If one walks through the older industrial estates either in Goa or elsewhere one will see many
closed units. A newer estate like Verna has less of such closed units. What is
the reason.? Usually if one looks at the history of the closed unit you will
notice a majority of them were born during the subsidy era. An era when subsidy
was paid almost as you started. Subsequently as the Governments became cash
strapped they paid subsidy after many years. We got our subsidy after 10 years
.
Is there a contradiction here, was subsidy not an
incentive to help entrepreneurs. If yes then how come it is responsible for
atleast some of the failures? The answer lies in an innocuous element,
OVERINVOICING. Simply put it means that a supplier will be asked to invoice a
machine for say 150 when the actual cost is 75. Why should this be a reason for
the downfall of a company? The advantage of over invoicing is very
apparent. The difference between the 150 charged and the actual cost of 75 will
be returned to the entrepreneur in cash and he can claim a little more by way
of subsidy
Anyone who is not commercially sound will believe that
there is nothing wrong or problematic in the transaction. Nothing can be further from the truth. Over
invoicing is like the proverbial iceberg, one sees only the tip and major
danger lurks below. And like the proverbial iceberg it has the potential to
sink your titanic.
Let us examine the pitfalls. First, the perceived
benefit. One actually never gets the full amount over invoiced back. The
supplier will state that since he has to pay income tax on the additional amount
he will try and keep atleast 30% back. Never mind the fact that to pay you cash
he makes fake expense vouchers and thus reduces his tax liability. Despite you
negotiation skills you will lose a minimum of 15%. The subsidy comes at a price
as the officials claim their pound of flesh.
Then this money is refunded in cash and faster than you can say “Jack Robinson”
the money will disappear into non asset expenses and be lost forever.
Having paid the supplier, the total appears on your
balance sheet as an asset. The bank would have funded this amount to the tune
of approx 75%. So the instalments and interest will be higher than if one had
not over invoiced. So there is a financial burden.
When you begin costing for your product, the extra depreciation,
the extra interest has to be loaded. This makes the cost that much more
expensive and therefore that mush more uncompetitive. In case you believe you
can cost the product or for that matter sell the product at the market
determined price and thus these simple aspects can be ignored. Think again.
When you sell at a lower price which has not factored the
extra interest or depreciation you will show a loss in your balance sheet. So
you are dammed if you factor in the
extra costs ie no one will buy your product and you are dammed if you do not
factor in the extra costs, you will be selling at a loss.
In a short while the Company will begin to go under. The
weight of over invoicing will begin to have its effect. Once under, the
financial institution will try and sell the asset to recover the original loan.
They will find that there are no takers as a new machine will cost less than your
depreciated asset. The asset will lie idle, double whammy, it lost money now it
cannot sell.
The simple act of
over invoicing has led to the sinking of the Company. So every over invoice
situation is actually making a hole in your boat. With such a boat you will not
get across a pond, leave alone an ocean called the “marketplace”.
Suggested reading: Financial basics.
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