspect of their work and have indepth knowledge of the patterns of cost behaviour and ways that future costs (and other factors such as sales) can be predicted. As the activity level rises and falls, a particular cost may rise and fall as well or it may remain constant. For planning purposes, the manager must be able to anticipate which of these will happen, and if cost can be expected to change he or she must know by how much.The purpose of classification of costs into fixed and variable in response to their behaviour and characteristics is essentially to facilitate cost production. Behaviour of cost is closely related to changes in activity level which forms the basis of categorising costs into fixed and variable as explained below.Fixed costA fixed cost is a cost that remains unaffected regardless the variations in the level of activity. In other words, fixed costs are costs that do not change when the quantity of output changes during a particular time period.Variable costA variable cost is a cost that tends to vary in direct proportion to variations in the level of activity. Variable costs are costs that change when the quantity of output changes.Fixed cost stays unchanged over stated ranges in the volume of production, but variable cost change in total when the volume of production changes within a stated range. It should be noted that classification is not a once off exercise to sort cost into rigid categorisation all the time and for all conditions. The manager must pay attention to the actual and forecast behaviour of the cost, and the purpose for which the cost is intended in order to facilitate a flexible approach to the classification of costs. This classification is only valid within specific limiting assumptions stated below.The time period is relatively short because in the long-run methods, technology and other factors alter, triggering changes in the classification of costs and in their behaviour.The activity variation is relatively small because outside a limited activity range costs are unlikely to behave in line with their original classification.Figure 3:14:1 below illustrates cost behaviour in terms of the way cost is linked to organisation’s volume of activity.Figure Graphical presentation of cost behaviourFrom Figure 3:14:1, it is observed that costs that remain unchanged when volume of activity increases (or decreases) are fixed costs for example headquarters administrative building, human resources, finance, etc. Costs that increase in proportion to volume of activity are variable costs, for example, raw materials, labour salaries, selling and distribution. Those costs that are fixed until capacity is reached and there is necessity to add another fixed cost is stepped fixed costs. For example, a supermarket operating on a 1,000 square metres space at Ikeja City Mall, Lagos may need to expand its shopping floor say 2,000 square metres due to increase in volume of activity. Furthermore, the annual rent may go up suddenly from N1 million to N1.5 million. This may be as a result of increased demand for the premises by other competitors.Costing MethodsThe fundamental principles of cost ascertainment are the same in every system of cost accounting, but the methods of collating and presenting the costs vary with the type of production to be costed. Costing methods are designed to suit the way products are manufactured or processed or the way services are rendered. The methods generally used fall naturally into two main categories: specific order costing and operation costing.Specific order costingUnder this subheading, we have the following costing methods:job costingbatch costingcontract costingOperation costingThe operation costing consists of the following costing method:process costingservice costingSuffice it to mention that whatever costing method employed, basic costing principles relating to classification, allocation, apportionment and absorption will be used. The costing method adopted depends on the nature of the activity in which the firm is engaged.Job costingThe main objectives of job costing are to establish the profit or loss on each completed job and to provide an accurate valuation of uncompleted jobs, i.e. work-in-progress. In the valuation process, direct labour costs, direct material costs and direct expenses incurred in the production of the goods or service are very important in the cost classification. A job is usually valued at production cost until it is dispatched when an appropriate amount of selling and administration overhead would be added.Batch costingThis is used when production consists of limited repetition work and a definite number of articles are manufactured in one batch. The general procedures are similar to costing jobs taking into consideration the various costs (such as material, labour and overheads) which must be collected. Batch costing procedures are commonly used in industries such as beverages, food processing, clothing, engine parts and components.Contact costingThe principle of job costing applies to contract costing because they have many similarities. A separate account is kept for each individual contract or job undertaken. It is usually adopted for work which is site based and for a specific work assignment of large-scale building and construction projects. It is usually incorporated progress payments on the basis of the length and value of work performed. The payments are made against architects certificate of work satisfactorily completed.The percentage-of-completion method is useful for managerial control purposes. During the early period of the contract, management can have an idea of the percentage of profit to revenue and then take actions in time to reduce costs on the remaining part of the contract in case things are not going in consonance with budget.Process costingThere is a need to grapple with the fact that in many firms manufacturing process is on a continuous basis, therefore at the end of a given period some uncompleted work remains to be carried forward to the next period. This is often referred to as work-in-progress which consists of direct materials, direct labour, and manufacturing overheads.Process costing is relevant where production is a continuous flow and is most applicable in industries where production is repetitive and continuous; e.g. food processing, oil refinery, chemical and paints, etc. The process costing is averaging of the total costs of each process over the total throughput of that process (including semi-completed units) and charging the cost of the output of one process as the raw material input to the next process.Service costingService costing is a form of operation costing which applies where standardised services are provided either by an undertaking or by a service cost centre within an undertaking. It can also be used where the service is not completely standardised, but where it is convenient to regard it as such, and to calculate average costs per period in relation to the standardised unit of measure.This method of costing is different from that used in connection with production manufacturing in the sense that the different lies chiefly in the manner of assembling the cost data, and in its allocation to cost units.Advance Costing MethodsWe would examine two categories of costing method under this subheading, namely target costing and activity based costing (ABC).Target costingTarget costing is the designing of a product so that it satisfies customers and meets the profit margins desired by the firm. Target costing is demand based. The manager estimate the selling price people would be willing to pay for a product and subtract the desired profit margin. The result is the target cost of production.Target costing is a market driven approach and its widely used in Japan by these companies: Sony, Isuzu Motors and Komatsu Limited. The product designers, purchasing and manufacturing experts work in tandem to determine the product and process features to establish the long-run target cost. Target costing is an example of feel-forward control. The target costing approach focuses attention on the product design stage before it is release to manufacturing department. It should be borne in mind that most costs are committed in the early life cycle of a product.Activity based costing (ABC)Activity based costing (ABC) became noticeable in the 1980s but the work of Professors Kaplan and Cooper of Harvard Business School brought it to prominence in comparatively recently. In the last few decades, the manufacturers made concerted efforts to eliminating all unnecessary cost from their operations. This resulted in dramatic improvements which lend credence to ABC becoming a widely used tool most especially in the manufacturing industry. In an attempt to make overhead attribution more realistic, there have been various product costing developments in recent years. ABC is one of the most influential and widely used.Activity based costing is a method of calculating the cost of business by focusing on the actual cost of activities, thereby producing an estimate of the cost of individual products or serves. In other words, ABC can be thought of as a method of charging overheads to cost units on the basis of benefits received from the particular indirect activity e.g. scanning, planning, ordering, etc. There are five basic steps of ABCThe first step is to identify the product or service to be studied, which includes materials handling, purchasing, delivery, etc.The second step is to determine all the resources and processes that are required to create the product or deliver the service, and their respective costs.The third step is to identify the factors which determine the “cost drivers” for each resource: the cost of labour as well as raw materials.The fourth step is to collect cost and other data, such as time taken for each process and resource. These are known as cost pools and are equivalent to conventional cost centres.The final step is to use data to calculate overall cost of the product or service, and charge support overheads to products or services on the basis of their usage of the activity.What are the merits of ABC?Activity based costing attempts to create the big picture in a crystal-clear, full and accurate by giving attention to details. The following are the major advantages of ABC.The principle of using activities as benchmark to trace costs can be applied across a range of service industries and also manufacturing companies.It focuses attention on the real nature of cost behaviour and helps in reducing costs and identify activities which do not add value to the product.It considers a much wider variety of resources and materials than the traditional accounting methodologies. As a result it presents a more complete picture.It recognises that it is activities which cause cost, not products and it is products which consume activities.It provides a reliable indication of long-run variable product cost which is relevant to strategic decision making.It is flexible method to trace costs to processes, customers, as well as product costs.It provides useful financial measures (e.g. cost driver rates) and non-financial measures (e.g. transaction volumes).What are the weaknesses of ABC?The data requirements alone are daunting. ABC can be a very time-consuming exercise because of the volume of data it requires.The numerous cost pools coupled with multiple cost drivers is more complex than traditional systems which make it more expensive to administer.It is all too easy for the manager to get caught up in ABC’s details and mechanics thereby becoming fixed on tracking the costs of the activity, rather than on tracking and perfecting the activity itself.Setting up ABC cost accounting systemAll business sectors can use ABC cost accounting system, ranging from manufacturers to florist. It may be helpful to knowledge-based businesses (such as law firm, medical and health care providers, and so forth) that rely primarily on human services and related resources, whose total costs may be difficult to measure with more traditional accounting techniques.It is important that the organisation understand its activities and resources that these require. It is essentially important to understand the amount of information required, and the expense of generating that information. Furthermore, it must determine what level of accuracy will be acceptable.In order to create an ABC cost accounting system, there are three preliminary steps to follow.converting to an accrual basis of accounting;defining cost centres and cost allocation; anddetermining processes and procedure costs.Traditionally, business has relied on the cash basis of accounting, which recognises income when received and expenses when paid. ABC seeks not only to attribute overheads to product costs on a more realistic basis than simply production volume, but also attempts to show the relationship between overhead costs and the activities that cause them. The main idea behind ABC is to focus attention on what factors cause or drive costs, known as cost drivers. Cost centres are a company’s identifiable products and services, but also include specific and detailed tasks within these broader activities. Obviously, cost centres will be defined in accordance to the nature of the business and method of operation. Therefore, what is critical to ABC is the inclusion of all activities and all resources.It is pertinent to emphasize that time studies establish the average amount of time required to complete each task, plus best-case and worst-cast performances. Only those resources actually used are factored into the cost calculation; unused resources are reported separately. Time studies can be employed by management teams to monitor and allocate expenses that might otherwise be expressed as part of general overheads, or even go undetected.For example, airlines have used the ABC methodology to determine the cost of processing flight tickets by hand and Internet. Studying such costs confirmed the wisdom of using online booking, which invariably translates to annual cost savings of millions of naira. The banks have long used the ABC-like methods to confirm that investments in automated teller machines (ATM), point of sales machines (POS), etc. would be both cheaper than continuing to rely solely on tellers and front desk officers and in their customers’ best interests.In sum, activity based costing is more insightful and a complete way to understand what drives costs as it allocates each cost in proportion to several business features. Time studies facilitate the keeping of detailed time sheets and cost records for every individual and every activity which enables the management to make a more accurate costing allocation based on the entire organisation.3.15 Cost-Volume-Profit (C-V-P) AnalysisCost-volume-profit analysis, often referred to as break-even analysis is a popular and commonly used tool for analysing the relationship between costs, volume and profit at differing activity levels. The level of activity achieved by a business is of great importance in determining both whether or not it makes a profit or loss. The analysis is used to examine the effect of changes in the variables contained in this project equation.Profit = revenue – costs = Sales volume x unit price – Total (fixed and variable) costs.The break-even analysis is an important and useful guide for short-term planning and decision making. A business has to cover both its fixed costs and its variable costs before it can make a profit. There exists a great deal of interest in exactly how much revenue (or sale) has to be earned before a profit can be made. In a situation where revenue is below total costs, a loss will be incurred. In contrast, if revenue is greater than the combined total of the fixed and variable costs, a profit will have been made. When there is greater changes in activity spreading over longer period, existing cost structures (e.g. the amount of fixed costs and marginal cost per unit) are more likely to change, therefore cost-volume-profit analysis may not produce useful guidance.At this juncture, the question that readily comes to mind is at what level of sales does the business stop incurring loss and the next unit of revenue it makes a profit? That is to say at what point does it break even, when it makes neither a profit nor a loss? Basically, as revenue increase so do variable costs, but the only item that remains unchanged is the fixed costs on a short-term. Fixed costs remain unaffected over stated ranges in the volume of production, but variable costs change in total when the volume of production changes within a stated range.A break-even analysis is a way of showing the impact of cost and revenue on a firm. The break-even point (BEP) in sales volume is the point at which total revenue equals total costs. The BEP shows the point at which a firm makes no profit or gain from its operations. The analysis assumes the following:That all costs can be classified into fixed and variable elements.That fixed costs are constant.That variable costs increase at the rate activity increases.That the only factor affecting costs and revenues is volume.That technology, production methods and efficiency is constant.Let’s look at an example showing the changing costs and revenues over different volumes of production. Candova Limited has variable costs of N2 and fixed cost of N10, 000 per year. The revenue (selling price) is N3 per unit. Production is in stages of 1,000 units.Table 3:15:1 Break-even point in tabular formatAs an aid to management, and in order to obtain a clearer view of the position of a business, it is more appropriate to construct what is known as a “break-even chart” as shown in Figure 3:15:1. From Table 3:15:1 above, it is observed that the business will break even at an activity level of 6,000 units. It will make neither a profit nor a loss. The business will continue to make progressive profit thereafter.Cost-volume-profit analysis can be derived by graphical representation as indicated in Figure 3:15:1, or by simple formulae as indicated below and illustrated by the information given in Table 3:15:1 above.We can calculate the break-even point without computation of costs, etc. and the break-even chart. Revenue (selling price) = N3 per unit Variable cost = N2 per unit‘Contribution’ towards fixed costs and profit = N1 per unitTherefore, there would be contribution of 6,000 units to provide a contribution of N6, 000 to cover fixed costs. It can be calculated thus:Break-even point = Fixed costs Selling price per unit – variable costs per uniti.e. in the case of Candova Limited = 6,000 = 6,000 units = 6,000 units N3 – N2 1The information given in Table 3:15:1 above can also be represented in graphical format as shown in Figure 3:15:1 below. It is pertinent to mention here that many business executives seem to understand the breakeven analysis more easily when they see it in chart form. Most especially those executives that are not used to dealing with accounting information.Figure 3:15:1 The breakeven chartThe effects of changes on profits can easily be shown by plotting fresh lines on the chart to show the changes, or intended changes in the circumstances of the firm.3:16 The Balanced Scorecard as Control MetricsThe early 1980s, brought radical change in the business environment, which prompted managers to take broader view of performance that provided a holistic assessment of corporate health for both the short-term and long-term with the aim of providing a balanced view of a company’s performance.Robert Kaplan and David Norton introduced the Balanced Scorecard in the early 1990s due to the fact that exclusive reliance on financial measures in a management system would be insufficient for the 21st century. Today dynamic business environment has shown that strategies for creating value had shifted from managing tangible assets to knowledge-based strategies that created and deployed an organisation’s intangible assets, including customer relationships, innovative products and services, high-quality operating processes, and the skills, knowledge, and motivation of its employees. It helps managers to focus on their mission instead of short-term financial gain.The Balanced Scorecard technique is a holistic approach to management control systems, which consider all aspects of a business rather than just its financial concerns. Robert S. Kaplan et al (1996) defined the Balanced Scorecard as a performance measurement and management system using objectives and measures in four interrelated perspective: financial (shareholder), customer, internal process, and innovation and learning. The key to the success of the control metric system is that it must comprise a unified and integrated set of indicators that measure key activities and processes at the core of a company operating environment.Traditionally, managers have relied on series of financial metrics to measure how well their companies are performing. These measures relate primarily to financial issues such as financial ratios, unit costs, productivity, profitability, cash flow, and profit growth. The Balanced Scorecard takes into account not only the traditional ‘key’ financial measures, but also three additional categories of ‘subtle’ quantifiable operational measures that can be categorized into four perspectives as mentioned earlier. The Balanced Scorecard is a powerful framework for aligning strategic objectives, management systems, and corporate performance, resulting in robust long-term growth and value creation more than the traditional financial indications.Managers should identify the company’s major strategic goals as a guide in choosing the control metrics. The objectives and measures on a Balanced Scorecard give managers a better understanding of the management control systems and thereby articulate their strategies. It provides a framework for organizing strategic objectives into underlisted unique perspectives.Financial (shareholder) perspectiveThe goals are increased returns on assets, increased profitability, and growth. While the measures are cost reduction, cash flows, economic value added, gross margins, profitability, return on capital/equity/investment/sales, revenue growth, and working capital.Customer perspectiveThe goals are existing customers retention, new customers acquisition, and satisfaction. While the measures are market share, customer service, customer satisfaction, number of new /retained/lost customers, number of complaints, delivery time, quality performance, response time.Internal process perspectiveThe goals are improved core competencies, improved critical technologies, streamlined processes, better employee morale. While the measures are efficiency improvements, development/lead/cycle times, reduced unit costs, reduced waste, improved sourcing/supplier delivery, employee morale, internal audit standards, number of employee suggestions, sales per employee.Innovation and learning perspectiveThe goals are new product development, continuous improvement, training of employees. While the measures are number of new products and percentage of sales from these, number of employees receiving training, training hours per employee, number of strategic skills learned, alignment of personal goals with the scorecard.Figure 3:16:1 Diagrammatic Representation of the Balanced ScorecardAt this juncture, it is exceedingly important to mention that the precise measure used to capture each of these perspectives will vary from business to business depending on the strategy of the organisation, the nature of its production process, and the industry in which it carried out operations. The Balanced Scorecard enables organisations to become more adaptive and responsive to the needs of both internal and external constituencies resulting in greater opportunity for problem solving, creativity and innovation.The implementation of the Balanced Scorecard approach requires managers to identify which individuals and units within the organisation should be responsible for achieving which metrics linking output controls and incentives to those metrics. In Figure 3:9:1, production managers might be assigned the responsibility for achieving the unit cost, inventory turn, and waste reduction goals. In addition, the managers might also be charged with the responsibility for goals related to delivery time because it falls within the purview of production process. In the same vein, customer service managers might be responsible for goals related to the time taken to solve customer service problems, while the product development, manufacturing and marketing managers are saddled with the responsibility of reducing product development/lead/cycle times because they function in tandem. PART 4 Managing and Growing Small BusinessSmall Business ManagementEntrepreneurship is the creation of a new organisation. Going by the definition of entrepreneurship, it centres on the organisation rather than the person involved, which means entrepreneurship ends when creation stage of organisation ends. This is the point where the small business management process begins. At this juncture, the small business manager guides and nurtures the business through the desired level of growth. Because growth makes an organisation bigger, the organisation begins to benefit from advantages of size. For example, higher volume increases production efficiency, makes the organisation more attractive to suppliers, and therefore increases its bargaining power. Size also enhances the legitimacy of the organisation, because organisations that are larger are often perceived by customers, financiers, bankers, and other stakeholders as being more stable, strong and reliable. Research studies have shown that 90 percent of all small business failures are as a result of poor management. We should bear in mind that the term poor management covers a number of faults. This could mean poor planning, poor record keeping, poor inventory control, poor promotion, or poor employee relations. Most likely it would include inadequate capital to sustain the growth process. Small business management takes time, dedication, and determination. In an attempt to help an entrepreneur succeed as a business owner; the following functions of business in a small-business setting should be explored.Planning the businessFinancing the businessKnowing the customers (marketing)Managing the employees (human resource development)Keeping records (accounting)It is interesting to note that all of the functions stated above are important in both the start-up and management phases of the business, the first two functions; planning and financing are the primary concerns when an entrepreneur start his/her business. The remaining functions are highly essential for the actual operations once the business has taken off. Business planning has been exhaustively discussed in Chapter 2:4, while strategic finance for micro, small and medium scale enterprise and records keeping have been handsomely dealt with in Chapter 3:1. In this chapter, we shall cover other functions such as operations management, human resource management, and marketing.It is no gainsaying that the growing of a business can provide the entrepreneur more power to influence the organisation performance. As the business grows, it changes. These changes bring about a number of managerial challenges. These challenges are as a result of the following pressures.Pressures on current financial resourcesGrowth has a large demand for cash. Adequate provision of finance to sustain the process must be planned ahead as investing in growth means that the organisation’s resources can become overstretched. Pressures on the management of employeesMany entrepreneurs realize that as the venture grows, they need to change their management style, that is, change the way they relate with employees. Management decision making that is the exclusive domain of the entrepreneur can be inimical to the success of a growing venture. In order to survive, the entrepreneur will need to consider some managerial changes.Pressures on human resourcesEvidently, growth is also triggered by the work of employees. On this note, if employees are spread too thin by the pursuit of growth, then the organisation will face problems of employee morale, employee absenteeism, and an increase in employee turnover. These employee issues could also have a negative impact on the organisation’s corporate culture. Human resource planning is highly essential to keep skilled employees in the organisation for the overall successful performance and competitive advantage.Pressures on the entrepreneur’s timeOne of the major problems in growing a business is limited time to attend to myriad of business and personal engagements of the entrepreneur. Time is the entrepreneur’s most precious yet limited resource. It is a very unique quantity as it cannot be stored, rented, hired or even bought. Growth is demanding of the entrepreneur’s time, but as he/she allocates time to growth it must be diverted from other activities and this can result to problems.4.2 Small Business Operations ManagementOur key words now are globalisation, new products and business, and speed – Tsutomu KanaiThis section focuses on manufacturing operations management but there is needs to grapple with basic elements of operations management systems to enable us have an in-depth understanding of manufacturing operations management. The function of operations management has evolved over the last few decades from a narrow view of production, inventory, and industrial management into broader concept that includes services.Operations management can be defined as the process of designing, operating, and controlling a productive system capable of transforming or converting raw material resources and human talent into useful products and services. To survive in the world of commerce, a company needs some types of distinctive competency or competitive advantage. Once attained, that advantage must be sustained. Otherwise, new ones must be developed. In either scenario, operations are the key to success or failure in the 21st century business world. The complexities of contemporary society make everyone dependent on organizations and the people who manage them; yet we often fail to understand and appreciate the process of management. In business, operations referred to different activities that involved in creating an organizations products and services. These activities such as production systems, product and process development, product quality, inventory systems, supply chains has to be effectively and efficiently managed by operations managers with a view to lowering the costs of production and increase the differentiation of their products. There are other essential activities in operations management that are necessary to produce and deliver a service as well as a physical product, which include research and development, marketing and sales, advertising and publicity, accounting, and finance.Obviously, every business takes inputs and transforms them into outputs. Therefore, the management of production and operations is critical to all businesses not just those involved in manufacturing alone. The processes and procedures of transforming needs of customers, people, capital, raw material, energy, information technology, and other resources into finished products or services are the business operations core function. Let’s briefly examine production process before we discuss the elements of operations management systems in order to have a good insight into the subject. Production is any process or procedure designed to transform a set of input elements into a specified set of output elements as shown in Figure 4:2:1 below.Figure 4:2:1 Operations Management SystemsThe operations management system is a collection of elements linked by some form of regular interaction and interdependence. These elements are pooled together and coordinated into a system to produce the product or service. From the Figure 4:2:1 above, it shows that operations management systems consist of five basic elements: transformation processes, outputs, control systems, and feedback.InputsIn the operations management system, the inputs include needs of customers, people, capital, raw material, energy, information technology, market and environmental forces that come into a business. These inputs are all needed in varying degrees in the transformation process.Transformation processesThe transformation processes incorporate planning, operating, and controlling the system. It consists of interrelated parts, each dependent on the others. There are many tools and techniques available to facilitate the transformation process, which includes product design; production planning; supply chains management; inventory control; workflow layout; and quality control that are implemented to produce output. These activities enable the operations managers to carry out their economic function of transforming resources into finished products and services.OutputsOutputs of a firm include all products and services produced during a given time. Outputs consist of products and services and may even be information, such as that provided by an expert or consulting company. These are the result of the transformation processes, which can be tangible (such as an android phone), or intangible (such as a MTN’s network service). A product need not be a physical object; it can be anything from haircut at a barbing salon to a pleasurable ride in an Uber service. Manufactured products such as aircrafts, cars, laptop computers, LCD television, air conditioners, etc. are good examples of tangible goods. The banks, insurance companies, airlines, ICT companies, universities provide intangible services. Today, operations management techniques are used in service provider organizations as well as manufacturing enterprises.Control systemsControl is an essential organizational function. As a management function, control is the process of taking the necessary preventive or corrective measures to ensure strict compliance with organization’s goals and objectives. The operations management systems require constant monitoring and adjustment to control for deviations from standards. Controls are integrated into all three stages of production: inputs, transformation processes, and output as illustrated in Figure 4:2:2 below.Figure 4:2:2 Types of Production ControlFrom Figure 4:2:2 above, an organization can take preventive or corrective actions by cheating, testing, regulation, verification, or adjustment.FeedbackFeedback which can be verbal, written or observational is the information that a manager receives in monitoring the operations management systems. Suffice it to mention that feedback is the necessary communication tool that links a control system to the inputs; transformation processes; and outputs as depicted in Figure 4:2:2 above. Feedback control involves monitoring and adjusting ongoing activities and processes to ensure compliance with standards. It could be further extended to gathering of information about a complete activity, evaluating the information with a view to taking appropriate steps to improve similar activities in the future.In a nutshell, a manager that wants to succeed in the prevailing business environment and today’s complex organization must exercise real-time control that will help him avoid mistakes in the present and make use of information on the past performance to forestall repetition of the past mistake.4.3 The Effective Operations Management in Manufacturing EnterpriseEffective manufacturing operations management and execution are critical for modern business success. Today’s manufacturers face an era where the problem is no longer one of not being able to collect enough data on manufacturing processes, but how to effectively use the massive volume of data collected. It is generally accepted that process based manufacturing intelligence is the best path to effective manufacturing enterprise management.As markets have become global, more and more manufacturing companies achieve global operations through various strategic business alliances including joint ventures and outsourcing, etc. Since manufacturing has become global to address the needs of the global market, companies take advantage of advanced information technologies in achieving their global supply chain. The Internet has provided the platform for operations managers to take operations management beyond the control of one plant to the control of multiple plants in multiple locations, often in multiple countries. Therefore, there is a need for the integration of people and information technology/information systems (IT/IS) in order to achieve significant improvement in organizational performance.Manufacturing operations management also focuses on decision-making regarding the quality, quantity, cost, etc. of production. The main objective of manufacturing operations management is to produce goods and services of the right quality, right quantity, at the right time and at minimum cost.What is manufacturing management?Manufacturing management deals with converting raw material with attendant human efforts into finished goods or products. It goes further to say that manufacturing management is centred on planning, organizing, directing and controlling of manufacturing activities. On this note, manufacturing operations management could be defined as an approach of overseeing all aspects of the manufacturing process, with a particular focus on increasing efficiency. The manufacturing operations management systems are used to manage the creation, development, production, and distribution of products and services. It also monitors a variety of aspects of the manufacturing process, including production capacity analysis, work-in-progress inventory turns, and standard lead times. In other words, manufacturing operations management is a methodology for viewing an end-to-end manufacturing process with a view to optimizing efficiency.In the business world of today, managers are challenged to improve organizational productivity by working smarter, not harder, and getting greater output with less costs. Therefore, productivity growth is everyone’s business and one of the major concerns of managers in the 21st century. Organizational productivity can be defined as measurement of the efficiency of production, taking the form of a ratio of the output of goods and services to the inputs of factors of production.Total firm productivity is expressed below:Productivity = output = goods and service produced Input people, capital, raw material and energyIn other words, productivity is the ratio of an organization’s total output to total input, adjusted for inflation within a time period with due consideration for quality. Techniques to improve productivity include greater use of new technology, altered working practices, and improved training of the workforce. It is pertinent to mention at this juncture that the productivity of the knowledge worker (such as engineers, information technologists, etc.) is more difficult to measure than that of the skill worker (such as carpenter, bricklayers, plumbers, Tilers, etc.) in the sense that knowledge workers activities help to achieve end results and contributes indirectly to the final products.The manufacturing process describes the flow of goods and services from production to the customer, which includes inventory or storage of manufactured products, shipping, inventory control procedures, and customer support services. Manufacturing business can be classified by the process they produce goods and by the time spent to create them. Goods can be produced and services can be delivered from analytic or synthetic systems, using either continuous or intermittent processes. We shall briefly discuss the systems and processes of manufacturing in this section.Analytic systemsThis manufacturing system reduces inputs into component parts to extract products. For example, the auto salvage businesses located at Ladipo spare parts market, Matori Mushin and Owode Onirin, Mile 12 in Lagos State engaged in buying used and accidented motor vehicles from overseas and insurance companies to dismantle them for parts to sell. So also the scrap iron that are being shipped to Galvanized Metal Products Company, a Chinese iron smelting venture located in Ogba, Ikeja, Nigeria.Synthetic systemsThis manufacturing system combines inputs to create a finished product or transform it into a different product. Sweet sensation (a fast food outlets) combine potatoes, onions, vegetables, fruits, meats, music, lighting, paintings, furniture, and a variety of skilled workers to create and serve meals at its restaurant outlets.Process manufacturingProcess manufacturing refers to that part of the production process that physically hardens clay and in the same vein, it melts wax. Process manufacturing turns paper/wood pulp into paper and sand into glass or electronic chips. The assembly process puts together components such as frame, engine, gear box, brake, tyres, etc. to make a car.Furthermore, production processes are either continuous or intermittent. Production by a continuous process is one in which production runs on short cycles and frequent stops to change products. It makes more sense to use an intermittent process when responding to specific customer orders, i.e. custom- designed products.In today business competitive environment, manufacturers must make keep the costs of inputs down. Suffice it to mention that small manufacturers are referred to as “job shop”. The job shop systems are used when items are ordered individually and unique to the specifications of a particular customer. Promotional and gift items can be designed and produced for individual advertising and marketing companies. Many small manufacturing operations are organized on a job shop basis. Service provider enterprises can also use job shop systems. For example, an architecture firm will design building in accordance to their clients’ needs and specification.Another traditional production system is the small batch production system in which a process is broken down into distinct operations that are completed on a batch or group of products before moving to the next production stage. Small batch production systems are used when customers order in small batches, but when each order is different.Assembly-line production systems are used for mass production of large volumes of a standardized product. Assembly-line technology which involves breaking down of a production process into discrete steps and positioning workers to different work stations on a continually moving line where they perform specialized tasks is widely used today. Automobile manufacturers such as Toyota, Nissan, Honda, Ford, etc. use assembly-line systems to mass-produce specific car models and also Hewlett-Packard, Dell, Apple, etc. uses assembly-line system to mass-produce personal computers.In addition, continuous flow production systems are used to produce a standardized output that continuously flows out of the system. A good example is oil refineries. The Kaduna oil refinery takes crude oil (an input) from Niger delta and refines the oil to produce a continuous output of PMS, AGO, Kerosene and other allied products. It is important to mention that some of continuous flow systems cannot be easily shut down because they operate around the clock.Figure 4:3:3 Costs and Flexibility of Production In the Figure 4:3:3 above, it is observed that production systems differ in the degree to which their output is standardized, their flexibility, and their costs. Obviously, job shop and small batch production systems are more flexible than assembly-line and continuous flow systems because their outputs are less standardized albeit higher production costs. Therefore, business ventures that use job shop and small batch production systems will usually charge higher prices to cover the costs of production.In the same vein, the manufacturers that use assembly-line and continuous flow production systems in which product is mass-produced or continuously produce a standardized output can lower costs in two ways by learning effects and economies of scale. Learning effects referred to the cost savings that result from learning by doing. Practice makes perfect as the adage says. Evidently, workers learn by repetition how best to carry out a work assignment. Research studies have shown that labour productivity increases over time and unit costs fall as individual learn the most efficient way to perform a particular task. While economies of scale are the cost advantages derived from large-volume production. In other words, economies of scale is the lowering of costs through production of larger quantities: the more units produce, the less each costs.In the 21st century, computers, robots, and flexible manufacturing processes allow firms to turn out custom-made goods almost as fast as mass-produced goods were once turned out. In this section, we shall consider some of the modern production techniques being used to make the manufacturing operations more efficient and effective.4.4 Modern Production Tools and TechniquesIn the last few years, we have witnessed an increasing attention given to accelerated development of modern production technologies that are designed to improve product customization and bring down higher costs of production. Experience has shown that the ultimate goal of manufacturing and process management is to provide high-quality products and services at the instance of the customer request. The traditional manufacturing organizations were simply not designed to be so responsive to the customer; rather they were designed to produce goods at a modest price. The obsolesce of the old corporation, the eruption of information technology, globalisation, the intensity of completion, society expectations, the consumer’s expectation has created the awareness and efficiency that speed and quality brings to business. With good information technology, the manufacturers would refine customer’s behaviour to a format called “sense and respond” in contrast to the old ways of doing things, know now somewhat disparagingly, as “make and sell”. Over the years, low cost often came at the expense of quality and flexibility. Today, global competition has been largely responsible for manufacturer to produce a wide variety of high-quality custom-designed products at very low cost.There are many tools and techniques available for improving manufacturing and service operations today. There are seven major developments that have radically changed the production process in the last few decades.Just-in-time inventory systemOutsourcingFlexible manufacturingLean manufacturingMass customizationCompeting in timeComputer-aided techniquesJust-in-time inventory systemThe concept of just-in-time production system (JIT) was developed as an antithesis to batch production by a Japanese, Taiichi Ohno at the Toyota Motor Corporation. One of the major reasons for Japan’s high manufacturing productivity is the drastic reduction in cost of production through its JIT inventory control. Modern information systems and flexible manufacturing technologies have made it easier for other organizations to adopt just-in-time inventory systems. It is a production process whereby the supplier delivers the components and parts to the production line only when needed and ‘just in time’ to be assembled.Just-in-time inventory systems means supplying to each process; what it needs when it needs it and in the quantity that it needs. In effect, JIT inventory systems help managers improve product quality by eliminating defects from production process. Quality is ensured by keeping small inventories and through the use of flow production, it makes production operations to be lean and flexible. OutsourcingIn business, outsourcing is the contracting out of a business process to a third party. Outsourcing occurs when a company hires another organization to provide goods or services rather than producing them itself. It is a practice used by small and large companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally. Outsourcing is an effective cost-saving strategy when used properly. In certain situation, it is economically wise to purchase some goods from companies with comparative advantages than it is to produce the good internally. Majority of the automobile manufacturers outsource nearly two-thirds of its component and parts used to build their motor vehicles to another producer, usually smaller manufacturers.Though outsourcing, small and large businesses form a strategic alliance, which is a contract or commitment to work together to produce goods and services. This kind of arrangement can add efficiency to the supply chain by reducing replication of logistics, production control, and supply-chain management. Outsourcing help firms to perform well in their core competencies and mitigate shortage of skill or expertise in the areas where they want to outsource. Today, the banks outsourced the front office jobs that include customer-related services: teller, customer service, security service, etc. to other service provider organisations.Outsourcing can offer greater budget flexibility and control. It allows organizations pay for only the services they need, when they need them. It also reduces the need to hire and train specialized staff, brings in fresh engineering expertise, and reduces capital and operating expenses.Flexible manufacturingThe term flexible manufacturing refers to the ability of computerised machines to perform a variety of programmed functions. It involves designing machines to do multiple tasks so that they can produce a variety of products. The traditional mass production flows of highly standardized products. This approach was further reinforced by the theory of economies of scale that emphasises mass production of identical products, which tends to lower per-unit production costs. It makes economic sense when people are satisfied with identical products but this type of production is too inflexible and unresponsive in the 21st century that is characterised with diverse and rapidly changing consumer tastes and loyalty. The economies of scale are now giving way to economies of scope owing to flexibility of modern production technology. In comparatively recently, the automobile industry invested heavily in the latest generation of computer-controlled flexible manufacturing technologies that make use of robotics on a large scale.Lean manufacturingToday, most manufacturing companies subscribe to the traditional batch production system. But a company that practices lean manufacturing system will continually increase its capacity to produce high-quality goods while decreasing its need for resources. Lean manufacturing is the production of goods using fewer workers, lower inventories, few suppliers, less production space, less investment in tools, and shorter development time. It emphasizes kaizen (Japanese word for continuous improvement) with strategic breakthroughs, just-in-time inventory systems, zero defect tolerance level, teamwork and collective responsibility for sharing problems.Taiich iOhno, an automobile engineer was responsible for the development of Toyota’s revolutionary lean production system, which reduced the cost of building an automobile and represented the biggest advance in the industry since Henry Ford introduced the assembly line in 1913. Lean manufacturing supersede the mass production of goods. It is a methodology aimed at reducing waste in term of overproduction, exercise lead time, or product defects in order to make a business more effective and more competitive. Lean production can simultaneously double productivity, improve quality and keep costs low.Although, managing lean value streams is not as easy as managing individual operations. However, the benefits are enormous, particularly when they are replicated across the whole value stream: customers get defect-free products on time; suppliers get level orders and can deliver to production line on time; inventories can be cut to half at every point down the value stream; free up a lot of resources in term of people, machines, and space until there is need for them.Mass customizationMany manufacturers are beginning to customize their products. Flexible machines can produce a customized product as fast as mass-produced products once the exact needs of a customer is obtained. Mass customization is a process that allows a standard, mass-produced item, for example, a computer, to be individually tailored to specific customer requests. It goes further to say that mass customization is the tailoring of products to meet the needs of a large number of individual customers. It is a production of unique product or provision of a specific service to an individual. Increasingly, flexible manufacturing tools and techniques are allowing mass customization, which is the ability to customize the final output of a product to an individual customer requirement without incurring a cost penalty.Mass customization can enable a manufacturer to better differentiate its product, which translates to higher prices or greater demand, and significant cost savings from reductions in inventory holding costs.Competing in timeEveryone seems to be in more of a hurry today. The truth is that most people do live at a fast pace, and businesses need to respond or risk losing their business. Some small companies have made speedy response the core of their business. The 21st century manager must continually strive to explore radical changes that are increasing the speed of production processes.Competing in time means being quick or faster than competition in responding to consumer wants and needs and delivering goods and services to them. Globalisation has changed the way business is being conducted and service is delivered. In order to keep abreast of today’s dynamic business environment, speedy response is very essential to competing in the global marketplace.Computer-aided techniquesThe integration of computers into the design and manufacturing of products have changed production techniques and strategies in recent times. Computer-integrated manufacturing (CIM) has begun to revolutionize the production process. Computer-aided manufacturing can be integrated with computer-aided design to create a CAD/CAM system. The use of computers in the design of products refers to as computer-aided design (CAD), while the use of computers in the manufacturing of products is known as computer-aided manufacturing (CAM). The use of both computer-aided design and computer-aided manufacturing made possible to customize products to meet the needs of small markets with little additional costs.It is worthy of note that software programmes have been designed to integrate CAD with CAM resulting in computer-integrated manufacturing (CIM). Production processes are integrated within themselves and with other business operations. This means that manufacturing is closely linked with design and marketing with a view to responding more rapidly to the requests of customers with specific requirements. This will become increasingly important as the shrinking product life-cycles is a reflection of “age of discontinuity”.4.5 Manufacturing Planning, Control Systems and Competitive StrategyManufacturing planning (or production planning) is the process of producing a specification or chart of the manufacturing operations to be performed by different functions and work stations over a particular time period. On the other hand, manufacturing planning can be defined in the context of consumer perspective thus: the process of creating a resource transformation system that will effectively and efficiently meet the forecasted consumers’ demand for goods and services. Amongst the productive resources are human capital, raw materials, space and facilities, inventories, etc. Production scheduling and control are vital parts of the manufacturing-planning process. It takes account of factors such as the availability of production lines and materials, customer delivery requirements, and maintenance schedule. There exist a dynamic relationship between manufacturing planning and the productive process. It is important to note that manufacturing planning guides the productive process, which invariably influences future planning. Let’s look at this scenario: Toyota Motors recalled some vehicles with faulty break system as a result of complaints from dealers and customers which prompted the automobile manufacturer to effect necessary changes in quality standards, production process, etc.In the context of this study, we shall take a cursory look at the broad-based conceptual design of planning that goes a long way toward determining the attributes, enthusiasm, and commitment of all team members to make not only plans but a well-conceived, highly integrative planning process. A well-designed and integrated process also results in a substantially higher level of coordinated actions and accountability for improving the performance of the organization as a whole. With accelerating complexity facing all organizations, a dynamic, flexible, and motivational process of planning is clearly one of the best ways to truly empower all individuals to plan and achieve improved performance throughout an organization. Corporate culture is a critical component for improving organization performance. Therefore, a “renewal and transformed culture” is more of an integral element of corporate culture, which translates to capability to consistently develop and execute results-oriented plans at all levels of an organization.There are diverse goals and objectives in manufacturing planning that requires gathering of product ideas that will satisfy the needs of customers and contribute to the overall profitability and growth strategy of the firm. The design of an operation system requires decisions concerning the location of warehouse, production lines, loading bay, the process to be used, the quantity to be produced, and the quality of the product as well. The various interests of functional managers such as production, marketing, engineering, finance, human resource, accounting, etc. must be taken into consideration in the manufacturing planning. The divergent interests of these functionality-oriented managers influence the products to be produced and marketed. The organization must integrate the various interests with a view to balancing revenues with costs, profits with risks, and long-term with short-term growth.The coordination of productive activities is central and critical to manufacturing planning process which entails incorporating a master production schedule. The operations managers use the master production schedule as a guide that indicates what will take place and when. In the main, it is source document for production activities such as supply chain management, inventory control, quality control and workflow layout.4.6 Supply chain managementThe latest in manufacturing systems coordination involves the supply chain. The supply chain consists of the sequence of linked activities that must be carried out by various organizations to move goods and services from the source of raw materials to end users. The supply chain of an organization is the vertically integrated chain of supplies that provide raw materials, which could be partly finished products, or finished products to an organization. In other words, we can succinctly say that supply chain is the network of manufacturers, wholesalers, distributors, and retailers, who turn raw materials into finished products and services and deliver them to consumers.The terms supply chain and value chain management are sometimes used interchangeably. There is a clear distinction between supply chain management and value chain management. Supply chain focuses on the sequence of moving raw materials and partly finished products through the manufacturing process in an economic manner. Value chain management, on the other hand, entails detail analysis of every stage in the process, ranging from the handling of raw materials to serving end users, providing them with greatest value at lowest cost. The central task in supply chain management is to synchronize the flow of productions from suppliers to the firm, and then out at the firms’ customers, so that inventory is minimized and capacity utilization is optimized.Supply chains are increasingly being seen as integrated entities, and closer relationships between the organizations throughout the chain can bring competitive advantage, reduce costs, and help to build and maintain a loyal customer base. It involves management of goods and flow of information between an organization and its suppliers and customers, to achieve strategic advantage. Supply chain management covers the processes of materials management, logistics, physical distribution management, purchasing, and information management.Interest in supply chain management has grown rapidly over the last few decades and still continues to increase. The focus is on supply chain integration network planning, supply chain alliances, outsourcing and supply contracts, product design and customer value bearing in mind the global completion. The bottom-line of supply chain management is to link the procurement activity, manufacturing process, distribution network, and marketplace in such a way that customers are serviced at higher levels and yet at a lower total cost.Inventory controlStock control as it has traditionally been called, or inventory control as it has become more widely known today is important at both end of the supply spectrum. Suffice it to mention that too much inventory ties up cash, impacts negatively on cash flow, and in extreme cases jeopardizes the survival and growth of the company taking a cue from experience of Lever Brothers Limited (now Unilever Nigeria Plc) in the late 1990s and Cadbury Nigeria Plc in the early 2000s. Both companies had large volume of unsold stock of finished products translating to billions of naira that led to the fall of profits of the companies. In the same vein, too little inventory threatens prosperity and growth if goods cannot meet customers’ demand. Inventory control is therefore crucial to survival and growth of a manufacturing enterprise.Inventory control is the process of establishing and maintaining appropriate levels of reserve stocks of goods. Inventory control is an important managerial concern. The scope of inventory control is enlarged when giving consideration to raw materials, semi-finished components, work in process (or work in progress), and finished products. The raw materials and semi-finished components are steady and reliable source of inputs that feed the manufacturing system.Work-in-process refers to the products that are in the process of being transformed into final product, which are usually valued according to their production costs are needed as well as finished products to keep up with customers’ fluctuating demand. Obviously, effective stock control requires the commitment of significant effort and resources. It minimizes the costs associated with holding inventory such as finance, storage, insurance, human capital, obsolescence, pilferage, etc.Interestingly, there are various reasons for keeping large and small inventories by manufacturing enterprises. Some companies maintain large inventories for fear of unknown and managerial conservatism. On the other hand, demands for small inventories are based primarily on cost considerations. The true cost of holding inventory must take into account the cost of: financing (the cost of funds or opportunity cost); storages; insurance; human capital; obsolescence; and losses through pilferage.Quality controlControl system refers to the operations of checking, testing, regulation, verification, or adjusting. Control is the process of taking appropriate preventive and corrective actions to ensure that events conform to plans. It involves measuring actual performance against desirable standards and make appropriate adjustments where necessary. In this section, we shall limit our discussion to quality as a control system enhancing organizational competitive advantage. Quality is consistently producing what the customer wants while reducing errors before and after delivery to the customer. Examples of these products are IPhone by Apple, Galaxy android phone by Samsung.Quality control refers to organization’s continuous effort to eliminate defects in the process of producing a product or service, thereby increasing productivity, lowering rework and scrap costs, and improving product reliability. Total quality management centred around the organization’s long-term commitment to the continuous improvement of quality through active participation of all levels of employee to meet and exceed customer expectations.The quality improvement efforts need to be continuously monitored through ongoing data collection, evaluation, feedback, and improvement programmes. Total quality management speeds up processes, eliminates task steps and waste, and reduces costs. The bottom line is to cut waste and increase customer satisfaction by improving product or service quality, organization and employee performance that translates to sustainable profitability. Quality means providing customer-satisfying products and services at a low cost on addition to a commitment to continual innovation and improvement that the Japanese call kaizen.Kaizen (Continuous Improvement)Kaizen is a Japanese term, which literally means “improvement”. Kai means “change” and Zen means “good” or simply put, “for the better”. Kaizen means “continuing improvement in personal life, household life, social life, and working life” (Imai, 1986). The concept of Kaizen refers to continuous improvement, seeking small improvements through the elimination of waste. It is a philosophy that can be applied to any area of life, but its application has been most famously developed at Toyota Motor Company, and it underscores the philosophy of total quality management.Basically, Kaizen aims to inspire the whole organization with the instinct for continuous improvement. It prompts the workers to use their creative skills to improve the operations they perform and the goods and services they produce. In order to be successful or remain successful as the case may be, organizations and finding that they must continually improve their quality assurance, cost management and delivery systems. The overall objective of Kaizen is to incorporate a variety of techniques and principles into the organization’s culture and philosophy of improvement as a way of life and not only as application of isolated work techniques. It offers great benefits to the organization and employees as well. The organization benefits from a more motivated workforce and improved financial returns resulting from more efficient operations coupled with improved quality product or service offer to customer. While it helps build employees’ morale and increase job satisfaction and knowledge.AdvantagesProduct or service quality is improved and monitored on a continuous basis.All functions of the organization come under continuous inspection.Employee morale and job satisfaction increase.Waste is eliminated throughout the organization, increasing efficiency and reducing costs.According to Imai, there are three major building blocks or keys to satisfying the customer in Kaizen:a continually improving quality assurance system to meet customer requirements.a continually improving cost management system to provide the product or service at a favourable price to the customer.a continually improving delivery system to meet customer requirement on time.These are known collectively as QCD – quality, cost, delivery (time). In summary, Kaizen means improving the overall system by constantly improving the little details such as shortening product development cycles, shrinking inventories, and training every employee to be a world-class competitor. It is best introduced as a means of achieving business targets. Workflow layoutOffice design incorporates both ergonomics and workflow, which examine the way in which work is performed in order to optimize layout. The design of workspaces must conform to health and safety legislation. Workflow layout refers to the arrangement of workspace so that work can be performed in the most efficient way. The organization of a factory or office so that the position of the workstations is optimized to suit the product is referred to as product layout. Product layout ensures that products are undertaken in a logical sequence.Modern production technology makes it possible for many companies to arrive from an assembly line layout, in which workers do only a few task at a time to a modular layout, in which teams of workers combine to produce more complex units of the final product. Cellular or module layout is used to accommodate changes in design or customer demand. There are three basic formats of production layout as follows: the product layout; the process layout; and the fixed-position layout.Product layout is designed in a way that components are arranged according to the progressive steps by which the product is made. The production line flow from raw material input to finished products, which is common in breweries, automobile assembly, food processing, etc. It is used to produce large quantities of a few types of product.Process layout often refers to as functional layout is designed in a way that components are grouped according to the general function they perform, without regard to any particular product. It is frequently used in operations that serve different customers’ different needs. This type of layout is exemplified in banks, hospitals, job shops, shopping malls, etc.Fixed-position layout is designed in a way that product remains at one location. When working on a major project such as a model market or an airplane, engineering companies use a fixed-position layout that allows workers to gather around the product to be completed.Benefits of a well-built workflow layoutExperience has shown that a well-built workflow layout of a manufacturing operation has many benefits. It enhances organizational structure.It facilitates the manufacturing/service process.It minimizes investment in plant and labour.It facilitates effective use of production space.It brings about flexibility and lean manufacturing operation.It provides for worker safety, comfort and convenience.It reduces material-handling cost.It reduces production time.The bottom-line of a well-built workflow is to make productive activities efficient and effective. The workflow layout should be designed in such a way to reduce cost, to increase productivity, to simplify the process, and to speed up delivery process.Competitive strategyThere is absolute need for today’s managers to take a view of three basic elements of competitive strategy: time, cost, and quality and consider it application on their day to day activities. The traditionalist claimed that improvement on one of the elements will have negative effect on the others. This means that quality could be improved, but only at the expense of additional time and cost. The global competition today is so strong that modern production technologies are used making time, cost, and quality complementary and mutually reinforcing as illustrated in Figure 17:5:1 below.Figure 4:6:1 Elements of Competitive Strategy for the Production of Goods and ServicesIt is important to note that a lean and flexible operation is based on total quality management which improves quality at lower cost coupled with faster delivery times. This is achieved by organizing production line more efficiently thereby eliminating wasteful steps in the work process, and detecting mistakes on time. This lead us to strategic control which is systematic monitoring at strategic control points and modifying the organization’s strategy based on this evaluation. In our earlier study, we have seen that planning and controlling are closely related. It is on this pedestal that strategic plans require strategic control. The use of strategic control gives insights not only about organizational performance but also about the business dynamic environment through consistent monitoring.4.7 Global Manufacturing CompetitionThe 21st century is increasingly challenging and exciting for business managers. We are in a dynamic world that is moving rapidly away from relatively independent national economies, isolated from each other by barriers to cross-border trade and investment; by distance, time zones, and language; and by national differences in government regulation, culture, and business systems. Manufacturing firms are now shifting productive activities to comparative advantage thereby creating a globally dispersed competitive production system. The process of globalisation, however, has invariably accelerated global manufacturing competition. There are four reasons for this: national economies are merging into an integrated and interdependent global economic system, the decline of barriers to international trade and foreign direct investment, advances and falling costs of telecommunication and transportation, and cheaper labour cost in developing countries.Today, United States is the largest economy in the world. It is the largest exporting and importing national as well. Global manufacturing competition is very intense. US companies face aggressive competition from manufacturers and exporters such as China, Japan, South Korea and Germany. Obviously, these facts show that global trade is big business today and will become increasingly important throughout 21st century.In the early 1980s, the shift toward market-base systems has paved way for deregulation of markets including abandonment of price controls and laws restricting investment by foreign enterprises in both advanced and developing countries. In addition, the establishment of a legal system that supports private enterprise and protects property rights in China, Russia and most Eastern Europe nations accentuated global manufacturing competition. Market economies are more open to foreign investment and international trade than socialist regime. Furthermore, the transformation of China, Russia, and India economy to more open systems has created a huge opportunities and threats for the western block businesses.Outsourcing of manufacturing activities to these countries has increasingly accelerated in the last few decades owing to the abundance of natural resources and cheap labour. China is the second largest economy and has become an engine of global economic growth and hub of productive activities. The global market contains over six billion potential customers for goods and services. Productivity grows when countries produce goods and services in which they have a comparative advantage. Free trade inspires innovation for new products and keeps firms competitively challenged.Competitive advantage is a factor giving an advantage to a nation, company, group, or individual in competitive terms. The concept of competitive advantage derives from the ideas on comparative advantage of the 19th century English economist David Ricardo. He based his argument on the fact the specialization in activities in which individuals or groups have a comparative advantage will result in great gains in trade. Comparative advantage is an instance of higher, more efficient production in a particular area. A country that produces significantly more cars (such as Japan) than another (Germany), for example, is said to have comparative advantage in car production. Comparative advantage theory states that a country should sell to other countries those products that it produces most effectively and efficiently, and buy from other countries those products it cannot produce as effectively or efficiently.Outsourcing manufacturing activities to foreign producers is not a new phenomenon. United States companies (such as Dell computer, Hewlett-Packard, Nike, etc.) have been doing this for decades. But until recently few service firms outsourced work to third parties overseas. The advent of modern communications and productions technologies is operations on a global scale. The United States has a comparative advantage in producing goods and services, such as computer chips, software, and engineering services. In contrast, the United States does not have a comparative advantage in making shoes.The successful manufacturing firms in 21st century will produce goods from locations around the globe to take advantage of national differences in the cost and quality of factors of production such as labour, land, capital, energy. Against this background, manufacturing firms will be able to lower their overall cost structure and improve the quality or functionality of their products, allowing them to compete more effectively. Today’s business managers are now creating and managing a globally dispersed production system which reinforces globalization of production. Dell computer uses the Internet to coordinate and control its globally dispersed production system, which makes it possible to keep only two days’ worth of inventory at its assembly locations.There are many ways in which an organization may remain dominantly competitive in global manufacturing competition. This includes licensing, contract manufacturing, creating international joint ventures and strategic alliances, creating foreign subsidiaries, and engaging in foreign direct investment. We shall briefly examine these elements of global manufacturing competition in this section.Licensing is a global strategy in which firm (referred to as the licensor) allows a foreign company (referred to as the licensee) to produce its product in exchange for a fee (usually in form of a royalty).Contract manufacturing involves a foreign company’s production of private-label goods to which a domestic company then attaches its own brand name or trademark. A host of United States companies such as Dell Computer, Hewlett-Packard, Nike, and Levi-Strauss practice contract manufacturing contract manufacturing also enables a company to exploit new markets without incurring heavily on start-up costs of manufacturing plant. In the same vein, if the brand name becomes a success, the company has penetrated a new market with low risk. Furthermore, a firm can also use contract manufacturing to meet an unexpected increase in customers’ orders.International joint venture is a partnership in which two or more companies (often from different countries) collaborate to undertake a major project. Joint ventures can even be at the insistence of host governments as a condition of doing business in the country.Strategic alliance is a long-term partnership between two or more companies established to help each company build competitive market advantages. Global market potential serves as an impetus for the growth strategic alliances.Foreign subsidiary is a company owed in a foreign country by another company referred to as the parent company. The subsidiary company would operate much like a local firm, with production, distribution, pricing, promotion, and other business functions under the supervision and control of the foreign subsidiary’s management.Foreign direct investment involves huge investment in an organisation that manufactures and markets product in many different countries often referred to as multinational corporation (MNCs) such as Unilever Nigeria Plc, Cadbury Nigeria Plc, Nestle, Coca cola, and Procter & Gamble (P & G).Multinational Corporations are firms that have manufacturing capacity or some other physical presence in different nations of the world. Evidence of global manufacturing competition is everywhere today. Japanese motor vehicles (such as Toyota, Honda, Nissan, etc.), French perfumes, Italian linen, shoes and bags, Chinese household utensils and mobile telephone handsets are evidence of global manufacturing competition.The global manufacturing corporations look at the whole world as a single market. The multinational corporation manufactures, conducts research, raises capital, and buy supplies wherever it can execute the job better. It keeps abreast of developments in manufacturing technology and market trends around the world. The global manufacturing corporations have fully integrated operations in term of product design, process design, manufacturing, and distribution management in many regions of the world.4.8 Service Operations ManagementGlobalisation of market and operations places tremendous pressure on productive management of services and manufacturing enterprises. Services are a rapidly growing and increasingly important in today’s global competitive marketplace. Operations management is the maintenance, control and improvement of organizational activities that are required to produce goods or services for consumers. Operations management has traditionally been associated with manufacturing activities but can be also be applied to the service sector.Service organisations do not produce a physical output but provide some services as output. Examples of service provider organization are legal practitioners, airlines, insurance companies, banks, health care, telecommunication, and retail stores. It is interesting to note that some organizations produce a combination of goods and services. For example, automobile manufacturers (such as Toyota, Nissan, Honda, Daimler Chrysler, etc.) not only produce cars but also provide services such as repairs, financing and insurance.It is important to note that the major distinction between services and manufacturing goods is services involve intangible performances. Service provider organisations rely on business delivery and quality of service. The effective performance of these types of business depends on location, facility layout, and human capital, which can in turn affect service quality. The process of delivering this service quality is what distinguish one service venture from another and thus needs to be given adequate attention by the operations managers.Operations management in the service industry is all about creating a good experience for those who use the service. There is strong evidence that productivity in the service sector is rising but it’s not easy to measure. Services are customer-driven; therefore, ensuring customer satisfaction is more important than over. Business experts say it costs five times more to win a new customer than it does to keep a current one.The strategic service challenge today is to anticipate and exceed the customer’s expectations. Service provider organizations would need business plan in order to explain the chronological steps in completing a business transaction. An Internet retail operation needs to explain the technology requirements needed to efficiently and profitably complete a successful business transaction in the firm master plan.Managing Services QualityMany of the operating strategies and methodologies we have discussed in manufacturing operations are important for service enterprises as well. Suffice it to mention that people often assume that operations management tools are not applicable to service organisations. Basically, all businesses are confronted with the same issues whether their product is a physical good or a service. Improving productivity is a major concern in both manufacturing and service enterprises. The quality of production processes and of the end product is a matter of great importance for both manufacturing and service organizations.Managing service operations is central to integration and application of holistic approach to service delivery. It focuses on how firms can deliver excellent service while achieving business success. This involves a deep understanding of customers, competitions, and firm’s internal mechanisms. As it is applicable to manufacturing enterprises, service enterprises also have to devise their production systems, design products, manage inventory, and cut down service delivery time. There is no magic formula for good product and service quality. Successful firms work smart and deeply committed to creativity, innovations and continuous improvement as a way of life.There are five distinctive service characteristics as stated below.Services are intangibleIt is more difficult to measure intangible service than to measure a tangible product.Direct customer participationCustomers are more intimately involved in the service-delivery process than in the manufacturing process. For example, we have to be present at barber’s shop to get a haircut or be in the hospital to extract an aching tooth.Provision of services at customers’ convenienceServices are delivered where and when the customer desires. Courier express delivery service is functional at weekends delivering parcels and package to customers at their convenient locations.Services tend to be labour-intensiveApart from automated machines that dispense service, most services are provided by people to customers face to face.Immediate consumption of servicesServices are consumed immediately and cannot be stored. Services delivered cannot be stored up by the service provider in the same way that Coca Cola products can be stored by a retailer.Ostensibly, a business exists to manufacture goods or render services. In economic sense, profits are merely a measure, although an important indicator of how well a firm serves its customers. Today, manufacturer and service provider organisations cannot be complacent to see the changing needs of the global market, which increasingly demand quality products and services. Quality has become a strategic weapon in the global marketplace.Service excellence will be one of the key success factors in the global competitive environment. Operations managers need to pay more attention to service in order to stay ahead of competition. There are variety of means for improving service quality that can be used which includes market research of potential customers, customer questionnaires, discussions with sales crew, and regular customer/management meetings. This effort will go a long way to measure the degree of customer satisfaction. Today, more organisations are using the Internet to provide better service to customers and in the process, are saving huge sum of money in enhanced efficiency. The current trend in Internet websites (such as jumia.com, konga.com, etc.) is interactivity, whereby customers can place and track orders, make enquiries, and give feedback 24 hours a day, seven days a week. Electronic mail or email, one of the most popular Internet related business tools is rapidly replacing phone and fax for basic business communications and at a fraction of the cost. For instance, the cost of savings on emailing a 10-page report from Lagos to New York would be enough to cover the full Internet data subscription charges for one month.The obsolescence of the old corporation, the eruption of information technology, globalization, the intensity of competition, society expectations, the consumer’s expectation has created the awareness and efficiency that speed and quality brings to business. The Internet provides an immense pool of worldwide information with a varied content.In sum, manufacturers and service provider enterprises need to integrate operations without border to enhance a smooth customer delivery service. The Internet has become the de-facto standard for business transactions. The bottom line is always to meet the customer’s and satisfaction.4.9 Small business human resource management The demands for new knowledge and skills will be constant, no longer a value added element, but the essential factor in determining organizational survival – Meg WheatleyThe 21st century knowledge workers are highly mobile, which requires organisations to place human resource planning on the front burner so as to meet business objectives and gain an advantage over competitors. In order to achieve this goal, employers need a clear picture of the organisation’s current workforce strengths and weaknesses taking into consideration what they want to be doing in the future and what size they want the organisation to be. Suffice it to mention that human resource planning compares the present state of the organisation with its goals for the future, then identifies what changes it must make in its human resources to meet those goals. Amongst other, the change may include early retirement, retrenchment, training existing employees in new skills or hiring new employees.Human resource planning is an integral part of business planning. It identifies the core competence the organisation needs to achieve its goals and therefore its skill and behavioural requirements. Human resource planning is important because it encourages organisations to develop clear and explicit links between their business and human resource plans and to integrate the two more effectively.Human resources are considered the most valuable, yet the most volatile and potentially unpredictable resource, which an organisation utilizes. If an organisation fails to place and direct human resources in the right areas of the business, at the right time, and at the right cost, serious inefficiencies are likely to arise creating considerably operational difficulties and likely business failure. Today, organisations must strive to enhance its capacity to plan, acquire, develop, maintain, dispose of and replace human resource as required by the activities to be performed to accomplish organizational objectives.Human resource planning helps management find the right people for the right jobs at the right time. Research study has shown that competitive success is based on retaining, motivated, creative, empowered workers in an organisation; therefore, human resource managers should strive to recruit, hire, train, evaluate and compensate the best people to accomplish the objectives of their organisations. Human resource planning is a pre-determined course of action. Planning is determination of personnel programmes and changes in advance; such that they will contribute to the organizational goals. In other words, it involves forecasting of personnel needs, changing values, attitudes and behaviour of employees and their impact on organisation. Human resource planning ensure that organisation are neither over nor understaffed that the right employees are placed in the right jobs at the right time.Human resource planning is the development of strategies for matching the size and skills of the workforce to organizational needs. Human resource planning assists organisations to recruit, retain, and optimize the development of the personnel needed to changes in the external environment. The process involves carrying out skills analysis of the existing workforce, carrying out manpower forecasting, and taking action to ensure that supply meets demand. This may include the development of training and retaining strategies.Organisations need to know the number of people and the kind of people they should have to meet the present and future business requirements. Human resource planning is defined as “a process in which an organisation attempts to estimate the demand for labour and evaluate the size, nature and sources of supply which will be required to meet the demand” – Reilly (2003). Human resource planning is a process that ensures the right kinds of skilled workers are in the right places at the right time in an organisation. It is important because it puts the right numbers of people with the right qualifications (and experience where necessary) in place to achieve the organisation’s strategic objectives in the most cost-effective and humane way.Human resource planning is a decision-making process that combines three important activities:identifying and acquiring the right number of people with the proper skills,motivating them to achieve high performance, and creating interactive links between business objectives and people-planning activities.