Poor finance process in Manning Selvage and Lee company’s finance department

Content List of tables .................................................................................................................................................3 Executive summary ......................................................................................................................................4 1. Company overview...............................................................................................................................5 2. Symptoms .............................................................................................................................................7 2.1. Negative Cash Flow ..........................................................................................................................7 2.2. Decreased Profit Margin...............................................................................................................9 2.3. Long collecting period................................................................................................................10 3. Problem identification ........................................................................................................................11 3.1. Potential problems ......................................................................................................................11 3.1.2. Lack of standardized financial process...............................................................................13 3.1.3. Weak collecting function....................................................................................................14 3.2. Validating problems ...................................................................................................................16 3.2.1. Assistant’s perspective .......................................................................................................16 3.2.2. Finance Manager’s perspective ..........................................................................................17 3.2.3. Employee’s perspective......................................................................................................17 3.2.4. The importance of main problem .......................................................................................17 4. Cause validation .................................................................................................................................18 4.1. Potential causes ...............................................................................................................................18 4.1.1 Lack of internal controls............................................................................................................19 4.1.2 Lack of skilled staffs ..........................................................................................................20 4.1.3 Lack of team cooperation ...................................................................................................20 4.1.4. Weak working allocation..........................................................................................................20 4.2. Validating causes.............................................................................................................................21 5 Alternatives solutions .....................................................................................................................23 5.1. Solution 1: Preparing and controlling the budgeting process .................................................24 5.2. Solution 2: Implement training program to improve company financial status .....................35 5.3. Solution 3: Apply KPI – rewarding system............................................................................38 6. Supporting information ......................................................................................................................50 References ..................................................................................................................................................53 1 List of abbreviations AR Account receivable CFO Chief finance officer CF Cash flow HR Human resource KPI Key indicators performance RF Rolling forecast 2 List of figures Figure 1.MSL Organization Structure ......................................................................................................... 6 Figure 2.Finance – Accounting Department Structure................................................................................ 7 Figure 3.Net Cash Flow of the company..................................................................................................... 8 Figure 4.Change in net cash of the company............................................................................................... 8 Figure 5.Profit Margin of the company ..................................................................................................... 10 Figure 6. Average collection period of the company ................................................................................ 11 Figure 7. Overheads RF vs Actual ............................................................................................................ 12 List of diagrams Diagram 1 Initial cause and effect map of Finance Department ............................................................... 16 Diagram 2 Updated cause - effect map of F&A Department .................................................................... 19 Diagram 3 Fish bone analysis diagram of the lack standardized finance function.................................... 23 List of tables Table 1.Roles and responsibilities of participants in budgeting plan .........................................................27 Table 2.Project management plan for running the budgeting process........................................................30 Table 3.Training program to improve company financial status................................................................38 Table 4.PSC Principles for allocating responsibilities ...............................................................................42 Table 5.PSC example format when allocating and scoring each department.............................................45 Table 6.Example format for cascading: Individual KPI.............................................................................49 3 Executive summary Finance and Accounting has been becoming as a major of concern in the world of fast- paced business. To keep advantage competitive, every firm not only needs to keep up with technology but also need to apply modern technology into the real work, utilize the current resource to maximize the profit. Hence, finance and accounting function becomes one of the most important components in an organization. This function maintains the relations with all parts of the company as well as ensure the operation is always under control at a management team level. A solid finance and accounting function will be a strong base for firm in the progress of achieving chosen objectives and optimize future investments. However, Manning Selvage & Lee (MSL) Company- a company that is working in public relations (PR) industry and its Finance Department in current situation, it can be seen that the firm is experiencing from long collecting period, poor cash flow management and decreased in profit margin due to the lack of standardized finance function. This research examines the impact of three main causes- weak working allocation, lack if skilled staffs as well as lack of team cooperation. These are the cause of some problems including weak overheads management, lack of standardized financial process and weak collecting period. In this paper, in-depth interview, literature reviews and historical data are used to figure out effective and efficient solutions for the department. To sum up, this paper defined symptoms and problems to evaluate and assess their importance as well as propose feasible solutions to enhance business performance, solve the current issue, general and improve the profit of the company through increase more inflows. Throughout this paper, viewers could have a full picture of relationship between cause and effects well as get familiar with solutions to cope with problems happened in the department. 4 1. Company overview Founded in 1926, Publicis Groupe is the 3rd largest communications group in the world. Through a powerful alchemy of creativity and technology, company are driving business transformation across the entire value chain. Highly modular, Publicis Groupe Connecting Company model is a unique platform that gives clients plug and play access to our best- in-class services. Supported by a Global Client Leader (GCL), company’s clients benefit from a borderless, seamless service that drives the alchemy of creativity and technology. Publicis Groupe is organized into 4 Solutions Hubs for easier connectivity and integration: Publicis Communications, Publicis Sapient, Publicis Media and Publicis Health. In this model, all agency brands still exist but share an operational backbone, which gives them the power and expertise of all the Solution Hubs combined to deliver the scale required to compete and win in new world markets. As a Connecting Company, firm is able to deliver as the Power of One - driven by a common purpose, a powerful spirit, shared behaviors, great character and a relentless focus on our clients. Publicis Vienam is established in 2016 with four main agencies including Manning Selvage & Lee (MSL), Publicis Media, Publicis and Leo Burnett that will be in charge of two mains divisions: Publicis Communications and Publicis Media. The needs of client are the core of the Connecting Company Model - Clients come first - We are seamless - We are frictionless - We are modular 5 - We are united 1.2. Organization structure Leading the company is Chief Executive Officer- Mr Lukasz Rosz who will take the management role for total company in Vietnam market. There are four shareholders which takes responsibility for four main groups: Finance and Accounting Department, Human Resource Department, Admin (Office) Department, Production Department. Chief Executive Officer (CEO) Finance & Accounting Department Human Resource Department Admin Department Production Department Chief Finance Officer (CFO) Chief Talent Officer HR executives Office Manager Admin executives Digital executives Event executives Planning executives Account excutives Finance Manager Chief accountant Finance Assisstant Figure 1.MSL Organization Structure Source: MSL’s internal information 6 1.3. Mission Publicis Groupe’s mission is to be the world leader in sustainable value creation through imaginative ideas and connections that build business with empowered people everywhere. Be the preferred creative partner for our clients' marketing transformation. Publicis Group offers two primary value propositions: innovation and brand/status. 1.4. Finance- Accounting Department Finance Assisstant AP accountant Finance Manager Chief accountant AR Accountant CFO General and Tax Accountant Figure 2.Finance – Accounting Department Structure Source: MSL’s internal information 2. Symptoms Thanks to the interview with finance manager- Mr Minh as well as Ms Hanh- finance assistant, Ms Linh- AR accountant as well as employees at MSL and historical data of the company, there are three symptoms could be listed as following: negative cash flow, decreased profit margin and long collecting period. 2.1. Negative Cash Flow The definition of cash flow is known as the cash and cash-equivalent which will be transferred into and out of an organization’s business. In other words, it shows company’s ability to create value for shareholders. It will be determined by the ability to generate cash 7 flows positively or long-term free cash flow will be maximized for the organization. Positive cash flow indicates a company enables to settle debts, reinvest in its business, pay money to shareholders, pay expenses to continue to run the business. As the table below, company is facing a problem in managing its cash flow. 2017 2018 2019 Net cash provided by operating activity (5,330) 2,233 (1,615) Net cash provided by investing activity (172) (1,972) - Net cash provided by financing activity - (98) (2,702) Other effects 245 1,235 (556) Change in net cash (5,257) 1,398 (4,873) Figure 3.Net Cash Flow of the company Figure 4.Change in net cash of the company Source: MSL Internal information 8 As the table above, company is facing a problem in managing its cash flow. The net cash flow witnessed a fluctuation from 2017 to 2019 that changing from 1398 to negative - 4,873. It 2017, company had negative cash flow from operating activities which means that firm could not generate enough cash to cover operating expenses (labors, taxes,.). The situation improved in 2018 but in 2019, the figure continued to drop to negative -1615 mil VND which can be seen as a signal of weak cash flow management. In general, it indicates that cash flow was not be concentrated enough which would be one of the reasons why the company often suffers from cash flow shortages. There was not sufficient actions to monitor and deep dive analyze in flow as well as the out flow. The current way of working for cash flow is mainly focused on when company needs to get funding from regional yearly. 2.2. Decreased Profit Margin Profit margin is one of the commonly used profitability ratios to measure the degree that a firm or a business activity that can make money. It illustrates the percentage sales that has converted into profit. In other words, the percentage figure indicates how many unit of measurement of profit the business has generated for each VND of sale. Net profit margin is calculated by dividing sales revenue by net income. Net profit margin can been seen as one of the most important indicators when it turns to an organization’s performance. By tracking the fluctuation of net profit margin, company could review and assess current practices applied on the firm. Net profit margin will be calculated as below The below line describes the net profit margin of MSL from 2017 to 2019 9 Figure 5.Profit Margin of the company The table shows that the company had experienced a significant loss in 2020 with negative 8.89% while in 2017 and 2018, it increased to 6.01% and 7.04% positively. The reduction could be a result of poor cost management which also means increase company’s expenses while revenue has also witness a fluctuation in the last 3 years. As a result, profit margin would be a symptom that needs to be solved properly to avoid future effects on company’s profitability. 2.3. Long collecting period Average collection period measures the amount of time for a company to receive payments from its clients. Company will use this financial figure to analyze as well as take action accordingly to ensure it will have sufficient cash on hand to meet upcoming financial obligations and run the business smoothly. Collection period is really important to firm as it relies on receivables for the company cash flow. A lower average collection period indicates that the organization collects payment effectively. Therefore, a low average collection period is usually more favorable than higher collection period. Average collection period will be calculated as below Average collection period at MSL is described as below chart 10 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 - Average collection period (days) 67.9 43.4 30.3 2017 2018 2019 Figure 6. Average collection period of the company Source:MSL Internal information of Finance Department According to the chart above, the collection days changed from 30.3 days to 43.4 days from 2017 to 2018. In 2019 there was a high fluctuation which is 67.9 days, increased approximately 24 days compared to 2018. This significant change in this figure could be seen as a signal for weak collecting payments which might come from weak collecting policy, inefficient management plan and ineffective collector. Thus, the company may not have enough cash on hand to operate smoothly and meet the expected results. Collecting period is considered as a symptom separately with negative cash flow. This is because cash flow included trading working capital which equals to current assets minus current liabilities. It means that current receivables will be an element of cash flow. However, chosen collecting period related to both long-term and short-term receivables and this symptom indicates more about the effectiveness measurement rather than just comparing the historical data. Hence, collecting period is a separate symptom in this paper. 3. Problem identification 3.1. Potential problems 3.1.1. Weak overheads management 11 Figure 7. Overheads RF vs Actual Source: MSL Internal information of Finance Department In 2017, the gap between actual and rolling forecast (RF) for overheads was 1% then in 2018, the portion decreased till negative -12%. However, in 2019 the percentage of the gap increased to 10% which indicates forecast was not reflect well the overheads cost. In 2018 overheads was under forecast while in 2019 the figure was over forecast with 10%. It can be seen that weak overheads management is one of the potential problems. Based on current way of working, Mr Minh also mentioned that the activities related to prepare and manage budget for overheads was not paid attention enough which leads to unexpected incurred costs. As a result, it made an impact on overheads budget and performance of the company. To be specific, lack of bottom-up activities was not utilized to prepare and manage budget while agency was always suffered from top-down KPI (key performance indicators) from regional. Weak overheads management also leads to the poor working allocation which brings out working overload and failure of each department budget management. This is because overheads budget needs to be aligned with relevant departments such as: human resource (HR), office. This activity helps to keep relevant teams keep updated, utilize budget and take action accordingly when cost incurred unexpectedly. However, the fact is that finance assistant is not only responsible for verifying documents, coding invoice in system but also preparing forecast. There has not yet a standardized process for overheads management as finance assistant does more of paper and manual working rather than dedicating to analyze and foresee overheads related activities. In other words, there was not enough time for 12 employee to do the tasks without proper process for each kind of task. As a result, it makes employees feel overload with current scope of work and they fail to follow up with relevant departments to update activities and manage the budget set for each department. Besides, Ms Hanh – finance assistant also mentioned that the current situation is that overheads management is lack of budget allocation process that leads to unstandardized procedure. To be more specific, overheads spending information need to be collected from relevant departments, overheads will be then set accordingly to make sure budget is allocated suitably. However, currently finance assistant is mainly collecting information through activities from departments when there is an upcoming spending will incur in next or current month to update to overheads budget while overheads budget management requires actions from both finance and relevant teams from the beginning. It is to ensure that company can anticipate the cost incurred during the year and make decision if needed to maximize the profit and minimize the cost. As per proper process, overheads budget is supposed to be allocated suitably to make sure costs are under control after collecting enough information from relevant partners and departments. 3.1.2. Lack of standardized financial process According to current structure of finance department and sharing from Mr Minh, there is a lack of standardized financial process in the current situation. It is a main reason leading to decreased in profit margin. Based on the chart of account at company, it can be seen that there is a lack of full, solid financial process in the within the company. This is because centralized manage which is known as actions by managers only still happens internally and employees are not fully aware of their contributions in the process. To be specific, forecasting process has not yet built properly as managers still hold and make decisions without other department’s involvement. Moreover, forecasting currently is mostly based on from historical data and updates from relevant team without a specific and clear timeline on collecting information. It happens when costs expected to cut significantly and manager will inform to relevant teams to make decisions on cost reduction. It can be seen obviously as one of the weakness in the operation. In addition, as a part of forecasting, managers received targets from regional and translated it into KPIs. However, with current practice, there is no 13