This article was published on: 1/02/19 8:11 AM
LGW Limited is an ISO 9001:2008, 14001:2004 & OHSAS 18001:2007 certified company. During the last three financial years the company achieved an aggregate sale of 100 million US dollars. This directly contributed towards the company being accredited with ‘Star Trading House’ which meant that as per EXIM policy they had an average FOB value during the preceding three licensing years, amounting to over 375 crore and a FOB value amounting to more than 560 crore during the preceding licensing year.
In the yarn industry raw material costs can account for 70% of the total costs. Therefore the purchase and procurement of cotton is one of the most important decisions a cotton manufacturer has to take. A substantial increase in demand for raw cotton from countries like Bangladesh enabled a raw cotton exporter like LGW to capitalize on the opportunities and achieve significant turnovers. This also meant that the volume of LGW’s business increased very swiftly over the course of just 10-15 years.
The growth and development which LGW had achieved during the past few years made the company come face to face with fresh challenges. No longer could they depend upon a simple accounting and reporting system to fulfill all their needs. They needed much more of a holistic approach towards finding a solution which would integrate each and every aspect of Export into a system which would simultaneously be user-friendly and also efficient.
Challenges with respect to Multiple Currencies and Exchange Fluctuations
Export is ‘the’ most important business process having a direct relationship with LGW’s growth and development. With an increased volume of export sales there is significant increase in the number of financial transactions that the company has to deal with. Now most of these financial transactions related to export are in foreign currencies and these transactions had to be handled accurately and also with due respect to trading timelines. Imagine making an error in a transaction involving thousands of US Dollars which would hurt even more when converted to domestic currencies. It could result in a catastrophic financial disaster.
The particular scenario which stood out to be a primary area of concern, with respect to dealing with foreign currencies is when Export Invoices are negotiated. Let us consider an example of LGW exporting raw cotton to Bangladesh. They receive an order of 3000 kgs of raw cotton amounting to USD 9000. After the general procedure of Export documentation like receiving a copy of the Letter of Credit and preparing the Proforma Invoice, the final Export Invoice needs to be prepared. During the preparation of this Export Invoice, the exchange rate between US dollars and Indian rupees has to be duly noted. The reason being that the Export Invoices are negotiated with banks in exchange for funds to ensure continuity in the business process. This negotiation of the Export Bill results in the existence of an Export Bill Discounting account.
Now as and when the customer transfers funds to the bank the Export Bill Discounting has to be set off. When the customer transfers the funds to the exporter’s bank it is most definitely at a date much later to than that of the Invoice date. Hence usually a gap exists between the exchange rate on the invoice date and the exchange rate on the date the money is received. This gap is called the Exchange Fluctuation and it results to a foreign exchange gain or loss on export bill discounting. The gain or loss has to be taken into account so that Financial Statements such as the Profit and Loss and Balance Sheet remain accurate.
Passing separate journal entries to account for the foreign exchange gain or loss was slowly becoming impractical and painful with the significant increase in the volume of export sales. LGW look towards finding a solution which would make the procedure less stressful for the user and at the same time account for every aspect of the mentioned scenario.
The availability of several scenario specific features in EXPAND helped LGW find answers to most of their questions with respect to handling of foreign currencies and dealing with foreign exchange fluctuation.
Firstly, since LGW carried out trade with multiple International customers, they had to deal with individual currency preferences. EXPAND offers a feature whereby the preferable currency of a particular customer could be defined in the Customer master itself. Therefore any documents prepared linking that customer would automatically be in the currency which was defined from the master.
Secondly, entering the financials related to the negotiation of an Export Bill can be carried out in EXPAND through a single section. This helped in giving an organized structure to the Export Bill Discounting procedure. Under this section the user is just required to link the Export Invoice and tag the bank account as and when funds are transferred from the customer. The accounting entries related to foreign exchange gain or loss is passed automatically the moment the details of the transfer of funds are entered and saved.
Thirdly, along with the provision to enter the details of funds transfer this section also hosts a number of other fields such as the provision to enter Trade Acceptance Date, Interests and Handling Charges. The section even has the option to adjust any PCFC adjustments where user generated PCFC vouchers can be adjusted against the receipt of any fund.
Therefore LGW was able to achieve a sense of organization that they were looking for by finding solution through a unified integration of the Export negotiation procedures provided by EXPAND. Also since there was internal linkage between all the aspects, reports with respect to Negotiation pending and Swift Pending were easily customized.
Challenges with respect to Units of Measurement used in the Cotton Industry:
One of the very first areas of concern for LGW Limited was the implementation of the various units of measurement used in a cotton industry and also integrating them into an accurate inventory management system. After studying and analyzing the various scenarios presented to us by LGW, we could draw a clear picture of the problem at hand.
LGW maintained their inventory in Kilograms (kgs), which is a standard unit of measurement. However during the purchase process of raw cotton a couple of other units of measurement had to be taken into account. Firstly during the verbal negotiation phase, the rate at which the purchase price is fixed usually in units of ‘Candy’ and ‘Maund’. These are the different types of units of measurement which are local to the cotton manufacturer from whom the cotton is bought. The implication of these units of measurement is subjected only to the purchase process and did not play any role in either sales or export.
Secondly, another unit of measurement called ‘Bales’ is used primarily for the purpose of packaging both in the purchase and sales. Now weight of each ‘Bale’ is not fixed and this presented with additional hurdles establishing relationship with ‘kg’ which is used for inventory management. For example, sometimes a single ‘Bale’ could weigh 90kgs while at other times a ‘Bale’ could weigh 170kgs.
LGW followed an ‘item Specific’ approach to inventory management. This meant that a certain number of ‘Bales’ (usually 100) is given a specific batch number and is put together as a ‘LOT’. At any given point of time a ‘LOT’ portrayed three major characteristics – the unique lot/batch number, quantity of bales present in the ‘LOT’ and the weight of the particular ‘LOT’ measured in terms of Kgs. Again, during export LGW usually sells raw cotton in Pounds (lbs). In other words, the unit of measurement which is used in all the export documents is in terms of lbs. However stock from inventory is reduced in terms of Kg. Keeping track of the individual ‘LOT’ numbers manually in terms of Bales and kgs was proving to be a painstaking process, ignoring the fact that no check existed in the consumption of quantities in terms of ‘Bales’.
After a thorough analysis it was identified that ‘Bales’ was as important of a unit of measurement as kgs. Therefore through Expand, LGW started to maintain their inventory in two units of measurement. The primary unit of measurement being ‘Bales’ while the secondary unit of measurement being kgs. This was possible due to the fact that Expand has the provision of having multiple units of measurements. While defining the product master for raw cotton two relationships between units of measurements were established, one between ‘Bales’ and kgs to facilitate the purchase process and another between ‘Bales’ and lbs to be used in the export process. Since the exact weight of 1 Bale is indefinite, a tolerance percentage was used along with an approximate conversion of one bale to both kgs and pound.
For example in the product master it was specified that 1 Bale of raw cotton = 150kgs with a tolerance of 20%. It meant that the user was given a relaxation of 30kgs per bale while preparing a document. Therefore while preparing a Purchase Order a user was required to specify the LOT number, the number of bales say for example 100 and its weight which could be anywhere between 12000kgs – 18000kgs according to the tolerance specified in the product master.
Similarly a relationship between ‘Bales’ and lbs was established using the tolerance percentage which facilitated the export process.
Since inventory was maintained in two different units of measurements, a check always remained on the stock consumption both in terms of kgs and ‘Bales’. The availability of a user configurable standard conversion from ‘Kg’ to ‘lbs’ meant that although stock was reduced from the inventory in Kgs and Bales yet it could be easily reflected in terms of lbs in the export documents.
All the reports including reports on stock listing, stock movement and stock valuation was available in both Kgs and Bales.