The Difference of Having and Not Having Finance Policy: The Curious Case of CINCOMM
It was around 5 pm on a very hot and humid July evening in Kolkata, India, Prof. Shubhra Biswas (Shubhra) and Anjan Ghosh (Anjan) entered into the cafeteria in IIM Calcutta, one of India’s best management schools. They came to IIM Calcutta after a review meeting at CINI Community Initiatives (CINCOMM), a private limited company located adjacent to IIM Calcutta (Exhibit I). Anjan resided in IIM Calcutta campus and as Shubhra wanted to visit the campus since a long time, they decided to have the
post-meeting coffee session at IIM Calcutta.
They had recently completed an interesting project under the guidance of Prof. Sougata Ray, reputed Professor of Strategic Management at IIM Calcutta who was also a board member of CINCOMM. The project was initiated when Anjan, who was instrumental in conceptualizing and starting CINCOMM detected a paradox during an internal audit at CINCOMM. Although the company was doing extremely well in terms of business volume in 2015 (3rd year of operation), cash flow was gradually turning out to be an issue. Moreover, almost daily there was a tussle between the accounting team members and the production members as the system data never matched the actual shopfloor figures. To Anjan, matters appeared steadily moving towards chaos...........................
The Paradox
Primary product for CINCOMM was Nutrimix (Exhibit II), a low-cost supplementary food for children. The company is very successful in product innovation. Nutrimix became a favorite food supplement for many organizations working for poor children. With increased demand on account of geographic expansion as well as expanding customer base CINCOMM started producing Nutrimix on a large scale. It seemed as the company is doing well. However, something was wrong on the floor. Rapid expansion was not leading to rapid growth in cash flows..........
The Diagnostics
Due to rapid expansion procurement of raw materials has increased substantially. However, there were no rules or guidelines existing regarding procurement of raw materials. Managers from factory floor ordered materials as and when needed and based on their perception of future orders. Further, due to rapid changes there were not even any well-established norms. Prof. Shubhra had to reach to the conclusion that inventory management system was close to nonexistent.............
The Solution
Based on these observations she observed a serious need of a sound financial policy. The basic purpose of this policy is to ensure the books of accounts of the organization are prepared in conformity with accepted accounting principles and practices. It will ensure correct and accountable use of funds and other resources. It will also enable management to receive accurate and timely financial reports, thereby promoting sound financial management. In accordance with these objectives, a user manual was prepared (Annexure I)............
The Outcome
In the last meeting after submission of finance policy manual, Prof. Shubhra explained Board of Directors what exactly was going wrong in a vibrant concern like CINCOMM. According to her, financial accounting and annual financial statements are useful for internal management as well as external observers. Management gets an overview of annual performance based on these statements. However, the issue with them from internal management’s point of view is time lag involved between occurrence of the event and information delivery...........
Exhibits
Exhibit I: CINCOMM Office
Exhibit II: NUTRIMIX – The CINCOMM Product
Exhibit III: CINCOMM Financials
Exhibit IV: The Audit Team with Shubhra (centre)
Annexures
Annexure I: Finance Policy Manual
Annexure II: Fixed Assets Register
ANNEXURE III: STOCK REGISTER
Annexure IV: Payment Voucher
Annexure V: Receipt Voucher
Annexure VI: Journal Voucher