How VAT works?

VAT — Value-Added Tax — is the biggest tax reform in the last 50 years of independent India and will change forever the way traders do their business.

But do you understand VAT? Don’t you need advice on the new VAT laws and how they affect your business? No need to worry, help is at hand.

Kul Bhushan, a newspaper editor — with over 30 years of experience — who specialises in presenting complicated economic and business issues in simple, reader-friendly language, has come up with a book — How To Deal With VAT — which addresses all the questions you may have about this tax.  The book has a foreword by Finance Minister P Chidambaram.

Here’s an extract from the book explaining how VAT works.

Some VAT registered traders may overcharge their customers because they do not understand the correct workings of VAT on prices or are deliberately using VAT as an excuse for increasing prices.

A trader registered for VAT effectively pays VAT only at one stage when he sells his goods.

This tax is the only amount, which has an effect on his selling price which includes VAT. The VAT that he has paid as a part of his purchase price is charged on him by his suppliers.

This is not a cost to him because he gets it back by deducting it from tax on his sales (Output Tax). Therefore, VAT should have a minimum impact on his selling prices.

If you supply designed goods and your annual ‘taxable turnover’ is more than Rs 5 lakh, you become a taxable person and must register for VAT.

Your taxable turnover is the total value of all taxable supplies (including ‘zero-rated supplies’) made in India or imported into India while increasing your business. ‘Exempt supplies’ do not count towards your taxable turnover. Both ‘zero-rated supplies’ and ‘Exempt supplies’ are listed in the VAT Schedules.

If you supply Vatable goods, the ‘taxable turnover’ that must be taken into account is the combined turnover of both these activities.

If you are a Vatable person, you must charge VAT whenever you make a taxable supply. The supply is your output and the tax you charge is your Output Tax. Similarly, the purchase is your input and the tax you pay is the Input Tax.

VAT Returns

VAT Returns are filed every month or every quarter depending on the amount of VAT you pay. The normal rule is that if you pay less than Rs 15,000 for VAT every month, a VAT Return is to be filed every quarter.

It is all at the discretion of the VAT officer. At monthly or quarterly intervals on your VAT Return, you should subtract your Input Tax (attributable to taxable supplies only) from your Output Tax and pay the difference to the VAT Commissioner.

If your Input Tax is greater than your Output Tax you can carry over the difference as a credit to your next VAT Return. In certain circumstances, the Commissioner may pay you any excess if he is satisfied that suchan excess is a regular feature of your business.

Issuing Tax Bills and Invoices

According to VAT law, you cannot sell any goods without a sales document. This document can be a small cash memo or a cash sale or a bill for cash transactions issued at, or before, the time when the cash is received.

The prices mentioned on these sale documents should include VAT and the words ‘Price includes VAT’ must be printed on them. These documents are suitable for retailers such as grocers and chemists.

You must give the original to the customer and keep a duplicate. At the end of each business day, you can total the cash sales and enter it in your Sales Ledger.

For selling on credit, you are required to provide the purchaser with a tax invoice at the time of supply in respect of that supply. When you receive a deposit as advance payment for a booking, a tax invoice should be issued at the time such deposit is received.

All tax invoices should be serially numbered and issued in serial number order. They must include the following information:

  • Your name, address, TIN.
  • Serial number of the invoice
  • Date of the invoice
  • Date of the supply, if different from invoice date
  • Name and address of the person to whom the supply was (will be) made
  • Description, quantity and price of the goods and services being supplied or to be supplied (in case of deposit)
  • Rate and amount of VAT charged on each of these goods and services
  • Details of whether the supply is a cash or credit sale
  • Details of cash or other discounts, if any, that apply to the supply
  • The total value of the supply and total amount of VAT charged
  • Number of the vehicle transporting these goods, if applicable
  • The customer’s PAN must be shown if the sale is over Rs 50,000.

However, if you are a retailer or you are primarily supplying taxable goods to unregistered persons, you will be required to issue a simplified tax invoice.

Simplified Tax Invoices

All simplified tax invoices shall be serially numbered and shall be issued in the order of the serial number. They must include the following information:

  • Your name, address and TIN
  • Serial number of the invoice
  • Date of the invoice
  • Brief description of the goods and services supplied.
  • Total amount charged to the customer including VAT and
  • A clear statement that the price includes VAT.

Value for Tax

The value for tax of a supply is the consideration or money paid. Consideration for a supply includes payment in money and / or in kind for the supply. The value for tax will be:

The full money value paid for the supply where consideration is wholly an amount of money, i.e., the value less any discounts allowed. Instalment payment do not affect the tax value or the point. Tax is due in full at the time of supply on the full (net) value of the article in question.

Open market value of the goods in question where consideration is not wholly an amount of money. This is the price, excluding VAT, which customers ordinarily have to pay for a supply if money was the only consideration.

Value for duty plus the duty — for imported goods at the time gods – cleared for use into the country or at the time of removal from warehouse.

Financial charges incurred by a person who purchases taxable goods on hire purchase business are excluded from the taxable value.

Similarly, interest incurred from late payment of the price of a taxable supply of goods is excluded from taxable value.

How VAT is Misused

Let us take two examples to understand the working of VAT.

Example A shows the pricing structure of a trader who uses VAT as an excuse for overcharging his customers.

Example B shows the pricing structure of a trader who does not use VAT as a tool for price escalation. For both examples, the relative data is:

  • Basic purchase of goods: Rs 10,000
  • 12.5 per cent VAT of the basic purchase price: Rs 1,250
  • Overheads related to the goods: Rs 100
  • Profit margin 20 per cent.

 

Example A (Rs)
Basic purchase price 10,000
Add 12.5 per cent VAT 1,250
VAT inclusive purchase price 11,250
Add overheads 100
Total 11,350
Add 20 per cent profit margin 2,270
Basic selling price 13,620
Add 12.5 per cent VAT 1,703
VAT inclusive selling price 15,323

 

Example B (Rs)
Basic purchase price 10,000
Add 12.5 per cent VAT 1,250
VAT inclusive purchase price 11,250
Less VAT input 1,250
VAT free purchase price 10,000
Add overheads 100
Total 10,100
Add 20 per cent profit margin 2,020
Total 12,120
Basic selling price 13,620
Add 12.5 per cent VAT 1,515
VAT inclusive selling price 13,635

The VAT of 12.5% is charged on the ‘Total’. Thus the VAT inclusive selling price will be ‘Total’ + ‘VAT.’

You will note that in Example A, the trader has overcharged his customer to the extent of Rs 1,688. Thus a trader is advised to adopt Example B as a guideline and nt overcharge the consumer. If he does, he will lose his customers before long.

VAT Account

You are required to maintain a VAT account as part of your records. This should have details of your Output Tax, Input Tax and under or over declaration in the previous VAT accounting period(s).

A specimen of such a VAT account is given below.

VAT Accounting for Filing VAT Return for April to June 2005
 

Purchases (in Rs )
Period Purchases Input VAT paid Total Total
April-June 100,000.00 12,500.00 112,500.00

 

Sales (in Rs )
Period Purchases Input VAT paid Total Total
April-June 120,000.00 15,000.00 135,000.00

Hence, VAT to be paid is Output VAT less Input VAT or Rs 15,000 – 12,5000 = 2,500.

VAT Accounting with Opening Stock for April to June 2005
(As per the guidelines of VAT White Paper of 17 January 2005.)

 

Opening Stock on 1 April 2005 Rs 500,000
Less Tax Free Stock Rs 300,000
Balance Rs 200,000
Sales Tax @ 10% paid before VAT Rs 20,000


This credit of Rs 20,000 has to be carried forward in VAT account shown below.
 

Purchases (in Rs )
Period Purchases ST paid Input VAT paid
Opening stock 500,000.00 20,000.00
April-June 100,000.00 12,500.00
Sales (in Rs )
Period Sales Input VAT paid Total
Opening stock 120,000.00 15,000.00 135,000.00

Hence, the credit of Sales Tax paid on opening stock (Rs 20,000) can be claimed in addition to Input Tax payable for VAT of 12,500.

This means the total tax paid (Sales Tax + VAT) will be Rs 20,000 + 12,500 = Rs 32,500.

In filing the VAT Return, the VAT payable is Rs 15,000 as per sales record.

This has to be deducted from the total tax paid of Rs 32,500, leaving a balance of Rs.17,500 to be claimed in the next VAT Return.

VAT Accounting For Inter-State Supplies and Taxes

Raw materials supplier in Mumbai sells to manufacturer in Delhi.
 

Delhi manufacturer Rs
Cost Price 10,000
Central Sales Tax @ 4% 400
Total Cost 10,400


Delhi manufacturer cannot claim central Sales Tax @4% of Rs 400 against Form C. hence his cost price will increase by Rs 400.

 

Rs
Manufacturer’s Cost Price 10,400
Value Added 2,000
Selling Price 12,400
VAT 1,550
Cost 13,950

Manufacturer pays VAT of Rs 1,550.00.

 

Rs
Wholesaler’s Cost Price 12,400
Value Added 2,000
Selling Price 14,400
VAT @ 12.5% 1,800

Wholesaler pays VAT of Rs 250. This is arrived at by deducting Rs 1,550 that he paid to manufacturer from Rs 1,800 that he collected brown i.e., 1,800.00 – 1,550.00 = 250.00.
 

Rs
Retailer’s Cost Price 14,400
Value Added 2,000
Selling Price 16,400
VAT @ 12.5% 2,050

Retailer pays VAT of Rs 250. This is arrived at by deducting Rs 1,800 that he paid to manufacturer from Rs 2,050.00 that he collected, i.e., Rs 2,050-1,800 = 250.

 

Rs
Customer Price 16,400
VAT @ 12.5% 2,050
Price with VAT 18,450

Cross Checking

Total VAT paid will be Rs 1,550 (Manufacturer) + 250 (Wholesaler) + 250 (Retailer) = Rs 2,050.

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Usage of debit note and credit note

Debit Note Vs Credit Note

Purchasing and Selling of goods are very common in day to day life, and in the same way, returns of goods are also a very usual thing nowadays. Debit Note and Credit Note are used while the return of goods is made between two businesses.

Debit Note is issued by the purchaser, at the time of returning the goods to the vendor, and the vendor issues a Credit Note to inform that the returned goods have been received by him. People are quite puzzled when they are asked to distinguish the two terms. So, here in this article we are going to explain you the differences between a Debit Note and Credit Note.

DebitCreditNote.png

Debit Note

It is a note issued by the vendor making the supply in the case where the consideration for the supply is increased after an invoice has already been issued. This can be the result of, amongst others; the reduced rate of VAT being used instead of a standard rate of tax (14%), a wrongly reduced quantity of goods is invoiced etc.

The debit note should contain the following information:

  • the words ‘debit note’ in a prominent place;
  • the commercial name, postal address, physical address, Taxpayer Identity Number of the vendor making the supply;
  • the commercial name, postal address, physical address, Taxpayer Identification Number of the vendor receiving the supply;
  • the date of issue of the debit note;
  • a brief explanation of the circumstances which gave rise to the issue of the debit note;
  • sufficient information to identify the taxable supply to which the debit note relates;
  • the taxable value of the supply shown on the VAT invoice, the correct taxable value, the difference between the two amounts and the VAT relating to the difference (that is, the VAT overcharged).

Credit Note

It is a note issued by the vendor making the supply in the case where the consideration for the supply is reduced after an invoice has already been issued. This can be the result of, amongst others, cancellation of the supply, a discount offer etc.

The credit note should contain the following information:

  • the words ‘credit note’ in a prominent place;
  • the commercial name, postal address, physical address, Taxpayer Identity Number of the vendor making the supply;
  • the commercial name, postal address, physical address, Taxpayer Identification Number of the vendor receiving the supply;
  • the date of issue of the credit note;
  • a brief explanation of the circumstances which gave rise to the issue of the credit note;
  • sufficient information to identify the taxable supply to which the credit note relates;
  • the taxable value of the supply shown on the VAT invoice, the correct taxable value, the difference between the two amounts and the VAT relating to the difference (that is, the VAT overcharged)

Gross Profit vs. Operating Profit vs. Net Profit

At the core, profit is earnings minus expenses. However, we want to bifurcate and come up with various variations of profit to understand the business better. Therefore, at the first level, we have gross profit.

Gross Profit is nothing but ‘Sales – COGS’

This shows how much profit are we earning without considering our expenses and only considering the cost of the product that we are selling.

Next comes the Net Profit.  Net Profit is ‘Gross Profit – Total Expenses’. The expenses include all the direct and indirect expenses incurred to achieve that sales.

However, some of these expenses might be operational related and some of the expenses may be stuff like taxes. Therefore, we sub-divide it again to understand it better. S, we first subtract all the operating expenses and call it as operating profit. Later, we subtract the rest of the expenses and call it as Net Profit or Bottom Line. This is what is going into the bank.

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Decoding or understanding your restaurant bill

Not everyone is aware about Service Tax and VAT taxation details. So let’s demystify these charges and understand the components that inflate your restaurant bills.

Service charge

Service charge is collected by the restaurant for rendering its service to you. It is not a tax and is not levied by the government but purely charged by the restaurants. They are free to charge any amount as there are no guidelines, but it usually varies from 4 to 10 percent. It is corresponding to the tip which you would typically give waiters for a good service, so there is no need to pay a separate tip. However, one has to pay this amount regardless of not being happy with the service if the menu card mentions the charges clearly. But you can always question the charges if the menu card doesn’t mention it.

Service Tax

Service tax is different from the service charges mentioned above – it is a tax levied by the government. This is 12.36 percent and payable on 40 percent of your total bill, which includes food, drinks, service charge and served in an air-conditioned restaurant only. In simple words, service tax would be 4.94 percent (i.e. 12.36 percent of 40 percent) of your total bill. Make sure that the restaurant does not charge you more than 4.96% (of the total bill) as service tax and that it is an AC restaurant.

VAT (Value Added Tax)

VAT is only applicable on food items that are prepared in the restaurant as they add value before serving it to you. So make sure that you are not charged VAT on packaged food items or water bottles. VAT rates are different for alcoholic beverages and other food items and is applicable only on your final bill. Also, rate of VAT tax differs from 5 percent to 20 percent depending upon the state you are dining in, because it is levied and controlled by each state separately.

Let’s understand this with an example of a restaurant bill for an amount of Rs 1000/-.

Items Amount

Your Total Food Bill 1000

Service charge (assuming 4 percent) 40

Sub Total 1040

Service Tax to be levied on (40% of subtotal i.e. 1040) 416

Service tax @ 12.36% on 416.00 51.41

VAT (assumed) @12.5 of subtotal i.e. 1040 130

Total amount to be paid (1000+40+51.41+130.00) 1221.41

So the next time you visit a restaurant, your bill will surely make more sense to you. Keep dining and bon appetit!

Calculating Distributor or Dealer ROI

This is a post that is written on gyaanokplease.blogspot.com and the link to the original article is here. I just cannot emphasize enough about how well this article has been written and hence I’ve included even some of the comments. Thanks to gyaanokplease for this post.

So probably the first thing that your distributor/dealer/stockist is going to tell you when you go to him for the first time is “Sirjee, ROI nahin baith raha hai”. What this simply means is that he is challenging you to calculate his return on investment.

This is sort of a monthly exercise – he knows that he is getting an ROI, else he would not be in the business. What he simply needs is some ego massage so that he gets an ILLUSION that he is in control of something when he is not – your rates are fixed, your schemes are fixed, and so are your claims. While ROI is something that they teach us in first day of B-School, calculating dealer ROI might be a different ball game altogether as he is a weasel who is going to try different permutations and combinations to get the better of you. Do this properly with him, and he (and you BDE/TSO who is twice your age but earns half as much) will respect you forever.

The equation is simple – Return/Investment, Return = (Earnings – Expenses).

The trick lies in realizing what earnings, expenses and investment involve & it is here where the dealer uses his tricks.

Let’s put down the formulae first:

  1. RoI or Return on Investment = Returns/ Net Investment
  1. Returns = Earnings – Expenses
  1. Earnings = Gross Margin that the dealer enjoys (Usually 6% – 8% in FMCG companies)
  1. Expenses = Direct Expenses + Indirect Expenses
  1. Here is where the first trick lies, Calculating Expenses:

This arises from the fact that the dealer in question is not dealing with just 1 company, he instead has 4-5 or even more number of companies that he is dealing with. Hence there are some resources that he is exclusively using for a particular company for eg. Sales Man and similarly many resources that he is sharing among the companies eg. His godown space, accountant, supply units etc.

Please note there is no thumb rule to it as there might be (and more often than not, will be) cases where even salesmen are being shared among 2 or more companies, and there will be one guy who would be the accountant-cum-manager-cum-supply wala etc. This is where the concept of direct and indirect expenses comes in.

Hence his expenses are split in to 2 parts i.e. Direct & Indirect Expenses

Direct Expenses are those that the dealer incurs exclusively for the company concerned.

And Indirect Expenses are those that the dealer incurs in totality for the companies for whom the resource/s is/are being shared.

The only rule in calculating expenses is that you need to take into account the part of expenses that he is incurring for your company alone. We will see how we do it below.

  1. Similarly the second trick lies in properly calculating the denominator, i.e Net Investment.

A dealer’s investment comprises of 3 parts : Average Stock that lies in his godown, Average Market Credit that he extends & Average Claims Outstanding,

Hence,

Investment = Avg Closing Stock + Avg Market Credit + Avg. Claims Outstanding

Here the usual suspect where one may go wrong in calculating Investment is the first variable i.e. Average Closing Stock of the dealer.

A layman would take the month-end closing stock as the average closing stock for the dealer, or worse if you do the mistake of asking the dealer what his closing stock is, the beast would tell you a figure which will be his all time high closing stock in a month.

The typical trend in FMCG is that majority of Pushing, also known colloquially as “thokna” (Primary) and Pulling (Secondary) happens in the last week and therefore the last week is not a true indicator of the entire month’s activity then why consider last week’s closing stock as his month’s closing stock. (To clarify, primary is what your company bills to the dealer and secondary is what your dealer bills to the retailer)

Confused?, we will deal with it with simplicity. Consider this as the trend of Primary & Secondary for a dealer in a 4-week cycle of a month

WEEK OPENING STOCK PRIMARY SECONDARY CLOSING STOCK
    1 5, 00,000 50,000 1,00,000 4,50,000
    2 4,50,000 1,00,000 2,00,000 3,50,000
    3 3,50,000 2,50,000 2,50,000 3,50,000
    4 3,50,000 5,50,000 4,00,000 5,00,000

The above table is how a dealer’s inventory in a typical FMCG set-up would behave like, i.e. majority of activity happening in the last week and hence one would be wrong in taking 5,00,000 (Week-4 Closing Stock) as the average closing stock for that dealer in that month.

The better way to do it is to take an average of all 4 weeks’ closing stocks. In this case it would come out to be as : ( 4,50,000 + 3,50,000 + 3,50,000 + 5,00,000) / 4 which equals to 4,12,500 which is lesser than the previous  result and hence his investment goes down and RoI goes up.

Enough of this gyaan now, let us get straight down to calculating a sample ROI

Premise:

Mr. Atul Mittal is the proud owner of his distribution firm M/S Bhagat Ram Jwala Prasad. His firm deals with distributing 4 companies in total of which ABC Pvt. Ltd. Is one for which we need to calculate the RoI. The firm has 1 dedicated (exclusive) salesmen working for ABC Pvt. LTd. with a monthly salary of INR 6,000/- per month per salesman. Apart from this, the firm also has an accountant-cum-manager with a monthly salary of INR 5,000/- per month, pays a monthly rent for the godown which comes to INR 5,000/- per month, incurs electricity & miscellaneous costs (supply units, chai-paani etc.) to the tune of INR 5,000/- per month. Other expenses such as his son’s education and his daughters marriage which your dealer would want to include are not to be included.

All figures are assumptions

Monthly Business (Turnover) inclusive of all 4 companies: 20,00,000/-;

Monthly Business (Turnover) of ABC Pvt. Ltd. : 8,00,000/-

ABC Pvt. Ltd.’s Company Margin: 8%

Average Market Credit for ABC Pvt Ltd. Is 10,000/- INR

Average Closing Stock for ABC Pvt. Ltd is worth 2,50,000/- INR

Average Claims Outstanding in ABC Pvt. Ltd. Is worth 10,000/- INR.

Hence going by the formula:

RoI or Return on Investment = Returns/ Net Investment

Returns = Earnings – Expenses

Earnings = Gross Margin that the dealer enjoys (Usually 6% – 8% in FMCG companies)

Expenses = Direct Expenses + Indirect Expenses

Let’s calculate each element one by one:

Earnings = Gross Margin = 8% of monthly turnover of ABC Pvt. Ltd. which is = 64,000/-

Expenses = Direct Expenses + Indirect Expenses

Direct Expenses = Salary of Exclusive Salesmen = 1*6000 = 6000 per month

Indirect Expenses  for ABC Pvt. Ltd.=( Contribution of ABC Pvt. Ltd’s Turnover to Total Turnover) * Total Indirect Expenses

Total Indirect Expenses = Godown Rent + Manager’s Salary + Miscellaneous Expenses = 5,000 + 5,000 + 5,000 = 15,000/-

Contribution of ABC Pvt. Ltd’s Turnover to Total Turnover = 8,00,000/20,00,000=40%

Hence, Indirect Expenses for ABC Pvt. Ltd. = 40% of 15,000/- = 6,000/-

Therefore Total Expenses = 6,000 + 6,000 = 12,000

Hence Returns = Earnings – Expenses = 64,000 – 12,000 = 52,000

Net Investment = Avg. Closing Stock + Avg. Market Credit + Avg. Claims Outstanding = 2,50,000 + 10,000 + 10,000 = 2,70,000

Therefore RoI = Returns/Net Investment = 52,000/2,70,000  = .1925 or 19.25%

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39 comments:

    1. AnupriyaJune 14, 2012 at 8:50 PMReply
    2. Just a point here….when you look at his investment in stock – one should always check whether he has taken bank loan. if he has then his actual capital investment is actually only to the extent of his own money. rest is interest which is part of expenses. a lot of dsitributors conveniently miss out this part of the equation. and for big distributors this makes a big difference in ROI.Similarly, if the distributor has a good overdraft facility then he actually pays for the stocks to the company from that and not his actual investment. here again interest should be added into his expenses and the investment reduced by the overdraft amount.

Replies

Reply

    1. KaushikJune 14, 2012 at 8:53 PMReply
    2. Thanks Anupriya! Duly noted 🙂
    3. KiranJune 14, 2012 at 11:19 PMReply
    4. Alternatively, if a distributor rotates his investment say, 10 times a year, multiply that by net profit percentage per rotation.
      For eg:The company gives a margin of 5% on its products to a distributor. After all his distribution expenses, the net profit % is 2.1, and his investment is 20L with an annual turnover of 200L, ROI is easily calculated as under.
      No:of rotations = annual turnover/investment = 200/20 = 10 rotations/year
      Investment = 20 Lakhs
      This means he rotates his investment of 20lakhs, 10 times a year, each time making say 2.1%. So his ROI is 10*2.1 = 21%
    5. KaushikJune 14, 2012 at 11:33 PMReply
    6. Thanks Kiran! Duly noted. Please feel free to contribute in the further posts also!
    7. Sambhav JainJune 14, 2012 at 11:48 PMReply
    8. Very Well Explained.!Thanks
    9. Ashish ShahJune 15, 2012 at 12:05 AMReply
    10. Very helpful. A much needed initiative. Thanks Kaushik! 🙂
    11. Tirthadeep DharJune 15, 2012 at 7:02 AMReply
    12. Brilliantly explained – Subbu and Nishit! I remember looking for somebody or something to teach me this, about a year back. That my dist. ridiculed me abt not knowing my ROI calculation was the ‘push comes to shove’ part.However, lets not forget a very important parameter of credit given by the company to the distributor which can range from 0 to anything.So if Credit = 7 days, 7 days of closing stock is deducted from the distributor’s investment. Also a distributor gives a cash discount to wholesale or even retail, so that too has to be accounted for. I would urge you to simplify this and put it up as ur article is crisp and clear and this could prove useful too.

      Recommendation:

      1) Teach them how to calculate a Super Stockist ROI as well. Far simpler than direct.

      2) Also, in your next article you could explain how to get back an uninterested distributor on track based on key parameters. (Kaushik you had aced that, Nishit you could share too… btw sup with you?)

      3)All distributors are swines with hair coming out of all their holes.. jusayin….they might not squeal but they do grunt a lot. Somebody has got to tell these kids that… Nishit you could elaborate I guess (this inference from ur fb statuses)

      And excellent explanation Kiran… was thinking abt that while reading the article.

      Cheers,
      TiTo

    13. Capt.KrunchJune 15, 2012 at 8:52 AMReply
    14. hey TiTo,hw u doing man….points noted dude….the upcoming posts will only highlight the point number 3 that u ve mentioned.

      may be we could come up with a post about how to tinker RoI to get back distributor’s interest provided he is sitting on a lesser RoI…

      would urge you also to contribute…and about explaining credit, wholesale discount, we intentionally didn’t go into the detail to avoid it from getting complicated…

      nevertheless thanks for the feedback.

      Cheers
      nishit

    15. Tirthadeep DharJune 15, 2012 at 10:47 AMReply
    16. Sure would love to contribute… but I would rather start by trying and provide some comic relief between intense FMCG sessions 😛
    17. Amber VermaSeptember 26, 2012 at 7:15 PMReply
    18. Thanks All of you.re,
      amber verma
    19. Kapil GuptaFebruary 8, 2013 at 4:26 AMReply
    20. Realy good explained ….Thanxxxx
    21. Robin Godara BishnoiFebruary 21, 2013 at 9:46 AMReply
    22. thanks dear
    23. vibhor srivastavMarch 4, 2013 at 12:06 AMReply
    24. very helpful…..thanks….for explanation of ROI insuch a way….
      thanks………….
    25. avik dasMarch 20, 2013 at 10:51 AMReply
    26. Can anybody exactly explain following-
      per month
      Sales: 10 Lac
      Margin: 3%
      Inventory: 2.5 lac
      Market credit: 2.5 lacCase 1: No credit from company to distributor
      Case 2: 7 days credit from company to distributor
      Case 3: 30 days credit from company to distributorPls explain the concept also

      Thnx

    27. Ankit DwivediApril 12, 2013 at 6:14 AMReply
    28. GOOD explanation……… but one doubt is there in example. ROI is 19.25%, as per calculation this is monthly ROI but monthly ROI would be 1.5-2.5%

Replies

Reply

    1. Ankit DwivediApril 12, 2013 at 6:27 AMReply
    2. avik das……
      if no expenses are there then
      case 1: roi is 6%
      case 2: roi is 7.2%
      case 3: roi can’t calculate……. because there are no investment.

Replies

Reply

    1. Davidraja J E SamJune 15, 2013 at 10:32 PMReply
    2. hi Ankit could you please explain the second case..David
    3. Rhishabh SuritJune 28, 2013 at 11:32 PMReply
    4. davidraja….if market credit is given for 7 days.. then average market credit would be 75% of inventory, thus total invenstment wud turn out to be 4.2lac.. hence ROI wud turn out to be 7.1% (guys plz correct if im wrong .. not from fmcg background)
    5. jjkljljJuly 23, 2013 at 1:45 PMReply
    6. This comment has been removed by the author.
    7. Munish KaulJuly 23, 2013 at 1:52 PMReply
    8. aa you are very close to being right if market credit = 2.5 lacfor 7 days market credit = 75% of inventory
      = 75/100*2,50000 = 1,87500total investment would be = 2,50000+1,87500 =4,37500

      margin is 3% of sale of 10,0000 = 30000

      so, Return on investment is = returns/total investment

      ie : 30000/437500 which comes out to be 6.8 % or you can say 7%

      but how come you came to conclusion that average market credit for 7 days = 75% of inventory cost ???

Replies

  • MadhavAugust 11, 2013 at 2:46 PM
  • I believe, he has not taken it as 75%..but..for 30 days..stock is 2.5 lacks..so for 7 days it’s 2.5 lacs* 7/30~=58300….So net investment in inventory=2,50000-58300=191700…..So,
    roi comes to be 6.7%..I think so…
  • chandan kumar balSeptember 10, 2013 at 1:24 AM
  • Hi what is the healthy ROI for FMCG Distributors(as u told margin is between 6%-8%)? Is it between 14%-24%?
  • AyushNovember 19, 2013 at 8:08 AM
  • 30 days inventory is 2.5 Lakhs
    so we can calculate inventory for 23 days which comes out to be (250,000/30)*23=191,667
    then final investment= 191,667+250,000= 441,667
    ROI= Earning/Net Investment
    =(30000/441,667)*100
    =6.7%

Reply

  1. vickyNovember 13, 2013 at 2:39 AMReply
  2. HI can any one confirm the standard norms for the ROI & Investment.If some one having please share @ vikasmendi@gmail.com
  3. Bipin BhanushaliFebruary 7, 2014 at 9:14 AMReply
  4. can anyone clear my following doubt
    Investment include Avg Closing Stock + Avg Market Credit + Avg. Claims Outstanding OK…. but what about deposit given for taking godown on rent and down payment done for purchasing vehicle do these investments are consider for calculation of net investment and if not then what would be consideration for them
  5. pranoy paulApril 10, 2014 at 12:05 AMReply
  6. thanks dear
  7. KapsMay 11, 2014 at 2:51 AMReply
  8. This comment has been removed by the author.
  9. KapsMay 18, 2014 at 11:42 PMReply
  10. Hi..Can someone help me crack this..
    Distributor does a 20Lac business per month. Earns Gross Margin of 10%, Exp per months comes to around 2%. Avg Inventory: One month, Avg Market Outstanding of 45 days. No claims outstanding. No company outstanding. Funding purely from internal resources. Doesn’t have any other co’s distributorship.
    I get two different ROIs with different approaches. Turnover/Inv method and Standard Method of Net Earnings/Investment.
  11. himanshuOctober 14, 2014 at 1:24 AMReply
  12. In both case it will be 38.4 % annual Roi1st method 160000 *100/ 500000 = 3.2 monthly Roi or 38.4 annual Roi2nd method 2400000/5000000 = 4.8 rotations , Earning per rotation 8 % hence annual Roi will be (8*4.8) = 38.4% only
  13. himanshuOctober 14, 2014 at 1:25 AMReply
  14. in first case read denominator as 50 lac and not 5 lac
  15. Ramaswamy VenkataramanApril 18, 2015 at 1:20 AMReply
  16. in the second case shouldn’t the numerator be the annual turnover ?
  17. qamar khanJune 7, 2015 at 1:36 PMReply
  18. thanks
  19. AdarshSeptember 12, 2015 at 12:40 AMReply
  20. Was going through the comment section and found someone mentioning interest charges on CC or OD being part of the expenses. This is a valid point of discussion and I have personally faced such scenarios.
    Humbly request the author to give a verdict on this. My understanding and opinion from many with whom I have shared is…Is a dealer who continuously needs CC or OD to fulfill his billing commitment, a sound dealer/distributor?
  21. UnknownMarch 14, 2016 at 9:43 AMReply
  22. Can anybody explain the followingAbc is a fmcg companyxxx is the product name

    Margin of the product for stockist is 10%
    Margin of the product for retailer is 20%

    Mrp of the product is 25000

    cost of stockist is 19120
    Retail cost is 20830

    What is the method of calculating the margin

  23. biswa nayakApril 12, 2016 at 10:24 AMReply
  24. ANYONE KNOW THE Healthy ROI for the FMCG channel partner??

– See more at: http://gyaanokplease.blogspot.in/2012/06/calculating-dealer-roi.html#sthash.8n84hH77.dpuf

Working Capital Management and Profitability

Working Capital is the total of the amounts invested in current assets of the company. Net working capital results from the deduction of current liabilities from current assets; Working Capital Management consists of determining the volume and composition of sources and uses of working capital in such a way that would increase the wealth of stockholders. Working capital management is the management of current assets and current liabilities such that would result in the most desirable level of working capital and maximum company profitability. Inadequate working capital leads the company to bankruptcy. On the other hand, too much working capital results in wasting cash and ultimately the decrease in profitability.

Conventionally, it has been seen that if a company desires to take a greater risk for bigger profits and losses, it reduces the size of its working capital in relation to its sales. If it is interested in improving its liquidity, it increases the level of its working capital. However, this policy is likely to result in a reduction of the sales volume, therefore of profitability. Hence, a company should strike a balance between liquidity and profitability.

Refer to the ppt working-capital mgmt on Working Capital Management and how it affects Profitability.

Strategic Channel Management

A sales channel is about where you’re going to sell and how you’re going to sell. In fact, it is about where you’re consumer is willing to purchase your product, where the consumer expects the product to be available, what is the consumer decision making process regarding your category and product, and what is your positioning in the market. All the channel decisions should go hand in hand with Segmentation, Positioning, Pricing and other elements of the Mix.

For example, let us consider the purchase process of Toothbrush. Most consumers even today don’t know exactly which variant of the toothbrush they use, and many of them don’t really bother about the product much. The consumer may know that he uses an Oral-B (mother brand), but may not recollect the brand of the toothbrush.  A consumer generally doesn’t remember a brand and ask for that particular brand at the retail store. Mostly the retailer displays or the consumer browses through the toothbrushes available and the consumer may recollect the brand, or the advertisement, or like the in-store promotions and product design for those toothbrushes and one of these elements of advertisement recall, product design, etc. may make the consumer consider and choose a particular toothbrush. So, in such categories, there is a lot of dependence on you’re presence in the store as the consumer remembers you only when you’re present in the store.  There are lot of categories ranging from deodorants and refrigerators to laptops and anti-viruses. It depends a lot on your availability in the stores and consumers choose among what is available. So, channel becomes a crucial part of marketing strategy which is where to sell and how to sell. The channel and distribution management comprise the Place element in the Marketing Mix.

Under channel management, the company deals with external organizations(channel members or partners) to achieve its desired marketing goals and profitability. There are different types of channel partners like C&F Agents, Distributors, Retailers, OEMs, Value-Added Re-sellers (VARs), Brokers, etc. Each of the channel members business goals will differ in their expectations of profitability, sales, ROI, long-term prospects,etc. The right channel strategy will help bring coherence and build value to the customer, channel members and the company. So, a strong channel network has become a key component in corporate strategy.

As discussed, there are many factors that influence channel management, but following are the broad factors that influence a channel design or strategy:

1. Understanding of the Target Group, Target Segments, the consumer needs and the consumer behaviour

2. Understanding of the Marketing Mix and the product features, brand persona, positioning, pricing, etc.

3. Understanding of the retailers needs and behaviour

4. Channel goals and the functions to be performed by the channel

5. Legal Issues

6. Reach required

Refer IBM Route to Market Strategy for an understanding of how effective channel management helped IBM.