Excess Debt-Risk to Global financial Stability

Any Financial crisis is linked to excess debt. And the world economy painfully experienced it in 2008. Why I am raising it now? Actually new data released on Monday by Bank For International settlements shows that china's debt is 248% of its GDP. The steep increase since 2008 is mostly explained by the credit spree unleashed by Chinese Banks under pressure from its government in a bid to keep the economy stable. And the option of reducing these debts does not exist because producer prices have been falling for years now because of massive over capacity. So the Chinese debt mountain is a clear source of worry. After all it is the second biggest economy in the world. It could be next source of global financial instability.

Contributed by CA Anil Gupta

REMOVE "MUDA"- A JAPANESE WAY TO REMOVE INEFFICIANCIES AT WORK PLACE.

The Taj hotel group had invited Mr. Masaaki Imai from Japan to hold a workshop for its staff.
The staff were very skeptical - the hotel is doing excellent business, this person from Japan has no exposure to hotel industry - what exactly is he going to teach?
But everybody gathered as planned for the workshop in the conference hall sharp at 9 am.
Mr. Masaaki was introduced to them –
"Good morning! Let's start work. I am told this is a workshop; but I see neither work nor shop.So let's proceed where work is happening Let's start with the first room on the first floor."
Mr. Masaaki, followed by the senior management, the participants, the video camera crew trouped out of the conference room and proceeded to the
destination.That happened to be the laundry room of the hotel.Mr. Masaaki entered the room and stood at the window, "beautiful view!" he said.
The staff knew it; they need not invite a Japanese consultant to tell them this!
"A room with such a beautiful view is being wasted as a laundry room. Shift the laundry to the basement and convert this into a guest room."
Aa Haa! Now nobody had ever thought about that!
The manager said, "Yes, it can be done."
"Then let's do it," Mr. Masaaki said.
"Yes sir, I will make a note of this and we will include it in the report on the workshop that will be prepared." Said the Manager
"Excuse me, but there is nothing to note down in this. Let's just do it,
just now." Mr. Masaaki.
"Just now?" Manager
"Yes, decide on a room on the ground floor/basement and shift the stuff out of this room right away. It should take a couple of hours, right?" asked Mr. Masaaki.
"Yes." Manager.
"Let's come back here just before lunch. By then all this stuff will have
got shifted out and the room must be ready with the carpets, furniture etc.
and from today you can start earning the few thousand that you charge your customers for a night."
"Ok, Sir." The manager had no option.
The next destination was the pantry. The group entered. At the entrance were two huge sinks full of plates to be washed.
Mr. Masaaki removed his jacket and started washing the plates.
"Sir, Please, what are you doing?" the manager didn't know what to say and what to do.
"Why, I am washing the plates", Mr. Masaaki.
"But sir, there is staff here to do that." Manager Mr. Masaaki continued
washing, "I think sink is for washing plates, there are stands here to keep
the plates and the plates should go into the stands."
All the officials wondered - did they require a consultant to tell them
this?
After finishing the job, Mr. Masaaki asked, "How many plates do you have?'
"Plenty, so that there should never be any shortage." answered the Manager.
Mr. Masaaki said, "We have a word in Japanese -'Muda'. Muda means delay, Muda means unnecessary spending. One lesson to be learned in this workshop is to
avoid both. If you have plenty of plates, there will be delay in cleaning
them up. The first step to correct this situation is to remove all the excess plates."
"Yes, we will say this in the report." Manager.
"No, wasting our time in writing the report is again an instance of 'Muda'.
We must pack the extra plates in a box right away and send these to whichever other section of Taj requires these. Throughout the workshop now we will find out where all we find this 'Muda' hidden."
And then at every spot and session, the staff eagerly awaited to find out Muda and learn how to avoid it.
On the last day, Mr. Masaaki told a story.
"A Japanese and an American, both fond of hunting, met in a jungle. They entered deep jungle and suddenly realized that they had run out of bullets.
Just then they heard a lion roaring. Both started running. But the Japanese took a short break to put on his sports shoes.
The American said, "What are you doing? We must first get to the car."
The Japanese responded, "No. I only have to ensure that I remain ahead of
you."
All the participants engrossed in listening to the story, realized suddenly that the lion would stop after getting his victim!
"The lesson is: competition in today's world is so fierce, that it is important to stay ahead of other, even by just a couple of steps. And you have such a huge and naturally well endowed country. If you remember to curtail your production expenditure and give the best quality always, you will be miles ahead as compared to so many other countries in the world.",
concluded Mr. Masaaki.
It is never late to learn...

Real Estate Bill

Recently Indian Parliament  has passed Real Estate Bill which would be notified after seeking President nod and thereafter Real Estate Bill would come into force. The intension of the Bill is to protect Customers interest as much as possible and to bring entire building faculty within one law. In nutshell it is an attempt to streamline the construction faculty.
 

The salient feature of the Bill in nutshell is :
 

1. It is mandatory for the Builder/s to get them registered before Municipal Corporation, Counsel and/or such Statutory approving planning Authority.
2. It is mandatory for the Builder/s to create their own website and put up on said website the layout plan of the property and the sanctioned plan of the buildings so as to enable the buyers to know whether Statutory Authority has sanctioned layout plan and building plan. This provision would help the buyers to know while booking a flat/s, commercial premises, units etc., whether the plan of the said flat/s, commercial premises, units etc. and the floor and the building is duly approved or not. This provision would deprive the Builder/s from booking the flat/s, commercial premises, units etc. which is not sanctioned by the Statutory Authority and thus buyer/s would not be vulnerable to evil designs of the Builder/s to book such flat/s, commercial premises, units etc. for which no sanction is obtained.
3. The Builder/s must disclose the name of all project on website along with location and its status which the Builder/s has carried out in the last five years.
4. The Builder/s must disclose all the facts on website and details which are required to be disclosed in respect of the project to be carried out by him.
5. The Builder/s must sale only carpet area of flat/s, commercial premises, units etc., carpet area means an area between the wall and no other area should be considered. Only carpet area in sq.mtrs. to be written in the Agreement for sale to be executed with purchaser/s of flat/s, commercial premises, units etc.. The Builder/s must mention separately and specifically the carpet area of kitchen, living room, bed room and other premises attached to the flat/s and commercial premises, units etc.
6. The Builder/s cannot sale the flat/s, commercial premises, units etc. without obtaining Commencement Certificate from Statutory Authority for the construction of the building.
7. The Builder/s must disclose the period within which the Builder/s shall complete the project.
8. If the Builder/s fails to complete the building strictly within stipulated time then the Builder/s will have to pay penalty. However, if the flat/s, commercial premises, units etc. purchaser/s does not make payment within time as per the Agreement then buyers will have to pay penalty which would be same as penalty on Builder for not delivering the possession in time.
9. In the event if the Builder/s desire to change the layout then consent of 2/3rd allottee of flat is mandatory for changing the layout plan.
10. Builder/s can be imprisoned for violation while penalty includes project de-registration also.
11. Builder/s is liable for structural defect for five years.
12. Provision for insurance of land title. This provision caution the Builder/s from hiding any facts and legality in relation to title of the property.
13. The Builder/s will have to compulsorily deposit 70% of sale proceeds in Escrow Account in order to protect the buyers interest, in case Builder/s fail to carry out and complete construction work, then buyers shall come together and complete the project.
14. The Real Estate Agent will have to register with regulator. He would be liable to one year jail term if they don’t comply order of tribunal.
15. Separate Real Estate Authority shall be appointed and Real Estate Tribunal shall be constituted for adjudicating all the matters regarding any dispute between flat/s, commercial premises, units etc. purchasers and the Builder/s. State-level Real Estate Regulatory Authority will be established to regulate the transaction relating to both residential and commercial.
16. It appears that Bill is applicable for incoming project but all endeavour would be made to cover all the project. However, the said Bill is applicable to a property having more than 500 sq,mts. or more than eight apartments.
17. The Builder would be imprisoned maximum upto three years if they violate order of Appellate Tribunal. Appellate Tribunals will have to adjudicate cases in 60 days.
18. The Builder/s will have to put agreement with project detail, details of contractor, architect and structural engineer.
Contributed by CA.Madhav Bhatt

FREE CASH FLOW-AN ELIXIR FOR BUSINESS

Importance of Free Cash flow in business:-

It is a measure of financial performance calculated as operating cash flow minus changes in working capital. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholders value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt. FCF is calculated as:Net operating profit + Depreciation & Amortization - Changes in Net Working Capital.

While working with many well established organizations in India as finance head specially with NHK Spring main focus while reviewing financial performance used to be on Free cash flows. A company may have good sales figures and profitability but by not getting  realization of its Trade debtors in time may become financially sick due to lack of funds. Stress should always be on management of working capital and keeping it positive by low inventories and zero bad debts. Even a small % of bad debt can wipe out profitability of any business overnight as many companies operate on thin profit margins due to acute competition.

Is negative working capital bad?

Answer is NO

A company operating with negative working capital ((e.g.In fast food chains like Dominos, KFC, McDonalds, Indian Haldiram etc etc where payments are realized prior to supplies to customers (means zero debtors) but enjoying good credit period from suppliers)) perform much better than a company with high current ratio and high profitability but a negative free cash flow on account of its failure to realize its debtors in time and slow inventories turnover.