Functions of Omar Kassem Alesayi Group - Case Study Example

Executive Summary This report is aimed at understanding the accounting functions of Omar Kassem Alesayi Group. This report aims at analysing a part of this group – SISCO. The report contains a detailed explanation of the financial health of the business and an explanation of the management accounting systems followed within the organisation. A detailed suggestion section is also included at the end of the document, where the company can make a few changes to gain profits and improve the current conditions of the company. Introduction: This section aims at providing a brief background of the company. Omar Kassem Alesayi was established in 1997 to assist Saudi citizen to own suitable housing units at reasonable terms. The company specializes in mortage and property financing. Over time, it gradually expanded its business activities to include external entities, i.e. other real estate developers and individuals . In 2006, approximately 87% of its turnover was generated from external parties (OKAG, 2000) They currently work out of one branch, with a total of 28 employees and owns a total of almost 135 million assets. SISCO being a privately owned company is not married in bureaucracy which is common in state-owned firms. The company’s organisational structure is horisontally desgined, with adequate processes and procedures. However, with the expansion plans, a review of its processes and procedures needs to be conducted. The processes and procedures of the company were implemented on an ad-hoc basis, on a learn-as-we-go basis. The company has competitive adavantage over its competitors with a large product portfolio. The key resources of any organization comprise of the financial resources and the human resources or as they are now known as human capital. It is staffed by some of the best professionals in the field. Intangible assets have gained importance now and human capital is the profit lever of the knowledge economy (Low, 2000). Human capital is the source of innovation and strategy; it is the combination of genetic inheritance, education, experience and attitude towards life and business (Bontis and Fitz-enz, 2002). Tacit knowledge has to be converted and retained in the knowledge economy to compete in the market (Marwick, 2001). . The market value of a firm consists of its financial capital and ‘something else’. The book value can be ascertained through the financial assets but this ‘something else’ is the firm’s intellectual capital (Pablos, 2002). The other key resource is finance. SISCO has a strong financial background. It has adequate capital resources to meet commitments and besides it also has the backing of banks. It offers syndication in concert with the local banks. It also has shareholders to meet contingency requirements. Business Health: The company has seen a decline in the net profits however the market for this sector is growing at a high rate. The business has seen a good growth over the past years. As mentioned by the chairman of the company, the company has been in the industry for almost 55 years now, and the company has ensured to be in sync with the technological development of the modern Saudi state and its institutions (Zawya, 2008). The government regulations now allow the GCC financial companies to enter this market. More importantly, the developers directly offer instalment facility to the customers. Also the banks can now hold title deed that was the main obstacle faced by banks in offering mortgage services. Nevertheless, the company has intensified its operations strategy to meet the challenges. Net Incomes and Debt Equity Ratio: Annual profits after tax have declined over the years as competition has intensified and profit margins have lowered. This is due to the increasing competition being faced from banks, where the banks have easier access to cheaper   2003 2004 2005 2006 2007 Net Income (SR) 16,245,463 13,339,041 9,540,415 4,322,564 2,750,000 In general most instalment companies are dependent on borrowings to finance their business. This shields them from the tax liability and also lowers the weighted average cost of capital (WACC). SISCO depends on borrowing from banks and securitization to finance its operations. The weighted average cost of capital is the after-tax costs of each of the sources of capital used by a firm to finance a project where the weights reflect the proportion of total financing from each source (Fagan, 2006). In 2009 the debt/equity ratio is expected to reach 2.60 times. This denotes the company has to be careful with its financial decisions as the financing is mainly through debts or borrowings. A high debt-equity ratio indicates that the company uses more financial leverage in the firm and is exposed to more financial risk. The Current /Debt equity ratio of SISCO as retrieved from the a report (SGIA, June 2007)   2004 2005 2006 2007 Debt Equity Ratio 1.73 1.2 1.01 1.44 Profitability Trend: The recent profitability trend of SISCO suggests that they need to lower their margins to compete and grow in the market. This would mean that they would need to increase their instalment portfolio. The expenses would have to be controlled and especially they would have to lower the operations expenses as a percentage of revenue. They have to benefit from economies of scale and they must increase the ROE (return on equity). Competitors Analysis: Most of the competitors belong to the private sector and as such are not liable to disclose their financial statements. Since there are no publicly owned companies in the instalment sector, it is difficult to get data on competition and their financial position. It is difficult to calculate all the ratios but the figure suggests that the WACC in 2006 was 10.36 that have come down to 9.21 in 2007. This is an industry average and indicates that the company would have to earn this rate from its investments so that the investors and creditors can be compensated with their individual rates of return. Financial Statements: The financial statements like for every company is mainly for the use of shareholders, investors and banks. The banks require carrying out the credit risk assessment of the company. The existing shareholders too want to know how sound is the investment they have made and whether to hold on to the stocks or liquidate their shares. The prospective investors too are interested to arrive at a decision whether or not to invest in a company. Accounting adjustments have at times to be made to maintain consistency. These have to be noted and rectified by an auditor. They verify whether all relevant qualitative factors have been reported in the balance sheet if they do not reflect in the financial statements. Banks require both qualitative and quantitative data to assess risk. While the quantitative factors can be ascertained from the financial statements, the qualitative factors include the expertise of the management, the market environment, and the legal form of the business (Fortis, 2007). At SISCO however, everything has been clearly mentioned in the balance sheet and does not require any further clarifications. SISCO is registered as a limited liability company and hence it is mandatory to get the accounts audited. A certified external auditor as per law regularly audits its financial statements. Management Accounting System: The company does not have any written procedures and policies in place. Also the company does not have records of any kind of documentation, workflows, job descriptions, or even a clear credit policy. However the company does have budgets that are prepared on an annual basis every September, and reviewed monthly to ensure the company is moving in track with the budget. Every year there is a through analysis of the budget vs. the actual costs. All the variances are well addressed and all changes are made to ensure the budgets are as accurate as possible. All changes that are made in the budget have to be authorised by the owners or the representatives. All the departments participate in the budget and all efforts are made to ensure the budgetary plan is accomplished. All the variances are analysed using the flexible budgeting method. Since the business is mainly into lending monies the costing is based entirely on the cost of funds and required margin. Again due to the nature of business ABC analysis is not an appropriate option, as the company would require working on the Enterprise Resource Planning, which currently is not taken by the company. The company does use break- even analysis and the company’s break even has been calculated to be 75,000,000 which is the required instalment portfolio. Suggestions: Following the above discussion it is clear that the company is using extremely outdated systems, which does not provide accurate information of the company’s performance. The major suggestions for the company to improve its management accounting would be to firstly ensure improved and clear operational process, i.e. well documented with a clear workflow. Secondly, improvising on the systems would be beneficial for the company. Even though it would mean higher investments it would be beneficial over the years. Thirdly, a transparent information flow system within the company will allow the company’s performance to improve. Finally it is essential for the company to ensure that the costing is more accurate and also the analysis of risk and hedging needs to be well calculated. Improving the current systems could do this. References Bontis, N & Fitz-enz, J 2002, 'Intellectual Capital ROI: a causal map of human capital antecedents and consequents', Journal of Intellectual Capital, vol. 3, no. 3, pp. 223-247 Fortis 2007, 'The impact of the new Basel II Capital Accord on your next credit application', Accessed on 3 November 2008, Retrieved from http://www.fortisbusiness.com/fbweb/int_en/businessadvisor/int_en/ba_perspectives_BaselII_en.html Low, J 2000, 'The value creation index', Journal of Intellectual Capital, vol. 1, no. 3, pp. 252-262 Marwick, A D 2001, 'Knowledge management technology', IBM SYSTEMS JOURNAL, vol. 40, no. 4, OKAG, 2000, ‘Group History’, Accessed on 6 November 2008, Retrieved from http://www.alesayi.com/groupp_history.htm Pablos, P O 2002, 'Evidence of intellectual capital measurement from Asia, Europe and the Middle East', Journal of Intellectual Capital, vol. 3, no. 3, pp. 287-302 SGIA, 2007, ‘Islamic asset Management’, June 2007, Accessed on 5 November 2008, Retrieved from http://dro.dur.ac.uk/4104/01/51667.pdf Zawya, 2008, ‘Omar Kassem Alesayi Group’, Accessed on 5 November 2008, Retrieved from http://uk.zawya.com/cm/profile.cfm?companyid=1001188 Read More