Addressing organisational challenges through ‘Performance CxO Services’

AKC CASE STUDIES

Manufacturing: Cost Rationalisation

AK Counsellors helped an apparel manufacturer to address multiple financial challenges, revamp its
business model, evaluate the business targets set by the owner and laid the groundwork to achieve
them.

Situation 1. Cut-throat competition: The client faced immense pressure to clock profits because of fierce
market competition and open costing model followed by all its major buyers.
2. Severe cash crunch: The client was also facing severe cash crunch and frequently failed to
honour its cheques. In order to sustain, the management had plans to sell one of their business
units.
3. Unreliable accounting data: Top leaders were unsure about the profitability of their business and
hence faced major challenges on the strategic front.
To revamp the financial and operating framework of the company and provide strategic direction,
AKC experts were hired by the management.

Client business Producer of high-quality apparels

Client
Variables Head office Mumbai

Manufacturing locations 4 (across Gujarat)

Production basis Make-to-order

Turnover ~ INR 50 cr.

Exports: ~ 47%
(predominantly to Europe & US)
Sales Mix
Domestic: ~ 53%
(predominantly to Pepe Jeans & Spykar)

Our Phase 1: Problem Diagnosis

Approach AKC’s CFO services team started with a ground-level ‘As-is analysis’ of the organisation to assess the
root cause of the problems. Prima facie, we could deduce that there was a significant gap between
the financial statements of the business and its actual financial position. Due to lack of reliable data,
we drafted a ‘Statement of Affairs’ which helped us identify the gap of accumulated losses to the tune
of INR 7 crores in the past funded by outside liabilities. Clearly, this was an evident cause of the
client’s deteriorating liquidity and increased cost of debt.
In absence of reliable data and data generating processes, the primary task was to implement
effective data capturing processes which would further assist in effective decision-making.
Phase 2: Designing Solutions
1. Improve the quality of data gradually for taking educated decisions through deep integration
of the ERP
2. Brainstorm different possible scenarios with the management to capture facts and figures
aiding detailed financial and operational projection of all the iterations
3. Pegging financial targets after rounds of discussions and draft the operational and financial
strategy around the same
4. Following-through rigorously to identify variances timely, take corrective measures,
rationalise costs, reduce wasteful activities
This approach was highly instrumental to arrest the losses and redefine the path towards sustainable
operating profitability.

Phase 3: Streamlining accounting & reporting

To address the biggest challenge of unreliable data, we conducted extensive audit of the internal
controls surrounding books of accounts. To improve the situation, we split the task into two parts:
1. Analysing, interpreting & improving the historical records
2. Ensuring the reliability of data beyond a certain point in time after incorporating all the
procedural changes in processes
We started by interviewing all relevant people in the accounting team of 4 people placed centrally in
the HO and extensions placed in the manufacturing plants. Additionally, we conducted a stock and
fixed asset audit throughout the organisation to capture all the relevant balances. To improve the
controls, AKC introduced an online and real time bill inward register. This helped us to track the
quantum of bills, types of entries and pending entries in the books of accounts at any point of time;
necessary to monitor the flow of accounting entries. The CFO team also demarcated & assigned
individual responsibilities (KRAs) and optimised user access to the accounting staff to ensure
accountability. We monitored the progress on a real-time basis to ensure completion of entries and
reduce unnecessary delays in posting. Also, the whole Chart of Accounts was redefined in order to
fetch & analyse the desired information in the form of monthly Operating Profitability Statement. This
report was scheduled to be reported by the Head Accountant to the CFO team from AKC in the
required format on a monthly basis.
Also, our analysis presented an opportunity to reduce costs in the accounting department as most of
the accounting staff was underutilised after all the procedural adjustments and clarity in functioning.
Upon approval of the management of the client, we were able to reduce cost by replacing the team
of accountants with a professional accounting firm which further helped us in strengthening internal
financial controls.
We defined the ‘Key Performance Indicators’ (KPIs) for the accounting firm to ensure desired
frequency and accuracy in the accounting department. The whole transition was monitored and
controlled closely by the CFO team.

Phase 4: Break-even analysis

The CFO team monitored each development around the business closely to account for it in the right
manner. We obtained monthly Operating Profitability Statements and thoroughly scrutinized the
books of accounts to ensure accuracy and analysed various items of the statement with relevant
analytical procedures. This offered us an insight into fixed, semi-fixed, variable and semi-variable
aspects of costs. We bifurcated the whole cost structure under these 4 heads. After this
classification, we were able to accurately assess the range in which annual breakeven point lies and
the higher limit of the range was considered to be the breakeven point for prudent planning.

Phase 5: Budgeting & cost rationalisation

As soon as the reports from streamlined operations (and manufacturing – not covered in this case
study) started flowing in to match our quality expectations and to the satisfaction of the client, we
perused them to conduct an elaborate budgeting exercise for the upcoming year. We divided the
budget into two parts – strategic financial budget & operational budget.
Strategic financial budgets help to set realistic goals for the upcoming year based on certain
systematic (economy related) and unsystematic (industry & client specific) factors affecting the client.
Operational budget laid down the path towards achieving those specific goals by different
departments in the client organisation.
The management of the client expected reduction in sales due to rising competition and inability to
inflate orders from existing buyers. In view of this, the client expected significant reduction in profits
but asked CFO team if the profits can be maintained to the levels of the previous year.
After careful calculations, it was clear that the client either had to increase sales or reduce costs
drastically to achieve desired profits in the upcoming year. To analyse the situation better, annual
budgets were divided into monthly budgets to understand the level of operations and sales forecast
in each month of the financial year.
The client expressed his inability to bring more orders in the coming 6 months and expected to
capture better orders after the said period. In order to optimise existing orders for upcoming 6
months as per the cost structure of the client, we suggested the client to spread the delivery of
orders and production evenly over the time period by specifically pointing out the orders which shall
be re-planned. We assisted the client to negotiate the terms with the buyers to get desired terms
and recalibrated his production planning to suit the same. This helped us reduce the quantum of
work originally planned to be offered to external job workers (who were approximately 1.20 times
more expensive). Also, because of adequate and streamlined production planning, worker overtimes
were considerably controlled. It helped us reduce direct costs significantly.

Also, it was noticed that the capacity of the plants of the client was projected highly underutilised in
the months of September and October. This contributed to magnifying losses in those months
dragging profitability. To fill this gap, CFO team suggested taking job work assignments from other
manufacturers in that period. Based on the monthly breakeven analysis, CFO team calculated and
advised the average rate and the minimum rate at which client should accept job work assignments.
This helped the client to plan the pitch to other manufacturers to obtain job work assignments at a
reasonable price and procured significant orders well in advance. This contributed in recovery of
significant fixed costs during this period reducing the amount of expected losses in those months.

Budgeted vs Actual Sales (Units)

1,40,000.00

1,20,000.00

1,00,000.00
Sales (Units)

80,000.00
Budgeted Sales (Units)
60,000.00
Actual Sales (Units)
40,000.00 Job Work (Units)

20,000.00

-
1 2 3 4 5 6 7 8 9 10 11 12
Month of the financial year
 Concurrently, the CFO team audited each expense head in the monthly operating statements well in
detail. Costs pertaining to printing & stationary were reduced by introducing efficient computerised
measures to avoid printed & handwritten documents. Also, it reduced the time taken to compile
summary of the day’s purchase requisitions from an average 60 minutes to 15 minutes and the
scope of errors was considerably reduced. Other measures like batching of couriers were also
implemented to control courier costs.

Phase 6: Variance analysis

The CFO team analysed all the variances on a monthly basis which helped them to keep a control
over all the expenses as budgeted earlier. In case of any significant deviations, the reasons were
analysed, reported in depth and the budget available for leaders for the upcoming periods were
revisited. In some cases, the budgets were revised to improve the forecast for more certainty.

Result As a result of consistent monitoring of financial figures, the CFO team was able to create elaborate
budgets offering unprecedented insights into the business to the client resulting in improved
decision making. The down times of business were well planned and newly introduced job work
activities helped recover significant fixed costs. The client was able to effectively negotiate the
terms of agreements with suppliers as well as buyers to his favor because of advanced planning.

The financial ratios became healthier, relatively consistent and sustainable, considering the
seasonal nature of business. Overall performance of the business for the financial year improved as
originally planned by the management and neared the budgeted figures. This was achieved through
effective execution at the ground level followed by strict monitoring. A clear path to recover
accumulated losses was laid over the next 4 years and the client agreed to follow the same.

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