Make Your Money Work For You

The richest investor & third richest person in the world, Mr. Warren Buffet, quotes “Someone’s sitting in the shade today because someone planted a tree a long time ago.” And so, even he did not become the richest person in a day. He started his investment at the very age of 11 years, and many a times found quoting as that he started a bit late, otherwise he would have become richest person earlier. Today he has assets valued for more than $ 50 Billion. He says “in this world there are two ways to earn income; one is to exchange you labor for dollars and the other is to have your money earn money for you.” And this process of money working for you is the phenomenon of INVESTMENT.  

SAVINGS & INVESTMENT

Before we understand investment, it is important to understand savings. Savings are the unspent incomes, or deferred expenditures. A simple formula to calculate savings is:

INCOME  –  EXPENDITURE  =  SAVINGS

Now an individual can keep such amount saved, with himself in his pocket or a piggy bank. But there are few issues when he is doing this as, firstly it may be stolen or lost & secondly due to inflation it looses its value, as it is kept idle. And for these reasons these savings should be invested.

We can define investment as the process of, ‘Sacrificing something now for the prospect of gaining something later’. Some examples of investment:

• A government employee opens a deposit account with post office.
• A person buys the shares of Tata Motors.
• A farmer buys a land for farming.
• A cricket fan bets on a cricket match.(surprised?? For details: patnisaurabh@gmail.com)

WHY ONE SHOULD MAKE INVESTMENT?

This question is often asked by the people, why should they invest??? Investments are both important and useful in the context of present day conditions. Here are some factors to answer it.

• Income: In the last two decades, our economy has witnessed a consistent growth. Due to which the overall demand for all the resources, including human has increased. And this demand has come with the rise in salaries, perks and other benefits. And more the income more would be the demand for investment, in order to bring in more income above their regular income.
• Inflation: As discussed above if an individual, keeps the savings in his pockets, the inflation tends to erode the value of such savings, as the time passes by. And to be paced with the inflation, the investments have to be made by the individual, to cover such a decline in the value due to inflation.
• Taxation: The government, in lieu for encouraging the savings in the economy, tends to provide various tax exemption opportunities for making an investment into selective avenues. And if the individual happens to invest in it, he tends to save some tax liabilities.
• Interest Rates: To take the advantage of the rising interest rates and trying to generate more income.
• Future goals: To achieve ones future goals like, children’s higher education, buying a house etc, smoothly proper and regular investments are necessary.
• Risk & Return: To take a calculative risk in order to generate that extra mile of returns.

WHERE TO INVEST???????????

Now as we know that there are many different types of investment options are available, like shares, debentures etc. It is very important to make an appropriate choice, as per ones requirement. The selection of an investment option by an individual would be based on certain criteria, let us first discuss those criteria or factors that could influence such a selection.

• Returns: This is the main factor that influences the selection of an investment option. Everybody would try to select an investment which provides the highest possible returns. Returns are the monetary benefit, which an investment option generates over the amount of money invested in it. The returns in general are measured in percentage. An investment can generate basically two forms of returns, categorized as:
• Incomes: This is the return, which an investment generates at a regular interval. This type of return is generally has a fixed rate. Example for such type of returns can be dividends and interest.
• Capital Gains: This is an increase in the value of an investment that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain does not correspond to a particular time interval. It gets affected by many factors like the performance of the asset, demand and supply for the same etc. A capital loss is incurred when there is a decrease in the capital asset value compared to an asset's purchase price.
• Risk: Traditionally risk is viewed as something ‘negative’. "Risk is the chance that an investment's actual return will be different than expected". This includes the possibility of losing some or all of the original investment. This is a very important factor which will influence the selection of an investment option. If an individual aspire for higher returns from an investment, then generally he has to take a higher amount of risk.
• Liquidity: The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. And higher the liquidity of an asset, easier it is possible to buy or sell the asset at the desired price and quantity.
• Lock in Period: It is the period during which an asset cannot be sold or redeemed earlier than scheduled date, without incurring penalties.
• Tax Benefits: The Income Tax Act of India provides tax rebates for the investment into certain assets, varying for different options.
• Convenience of owning: It is one factor, which analyzes how easy it is for an individual to gain the access to the investment option for buying and selling of the same.

Here, is a comparative table between some of the commonly used investment avenues, based upon certain criteria’s.

(This comparison is based on my personal experience and the information available on various concerned websites.)

Thus investment and that to right investment is necessary for every person dreams of becoming rich, and lotteries, slot machines, betting, etc will not make it happen. Truth is, every time you waste your money on the lotteries, you put yourself farther and farther, from financial success. Every penny you waste on it, makes you poorer, and someone else richer. Thus, a prudent investor will always stick to the basics and will reap the benefits of his investment for a very long time.

WISH ALL MY READERS HAPPY INVESTING!!!!!!!!!!!!!

P2P Process

INTRODUCTION (PROCURE TO PAY PROCESS)

All enterprises and corporate aspire to improve their bottom line. Basically, there are two ways to do it, either to increase the top line or reducing the cost. Increasing the top line or the revenues in today’s competitive markets is not a very good option. That’s why, now a day’s the sourcing and procurement functions are being examined, by the companies, in order to find ways to cut costs and control spending. Thus, for all such enterprises the procurement process is very important, so here in this article we will try to focus on the P2P process of an enterprise.

STEP 1: IDENTIFICATION OF REQUIREMENT

This is the first stage, at which the user department (say, Maintenance, Production, Sales and distribution, administration, accounts etc) identifies their requirements, that is what are the items they require and based upon which they create a document called as the Purchase requisition /Purchase request (PR). This document normally contains description of material, quantity, approx cost, material requirement date, preferred or standard vendor etc.

STEP 2: AUTHORIZATION OF PR

Then, the PR is to be first approved by the head or the senior authority of the user department. At this stage, the authority may return the PR to the originator for modification or can approve it.

STEP 3: FINAL APPROVAL OF PR/ROLE OF INVENTORY CONTROLLER

Once the PR has been authorised by user department then it is available to the inventory controller, or the materials management department, who are responsible for handling all the materials in the organization. Inventory controller shall review the PR and shall check the open Purchase Orders (PO), any other scheduled or planned delivery for the material. If there is any planned delivery or any existing open PO then Inventory controller can return the PR or request the user department to revise the quantity of the material (if required). After the approval of Inventory controller, the approved PR is available to the Procurement department.

STEP 4: PROCUREMENT

After final authorization of PR, that it is found out that there is no planned delivery of such a material, it is available to procurement department. The department shall check for any existing contract for the material. If any contract exists then a call-off shall be generated and shall be sent to the existing supplier. In case no contract exists then the procurement department shall initiate supplier search and floating enquiries.

STEP 5: IDENTIFICATION OF SUPPLIERS

If no pre-contracted supplier exists, then the procurement department shall interact with the user for the possible suppliers or search on the internet or use referrals or search data base, etc. to identify the suppliers for the said material.

STEP 6: FLOATING OF ENQUIRIES

Once the suppliers are identified, procurement department shall send the Request For Quotations/Proposal (RFQ/RFP) to the supplier, based upon the PR. RFQ normally contains description, technical specifications of the material, quantity of the material, term and conditions, delivery date of the material, date of submission of the RFQ, quality standards, validity of the suppliers offer, etc.

STEP 7: RECEIPT OF TECHNICAL QUOTATIONS

After sending the RFQ/RFP to vendors, the procurement department shall receive the quotations from the suppliers. These technical quotations contain the information pertaining to the technical specifications of the material, if there are any. Normally, vendors are instructed to send their quotation in a sealed envelope, mentioning only RFQ reference number on it. Quotations are normally opened and signed by two or more persons of the procurement department.

STEP 8: TECHNICAL EVALUATION OF QUOTATIONS

Quotations are sent to technical department for technical evaluations of the quotations. Here, technical department shall shortlist the quotations based on the technical specifications.

STEP 9: RECEIPT OF COMMERCIAL QUOTATIONS

Once the technical evaluation is over, the procurement department shall send the advice to shortlisted suppliers for commercial quotations. These commercial quotation will contain details about the payment terms, discounts etc. After receiving the commercial quotations, these shall be opened by two people. Quotation comparison statement is prepared by the procurement department to compare all the quotations of the supplies and suppliers are short listed for negotiations.

STEP 10: NEGOTIATION

Based upon the commercial quotation, the procurement department will short list the suppliers and will invite then for negotiations. The negotiation can happen on various grounds like, reduction in the prices of the materials, quantity and price breaks, delivery terms and conditions, freight charges, payment terms etc.

STEP 11: SELECTION OF THE VENDOR

After negotiations with all the selected vendors, the revised quotations are prepared and vendor is finalized for award of contract based on the weightage to the commecial, technical parameters, previous performance of the vendor, delivery dates of the material, etc.

STEP 12: AWARD OF CONTRACT

After the vendor is finalized, LOI (Letter of Intent) can be sent to him and he may be asked to deposit security or bank guaranty before signing the agreement. Agreement can be of Fixed or Blanket (the same can be mentioned in the RFQ).

STEP 13: PURCHASE ORDER (PO)

The procurement department then shall raise the purchase order against the contracts and then is send to the supplier.

STEP 14: PO ACKNOWLEDGEMENT

After receiving the PO the supplier sends the acknowledgement to procurement department and they record the acknowledgement. If any ERP is being used for procurement functions then supplier can remotely download purchase orders and can acknowledge the PO.

STEP 15: ADVANCE SHIPMENT NOTE (ASN)

The supplier sends the Advance Shipment to procurement department as soon as he ships the material to the buying organization. This note normally contains shipping date, transporter’s name, airway bill number, number of packages, weight of the packages, receiving location address, description of goods, etc.

STEP 16: GOODS RECEIPT

When the goods are received at the warehouse of the organization, the receiving staffs checks the delivery note, PO number etc and acknowledges the receipt of material. After the material is received the same is checked for quantity in case of discrepancy the same is reported to the vendor. After the quantity verification the material is kept at inspection locations and material inspector is called for inspection of material. If material is rejected by the inspector the same is sent back to the vendor or the vendor is asked for the rectification at the site. The sound material is moved to respective warehouse locations.

(i)GOODS RECEIPT – ACCOUNTING ENTRY

                RECEIVING INVENTORY A/C Dr.

                To GR-IR A/C

(Note: With this entry, the goods are received in the organization, hence the inventory has to debited, but since the invoice is not received yet, thus the vendor cannot be credited, and thus a clearing account is used as GR-IR A/C i.e. Goods Receipt-Invoice Receipt A/C)

(ii) GOODS ISSUED TO THE DEPARTMENT - ACCOUNTING ENTRY

(Note: As the inventory department issues the goods to the user department, the accounting entry should be passed on, on the basis of the nature of the material and the use of it.)

(a)If goods are used in consumption:

EXPENSE A/C Dr.

                                   To RECEIVING INVENTORY A/C

                                (b)or,if goods are used as assets:

ASSET A/C Dr.

                                   To RECEIVING INVENTORY A/C

               

STEP 17: INVOICE RECORDING

Vendor sends the invoice to accounts department of buying organization for claiming payment. This invoice is entered in to the system.

(i) INVOICE RECORDING - ACCOUNTING ENTRY

GR-IR A/C Dr

            To VENDOR a/c

(Note: Since now the invoice is received, thus the vendor is credited, and the clearing account ‘GR-IR A/C i.e. Goods Receipt-Invoice Receipt A/C’ gets cleared)

STEP 18: PAYMENT TO SUPPLIER

And in the last the supplier is paid as the terms of the payments and the invoice.

(i) PAYMENT TO SUPPLIER - ACCOUNTING ENTRY

VENDOR A/C Dr

To BANK A/C

CONCLUSION

The very processes and documents in procure to pay cycle may differ from company to company, but a generic process more or less remains the same. During the process we have seen various documents being created and the accounting entries that happen (if any). These documents and the accounting entries and name of the accounts used may differ from various ERP or accounting systems, but the basic things remain the same. Here, we have seen how the accounting entry happens in SAP-FI and the integration points between FI & MM. To conclude, refer to the image below to understand the flow of the things in a P2P process.

The Inflation Rate

Introduction to Inflation

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects the erosion in the purchasing power of money. A chief measure of price inflation is the inflation rate.

The immediate effect of inflation is the value of rupee/dollar (based on the country you are staying) decreases at par with inflation. That means the purchasing power of your ‘money’ decreases. If you want to understand it better, consider the below example. Say, on 1^st January 2010 price of 1 KG of wheat is INR 30. If the inflation raises 10% annually, then the price of 1 KG wheat after 1 year will be INR 33 {30 + (30 x 10%)}. That means, you need INR 33 to buy the same 1 KG wheat after 1 year just because inflation is 10% annually. In other words, you can’t buy the same 1 KG wheat with your INR 30 money anymore, i.e. purchasing power of your 'money' got reduced.

What is Price Index & WPI?

Inflation rate of a country is the rate at which prices of goods and services increase in its economy. Since it’s practically impossible to find out the average change in prices of all the goods and services traded in an economy due to the sheer number of goods and services present, a sample set or a basket of goods and services is used to get an indicative figure of the change in prices, which we call the inflation rate.

Inflation rate is calculated as the percentage rate of change of a certain price index. A price index is a normalized average (typically a weighted average) of prices for a given class of goods or services in a given region, during a given interval of time. The widely used price indices for inflation rate calculations are Consumer Price Index (adopted by countries such as USA, UK, Japan and China) and Wholesale Price Index (adopted by countries such as India).

In India, WPI is a basket of commodities divided into three major groups - Primary Articles; Fuel, Power, Light & Lubricants; and Manufactured Products. These are again broken up into smaller sub-groups. For instance, the primary articles group would have food articles, non-food articles and minerals. Each of these sub-groups would have several individual commodities in them. The current WPI tracks prices of 435 commodities, of which 98 are primary articles, 19 fall in the fuel, power, light & lubricants group and 318 are in the manufactured products group. The WPI has been periodically revised from the time it was first constructed in the 1930s and for obvious reasons the weights have moved progressively in favour of manufactured products. The current index, which uses 1993-94 as its base year, has weights of 22.025 for primary articles, 14.226 for fuel etc and 63.749 for manufactured products.

How WPI is calculated?

WPI is calculated on a base year and WPI for the base year is assumed to be 100. For example, let’s assume the base year to be 1990. The data of wholesale prices of all the 435 commodities in the base year and the time for which WPI is to be calculated is gathered.

Let's calculate WPI for the year 2000, for a particular commodity, say wheat. Assume that the price of a kg of wheat in 1990 to be INR 8 and in 2000 to be INR 10, and say the weight age for the commodity in the index is 15%.

The WPI of wheat for the year 2000 is,

{(Price of Wheat in 2000 – Price of Wheat in 1990)/ Price of Wheat in 1990} x 100

i.e. {(10 - 8)/8} x 100 = 25

Since WPI for the base year is assumed as 100, WPI for 2000 will become {100 + (25 x 0.15)} = 103.75.

In this way individual WPI values for the remaining 434 commodities are calculated and then the weighted average of individual WPI figures are found out to arrive at the overall Wholesale Price Index. Commodities are given weight-age depending upon its influence in the economy.

How Inflation is calculated?

Using the WPI figures of two time zones, say, beginning and end of year, the inflation rate for the year can be calculated by applying the formula as:

{(WPI of end of year – WPI of beginning of year)/WPI of beginning of year} x 100

For example, WPI on Jan 1st 2000 is 103.75 and WPI of Jan 1st 2001 is 108.15 then inflation rate for the year 2001 is,

{(108.15 – 103.75)/103.75} x 100 = 4.24% and we say the inflation rate for the year 2001 is 4.24%.

WPI figures are available every week, with a shortest possible time lag of two weeks, inflation for a particular week is calculated based on the above method using WPI of the given week (say 1^st week of 2001) and WPI of the week one year before (i.e. 1^st week of 2000). These rates are available not before the 3^rd week of 2001. This is how we get weekly inflation rates in India.

Why WPI and not CPI?

There is a serious debate going on, why India does not switch the calculation of inflation based on CPI, as the major countries in the world do so, and why are we still calculating it on WPI. The most important argument in the favor of this is, as CPI actually measures the increase in price that a consumer will ultimately have to pay for. It pointed out that WPI does not properly measure the exact price rise an end-consumer will experience because, as the name suggests, it is at the wholesale level.

Arguments in favor of WPI are, in India, there are four different types of CPI indices, and that makes switching over to the Index from WPI fairly 'risky and unwieldy.' The four CPI series are: CPI Industrial Workers; CPI Urban Non-Manual Employees; CPI Agricultural labourers; and CPI Rural labour. Secondly, the WPI is published on a weekly basis and the CPI, on a monthly basis. Thirdly, WPI has a broader coverage than the CPIs in terms of the number of commodities.