A Rapid Decision and Decentralized Decision Making Process in Financial Management - Research Paper Example

Introduction This research report aims at demystifying the concept of financial management with the help of a case study of PrepGenie.com. A critical analysis of its products and services, resources and financial control protocols will help to understand the dynamics of financial management. Prepgenie.com is a e-learning start up and it is still in its nascent stage and needs much traction to make it big in the test preparatory market. As on Jan 2009, it caters to a select tests and has a niche market of moderate size. Question 1: Describe the organization, its purpose, products and/or services and the department or project you work for (or the department/project you have selected) and your involvement in it. Prepgenie offers online and offline test preparatory tools for a range of Australian, British and US tests including GAMSAT, UMAT, ISAT, LNAT, UKCAT, BMAT and Subject GRE. These are international standardized test used by various schools and universities of US, Australia and UK to select students for various courses. The education sector in general is experiencing a healthy growth rate and on an average 110,000 individuals sit in the tests that will be catered to by Prepgenie. Prepgenie provides the aspirants with test preparatory tools like practice exercises, test papers and online interactive gaming sessions. As a strategy Prepgenie outsources content creation to low cost destinations like Asian countries. Its development centers in India and Vietnam have a pool of English educated, highly qualified yet low cost professionals who create content. It helps Prepgenie in minimizing cost and yet provides quality products. As a unique strategy, Prepgenie also uses multiple platforms to deliver the preparatory and learning tools in order to reduce cost and increase customer retention and interactivity. The different platforms of delivery comprise, An online proprietary interactive platform, Digital downloads, and Content in printed format. The online proprietary interactive platform provides better learning experience for the aspirant and also allows Prepgenie to capture crucial data about individual learning preferences learning style. Prepgenie also uses its LMS to create a vibrant online community of test takers. However, an offline mode of content delivery is important - more so for overseas customers where access to the Internet is limited, or is expensive. However, this medium is expensive as it involves publication, stock maintenance and delivery. Digital download is by far the most inexpensive for Prepgenie, thereby enabling it to offer more volume of content. However, this mode suffers from three major disadvantages - possible piracy, higher cost of ownership for the user if s/he intends to print these documents and no interactivity with the company. A combination all three platforms helps Prepgenie to maximize profit, minimize cost and increase interactivity. PrepGenie aims to cater to 1000 students in its first years of operations. Over the next 3 years, it aims to expand its student base to about 5000 students across Australia, UK and US and increase its average revenue per student from the present USD 450 to USD 1000. As on Jan, 2009, Prepgenie has a small team of 17 team members. It plans to increase its team size to about 30 by year end and to 45 by the end of the 3rd year. Prepgenie plans to introduce low cost products as a market penetration strategy. However, within the 2nd year of its operations, it plans to introduce comprehensive, multimedia based preparatory tools that will let PrepGenie charge premium prices. On a long term basis, PrepGenie aims to be the most innovative test prep solutions provider for a range of tests. Question 2 Describe how finances are managed within your department or project, including the nature and use of budgets and how these are established. Explain how your financial management processes fit into the overall strategic and operational planning processes for the organisation. Clearly explain the importance of effective financial management in your department or project to the successful achievement of its objectives. In your explanation state the limitations of your authority regarding expenditure. Prepgenie, being a start-up and only a year old, has a flat and overlapping organizational structure. The team is headed by an executive chairman, and is assisted by four different teams- Content development, Technology and delivery, Marketing and General Administration. The core processes of business include content creation, content validation and quality assurance, delivery and after delivery customer service. However when it comes to financial management and budgeting, these are done more on the organisation as a whole. Since it is a start-up, it is more about managing expenses rather than managing finances. Prepgenie is seed-funded upto 400,000 USD and this amount is to take care of the capital expenditure and also the working capital requirement of the first 6 months. However irrespective of the size and scale of operation it is essential for any organization to have a smooth financial management because finances are the backbone of any firm. For a start-up managers typically concentrate on the 2 or 3 domains that constitute about 90% of the budget. In fact managers should always try and avoid getting into too much of details and rather focus on the core areas. For Prepgenie such areas of core importance are content creation, website and software development and advertisement. Apart from advertisement both content creation and software development are one time capital expenditure with incremental yearly expenses. However all these three components have a huge impact on the finances of the first financial year. From the second year onwards the expenditure on content and software development will be declining and that on advertisement will rise. Since Prepgenie is primarily a web-based business and only a year old, neither assets nor liabilities are substantial. Because the source as well as the extent of capital inflow is limited, it makes sense for Prepgenie to carefully select resources and make a judicious use of its financial resources. Effective financial management at Prepgenie ensures smooth and timely cash flow. Apart from the bulk investment received, a regular cash flow is extremely important to meet the growing demands of the organization. However because of pressures from both ends of the value chain, maintaining a smooth cash flow is a complicated process. 1. Using your own organisation’s protocols, prepare a financial statement that summarises the current position of your department or project against budget. Compare actual and budgeted expenditure and identify variations. Explain the significance of these variations and why they may have arisen as well as their potential impact on associated financial management and any action that needs to be taken or has been taken as a result of them. Financial Statement   January'08 - Febuary'09   Estimated Actual Revenues and Gains Net Sales 450,000 112,500 Other Revenue - 58,000 Total Revenues and Gains 450,000 170,000 Expenses and Losses Cap Ex Content Creation 60,000 95,000 Website - Software Dev 75,000 125,000 Working Cap Ex Salaries 150,000 150,000 Utilities - Office Supplies, Telephone, Rent, Repairs & Maintenance 30,000 24,000 Advertisement 50,000 65,000 Insurance - - Travel and Entertainment - - Interest Paid - - Taxes & Licenses - - Total Expenses 365,000 459,000   NET INCOME    85,000  (280,000)   Financial forecasts at Prepgenie are done based on assumptions and the best information that is available with the company. Financial forecasts are made consistent with Prepgenie’s long term planning. As can be seen from the financial statement, there exists huge gaps between the forecasted and the actual figures. The capital expenditure overshoot occurred mainly due to unforeseen circumstances like sudden attrition of the development team and consequent change of the lead developer. The organisation also decided to outsource its designing activities to a designing studio midway, thereby driving up the costs. However, these activities were one time, developmental activity and hence these activities will not be there next year. Additionally, as the organization completes one complete financial years, the employees become more certain of their deliverables, responsibilities and the control protocols. This also helps the organization become a more disciplined and synchronized team. I am the product manager for GAMSAT prep tools and I am solely responsible for successful creation of content for prep tools. I worked with a team of in-house content developers, freelance editors and SMEs(Subject Matter Experts) and volunteer test takers. As a Product Manager, I had complete freedom on the budget allocated to me. Additionally, when I felt the need to conduct extra quality assurance activities, I was allocated another 30% of my previous budget after a short discussion with my immediate superior. Question 3 Consider an expected growth of your organisation that requires the acquisition of further premises or the purchase of new equipment. Identify possible options for suitable premises or equipment. Carry out a financial feasibility study on your chosen investment through purchase or lease. Use a range of costing models to project the return (or impact) on this investment and draw conclusions about the feasibility of such an investment. As on Jan 2009, PrepGenie was offering preparation tools for GAMSAT and Subject GRE. However, there a clutch of tests scheduled to be held in the months of July, August and September. PrepGenie will have to add new members to its content development team to cater to these new tests. To create content for a set of 4 tests (UMAT, UKCAT, LNAT and BMAT) at an accelerated speed, PrepGenie will need to add a total of 12 new team members. PrepGenie will also need a bigger office space to house its extended team. However, apart from workstations and furniture, PrepGenie will not need any to acquire any more assets. At this moment, Prepgenie has about 250 enrolled students with an average billing of $450 per student. However, with increased number of tests, number of students enrolled is expected to reach about 1000 by the end of this financial year. With 250 students, student relationship management was taken care of by the existing team members on an ad hoc basis. With 1000 students, Prepgenie will need to create a full-fledged student relationship management team to ensure there is proper communication with the students. It is expected that this team will be 7 members strong. This entire student relationship management team is planned to be housed in the India office. Just like the extended content development team, this team will require a robust IT infrastructure consisting of high speed Internet connectivity with redundant lines, work stations and a local area network. In addition to this IT infrastructure, the team will require an fully furnished office space with required seating capacity. PrepGenie will use the same domain, www.Prepgenie.com , to offer preparation tools for all new tests. PrepGenie has already invested considerable amount of resources in developing a custom Learning Management System. Prepgenie has also invested towards developing various web2.0 features to increase student interaction and repeat visit. So, on the delivery front, PrepGenie will need to recreate its existing modules for GAMSAT and Subject GRE to cater to the new set of tests. Hence, the investment required to create the delivery platform will be minimal. Advertising was one of the most important cost heads for Prepgenie when it initially launched its operations. The initial advertising campaign launched has two distinct goals – Promote Prepgenie.com as a trusted brand among student community Promote preparation tools for the specific tests (Subject GRE and GAMSAT) However, over the last 6 months, it has gained considerable student traction and has gained a foothold in student community’s mindspace. As a result, the next wave of advertising campaigns will be primarily aimed at promoting test specific preparation tools. So, the incremental cost incurred in advertising will be considerably lower. Question 4 Identify the different financial processes and protocols that organisations use. It is useful to compare different types of organisations based on geographical location, products or services and size, as well as financial control methods used. Compare these with the processes and protocols used by your own organisation, identifying the benefits and drawbacks of each approach. Summarise your findings and draw conclusions about the effectiveness and suitability of your organisation’s financial processes and protocols. Present your financial review to your manager for comment. Include your summary of the two scenarios and your feasibility study for additional premises or equipment. Offer constructive comment on the organisation’s financial processes and protocols, making cost beneficial recommendations for change where appropriate. “An organization's internal control structure consists of the policies and procedures established by management to achieve organizational objectives.” Control mechanisms, financial or otherwise, should follow a broad set of thumb rules like: The cost of executing the control mechanism should not be higher than the possible cost in case of a total failure. Separation of duties/multiple checks: A single person should not be in charge of all aspects of a transaction. That is, a single individual should not have the authority to initiate, approve and execute a transaction. Limited authority: The hierarchy of authority should be clearly defined Maintenance of records: Records should be maintained and should be retrievable when required. Review: There should be periodic review of all transactions by reviewers with clear authority (Davis T. J., n.d.). Finance is perhaps the most important resource for any business organization and a meticulous and through set of processes and protocols is critical to the survival and success of any organization. Financial control protocols are set to safeguard the organization’s assets and to gather accurate financial and accounting data. Financial control protocols are also intended to stop unintended errors and intentional frauds. However, control protocols aim to minimize the probability of errors/frauds and it is not possible to completely eliminate errors or frauds. There are no set rules that decide the shape and structure of financial processes and protocols that organisations use. The exact framework of the financial protocols are influenced by a lot of factors, including the corporate hierarchy, degree of decentralization, size of the organization and complexity of the business process. For example, the financial controls used by a start up will be minimalistic in nature and will be characterized by a least amount of paperwork and bureaucratic hurdles. Similarly, activities in a research organization are characterized by high degree of uncertainty, and hence the financial and other controls used in a research organization are entirely different from an organization, like for example, a commodity trading organization (Moodle FAQs 2008). Similarly, the financial control methods used by a governmental organization will be drastically different – such a control system will be characterized by a well defined and rigid, details driven and compartmentalized financial control mechanism. ,While systematic and through financial control procedure is critical to the success of the business organization, over reliance on a strict financial control procedure may also lead to discouraging of innovation and improvement. PrepGenie is a start up and hence the level of uncertainty is extremely high in its operations, thereby forcing it to adopt a relatively flexible and decentralized financial control system. However, given the fact it is a start up, conserving cash is one of the most important considerations. Hence, the financial control structure has been designed to cater to these apparently divergent orientations. All activities at PrepGenie have been categorized as either critical or non-critical activities and the decision making authority has been decentralized accordingly. As a policy, all decisions making authority related to critical activities are highly decentralized and activity owners are allowed to take financial decisions up to a preset limit without getting approval from the appropriate senior authority. For business critical activities, decision makers are actively encouraged to have a high risk appetite backed up by a strong execution plan. However, for non critical activities, each decision has to be approved by the immediate team leader as well as the CFO before it is executed. For example, the decision to outsource the designing activities to a third party specialist designing studio was taken by the Product manager without requiring to get it approved by the CEO. However, the stringent rules were set up while identifying computer vendors and the office space. Given the nascent stage of the organization, the present decentralized financial control procedures are highly effective. However, the following changes have to be incorporated to improve the effectiveness of the control procedure: 1. Defining the limit to cost of salaries: Since PrepGenie requires a special set of skills and attributes, it has to pay a premium over market rates to attract talent. However, this premium is on an ad hoc basis and is decided by the corresponding team leader on the spot. This process should be more system/rules driven. 2. Defining the limit to cost of content: The process of creating quality content is generally a slow one. However, in its urge to create content at an accelerated pace, the quality took a hit and the overall cost of content was substantially higher than the forecasted one. From next year onwards, PrepGenie has to put in special financial control protocols to tightly control costs incurred in its biggest cost incurring activity – test content creation. Conclusion PrepGenie, like almost all start ups, has relatively low density financial protocol and control systems in place. This is both necessary and helpful in maintaining a rapid decision and decentralized decision making process. However, as Prepgenie grows in terms of team size, revenues and organizational complexity, it will have to soon shift to a more system driven and robust financial control framework. PrepGenie also plans to rapidly scale up on its 3rd year and have physical presence in its target markets – Aus, UK and US apart from its offices in India and Vietnam. As and when PrepGenie grows from a small, nimble start up to a multi product, geographically distributed organization, it will have to shift from a informal control protocol to a process driven control framework. PrepGenie operates in the domain of E-learning, E Commerce and new technologies. These domains are characterized by rapidly diminishing shelf life of technology, high fluidity and minimal entry barriers. So Prepgenie will have to maintain a highly decentralized decision making process and offer enough flexibility to its middle level managers. So, while shifting to a more robust financial control protocol, it has to ensure it leaves enough room for its managers to nurture a high risk appetite. List of References: Davis T. J., n.d, Internal Control Structure, Weber State University, Ogden, Utah, U.S.A. retrieved on 11th March, 2009 from: http://faculty.weber.edu/jtdavis/ac3750/ICstruct.ppt Moodle FAQs, 2008, How can I add an image to my course page?, University of Bath, U.K. retrieved on 11th March, 2009 from: http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1424&context=commpapers Read More