It is bit surprise listening finance as profit centre for industry like manufacturing etc. But I think, this idea can transform the business in toto.
Core Idea -
Account & finance department deal with following activities
`11. maintaining books of account
2. liasioning with auditors
3. Liasioning with all stakeolders
4. providing inputs for business strategy and periodical performance through MIS
5. Compliance for taxes etc
I think one can value above activities at arms length price. once that value is defined and agreed upon, this would be top line of finance department. and bottom line can be arrived at
Value of above services *****
Treasury Income *****
Total Income *****
Personnel exp *****
Other Expenses *****
Net Income ****
Treasure income - It should be taken over and above risk free return. Other expenses will include apportionment of indirect expenses like electricity, depreciation, rent etc on suitable basis. once net income is identified, ROCE may also be derived. Total assets should be present value of all future pay off for personnel expenses with suitable growth rate at an appropriate discount rate.
Human Resources (Assets) = PV ( future employee payoff)
Other Assets = Direct Assets allocated to finance and account department other than employees.
Total Assets = Human Resources + Other Assets
ROCE = Net Income / Total Assets
EVA = Total Assets * (ROCE - WACC)
where WACC = weighted Average cost of capital.
I do realise that it is bit challenging and complex to arrive at fair valuation of above activities. But it is not impossible. Never the less, this can guide the owner of the company to identify departments with + ve EVA and -ve EVA. This can even guide whether to outsource the department or keep it.
Above extract is just a fraction of benefits that may be derived from this concept..
Thanks for you time....tc..catch me at prabhashj@gmail.com
by...tc
