Knowhow Academy

BPI Cycle:
1. Define the problem
2. Map the current process
3. Identify opportunities for improvement
4. Implement changes
5. Monitor and evaluate

I hope this helps. 😀

Summarized Historical Trail of Business Process Improvement

Business process improvement (BPI) has a long and evolving history, and its future is promising as organizations continue to seek ways to optimize their operations and deliver value to their customers.
Historically, BPI began as a management practice focused on improving productivity and efficiency in the manufacturing industry. It gained prominence in the 1980s with the introduction of Total Quality Management (TQM), which emphasized continuous improvement and customer satisfaction.
In the 1990s, BPI continued to evolve with the introduction of Six Sigma, which focused on reducing defects and improving quality. Around the same time, business process reengineering (BPR) emerged as a popular approach to BPI, which aimed to redesign business processes from scratch to achieve significant improvements.
In the early 2000s, lean manufacturing principles, which originated in Japan in the 1950s, were adopted by many organizations as a BPI approach. Lean manufacturing emphasizes the elimination of waste and the continuous improvement of processes.
Today, BPI continues to evolve with the rise of digital transformation and automation technologies. Organizations are using digital tools such as robotic process automation (RPA) and artificial intelligence (AI) to streamline processes and enhance efficiency.
The future of BPI is likely to involve even greater integration of digital technologies and data analytics. As organizations seek to optimize their operations, they will need to leverage data to identify opportunities for improvement and measure the impact of their efforts.
Another trend that is likely to shape the future of BPI is the growing focus on customer experience. Organizations are increasingly recognizing the importance of delivering a seamless and satisfying experience to their customers, and BPI will play a critical role in achieving this goal.
In conclusion, BPI has a long and evolving history, and its future is promising as organizations continue to seek ways to optimize their operations and deliver value to their customers. The integration of digital technologies and data analytics, as well as the growing focus on customer experience, are likely to shape the future of BPI in the years to come.

Bank reconciliation statement
Definition and explanation
• Reasons of difference
• Steps in preparing a bank reconciliation statement
• Example
Definition and explanation:
Bank reconciliation statement is a statement that depositors prepare to find, explain and understand any differences between the balance in bank statement and the balance in their accounting records.
All transactions between depositor and bank are entered by both the parties in their records. These records may disagree due to various reasons and show different balances. The purpose of preparing a bank reconciliation statement is to find and understand the reasons of this difference in account balance.
Reasons of difference between bank records (bank statement) and depositor’s accounting record:
Usually, the balance on the monthly bank statement does not agree with the depositor’s accounting record. The usual reasons of this disagreement are listed and briefly explained below:
1. Outstanding/unpresented checks:
Outstanding checks (also known as unpresented checks or uncleared checks) are the checks that have been issued by the depositor in favor of a creditor but have not yet been presented for payment by him. The amount of these checks are recorded by the depositor when they are issued but no entry is made by the bank in his account until the checks are actually presented and payment received by the creditor. Unpresented checks, therefore, cause a difference between the balance in company’s accounting record and the balance as per bank statement for the period concerned.
Example:
You issued a check to Mr. X (one of your creditors) for $500 on January 31, 2021 and entered it immediately in your accounting records. Mr. X did not present or deposit that check in his account before the end of January. Your bank statement for the month of January would not show the entry for that $500 because Mr. X did not present this check before the end of January. It would essentially create a difference of $500 between the balance in your accounting records and the balance in the bank statement.
2. Deposit in transit:
Deposit in transit means the cash received from a party has been recorded by the depositor but has not been entered by the bank in the bank statement. It usually occurs on the last day of the month.
Example:
You received $800 from Mr. Y (one of your debtors) on January 31, 2021 and recorded it immediately in your accounting records. You then sent this cash to your bank to be deposited into your account but it reached too late to be entered in your bank statement for the month of January. The balance in your accounting record would be different from your bank statement.
3. Credit entries for interest earned:
Banks pay interest on some accounts. If this interest is credited in the depositor’s account without intimating to depositor, the bank statement and the depositor’s record would not agree.
4. Service charges deducted by bank:
Banks provide various services to its customers and deduct service charges from their accounts. The depositors usually are not aware of such deductions. These charges create a difference of balance between bank statement and the balance as per depositor’s record.
5. NSF Check:
NSF stands for Not Sufficient Funds. When a customer deposits a check in his account, the bank immediately credits his account with the amount of the check. Sometime such checks are not honored because the person issuing the check does not have sufficient funds in his account. In such situation, bank reverses the entry and reduces the balance of depositor’s account to previous amount. The dishonored check is then returned to the depositor as NSF check.
Example:
You received a check from Mr. A for $1,000. You entered it immediately in your accounting records and deposited the the check into your account. After depositing the check, your bank immediately credited your account by $1000. Afterward your bank told you that Mr. X’s bank did not honor the check because there were not sufficient funds in his account. Your bank reduced your account by $1,000 and returned the dishonored check of $1,000 to you as NSF check. The balance shown by your accounting record will differ from your bank statement by $1,000.
Steps in preparing a bank reconciliation statement:
Step 1 – Find the deposits in transit:
The first step is to see if one or more deposits are in transit. You can do so by comparing the deposits in your accounting record with the deposits shown by your bank statement. If you find a deposit in your accounting record that does not appear in bank statement, it means that particular deposit is still in transit and has not been credited to you account by the bank.
Treatment:
Add to the bank statement balance all deposits that are shown by your accounting record but have not been entered in the bank statement.
Step 2 – Find outstanding/unpresented checks and deduct from bank statement balance:
Find all checks that you have issued but have not been presented for payment. You can do so by comparing the checks issued in your accounting record with the checks honored as per your bank statement. If your accounting record shows that a check has been issued and your bank statement does not show a corresponding entry for that check, it means that it is an outstanding or unpresented check.
Treatment:
Deduct from the bank statement balance the proceeds of any check that you have issued and entered in your accounting record but have not been presented to paid by the bank.
Step 3 – Find and add credit memorandum to your accounting record:
Bank issues a credit memorandum when it collects a note receivable on behalf of the depositor. Find if there exists any credit memorandum issued by the bank that you have not entered in your accounting record.
Treatment:
Add to your accounting record any credit memorandum, that you have not already entered.
Step 4 – Find and deduct debit memorandum from your accounting record:
Bank provides various services to its depositors such as printing checks, processing NSF checks and collecting notes receivables etc. Bank usually deducts charges from depositor’s account for such services and intimates him or her about these deductions by issuing a debit memorandum. Find if there exists any debit memorandum that have not been recorded in your accounting record.
Treatment:
Deduct from your accounting record any debit memorandum issued by the bank but not entered in your accounting record.
Step 5 – Are the adjusted balances equal?
See whether adjusted balance of your accounting record is equal to the adjusted balance in your bank statement.
Step 6 – Make appropriate journal entries:
The final step of a bank reconciliation process is to prepare appropriate journal entries for the items that are causing the difference because you have not yet recorded them in your accounting record.
For better a explanation and understanding of how a bank reconciliation statement is prepared, consider the following example:
Example
The bank statement of the Fast Company shows a balance of $10,000 on January 31, 2021 whereas the company’s ledger shows a balance of $8,525. The following reasons have been identified for this discrepancy.
1. An amount of $822 sent to the bank for deposit on January 31, 2021 does not appear in the bank statement.
2. The following checks issued during the month of January have not yet been cleared by the bank.
Check No: 201, Issue date: 15 January 2021, Amount; $200;
Check No: 212, Issue date: 19 January 2021, Amount; $20;
Check No: 216, Issue date: 25 January 2021, Amount; $610;
3. A note receivable amounting to $1,588 has been collected by bank for the company.
4. The bank statement shows that interest amounting to $50 has been earned on average account balance during January.
5. The bank has charged $10 for the collection of a note.
6. A check of $100 deposited by the company has been charged back as NSF.
7. An amount of $25 has been deducted by bank as service charges for the month of January.
8. The check no. 220 is issued to electricity company. The check is in the amount of $95 but is erroneously recorded in the cash payments journal as $59. The credit entry in the journal is, therefore, understated by $36 (= $95 – $59)
Required: Prepare a bank reconciliation statement for the Fast Company using above information. Also make journal entries to update the accounting records of the company.
Solution
(a). Bank reconciliation statement

(b). Journal entries to update company’s accounting record
To record cash receipts:

To record cash payments:


Note: We have made two journal entries to update the accounting records of Fast company – one for cash receipts and one for cash payments. Alternatively, separate journal entries for each item or only one compound entry can be made to update the accounting record of the depositor.

Impact of income tax on financial leverage:
Debt is considered a more effective source of positive financial leverage than preferred stock because the interest on debt is tax deductible but dividend on preferred stock is not. For explanation of this point, consider the following example.
Example:
Suppose a company is considering to expand its production plants. The expansion can increase the net income before interest and tax by $30 million and requires a financing of $200 million. The three proposed ways of financing are as follows:
1. By issuing common stock.
2. By issuing common stock and 8% preferred stock in the ratio of 1 : 1.
3. By issuing common stock and 8% bonds in the ratio of 1 : 1.
The following computations show how obtaining debt can be a more efficient way of generating positive financial leverage than issuing preferred stock.
The alternatives in above example generate different return on common stockholders’ equity. The reason of the difference is explained below:
Alternative-1 generates 10.5% return on common stockholders’ equity, there is no debt or preferred stock involved, the leverage is therefore zero.
Alternative-2 generates 13% return on common stockholders’ equity, the preferred stock is present but there is no debt.
Alternative-3 generates 15.4% return on common stockholders’ equity which is the highest of three alternatives. The reason is that the preferred stock is replaced with the debt. The interest on debt is tax deductible while the dividend on preferred stock is not.

Financial leverage

Financial leverage (or only leverage) means acquiring assets with the funds provided by creditors and preferred stockholders for the benefit of common stockholders. Financial leverage is a two-edged sword. It may be positive or negative. The following paragraphs explain what is positive and what is negative financial leverage.
Positive financial leverage:
A positive financial leverage means that the assets acquired with the funds provided by creditors and preferred stockholders generate a rate of return that is higher than the rate of interest or dividend payable to the providers of funds. Positive financial leverage is beneficial for common stockholders. For example, XYZ company obtains a long term debt at a rate of 12%. The company can use the funds to earn an after-tax rate of 14%. The interest on debt is tax deductible. If the tax rate is 40%, the after-tax interest rate would be 7.2% [12% × (1 – 0.4)]. The difference of 6.8% (14% – 7.2%) is, therefore, the benefit of common stockholders.
In this situation, the financial leverage is positive because the after-tax rate of return is higher than the after-tax rate of interest on long-term debts.
Negative financial leverage:
A negative financial leverage occurs when the assets acquired with the debts and preferred stock generate a rate of return that is less than the rate of interest or dividend payable to the providers of debts or preferred stock. Negative financial leverage is a loss for common stockholders.

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What is a financial model?

A financial model is a tool that’s built in Excel to forecast a business’
financial performance into the future. The forecast is typically based on
the company’s historical performance and requires preparing the
income statement, balance sheet, cash flow statement and supporting
schedules.

What is a financial model used for?

The output of a financial model is used for decision-making and
performing financial analysis, whether inside or outside of the company.
Inside a company, executives will use financial models to make decisions
about:
• Raising capital (debt and/or equity)
• Making acquisitions (businesses and/or assets)
• Growing the business (i.e. opening new stores, entering new
markets, etc.)
• Selling or divesting assets and business units
• Budgeting and forecasting (planning for the years ahead)
• Capital allocation (priority of which projects to invest in)
• Valuing a business

DATA, INFORMATION, AND KNOWLEDGE

In this article, we distinguish between the three concepts: data, information, and knowledge. This chapter in particular emphasizes this distinction, which is why we’ll go through the terms briefly.
Data is defined as the carrier of information. Data, as such, seldom delivers, line by line, fact by fact, or category by category, any value to the user. An example of a piece of data could be “bread” or “10.95.” Data is often too specific to be useful to us as decision support. It is a bit like reading through a data warehouse from A to Z, and then expecting to be able to answer every question. We are deep down at a detailed level, where we simply can’t see the forest for the trees. Besides, data in a data warehouse is not structured in any single way that makes sense; rather, it could potentially make sense in many contexts. Information is data that is aggregated to a level where it makes sense for decision support in the shape of, for instance, reports, tables, or lists. An example of information could be that the sales of bread in the last three months have been respectively N18,000, N23,000, and N19,000. We can generate this information in a department and then deliver it to the person who is responsible for bread sales, and this person could then analyze this information, draw conclusions, and initiate the actions that are deemed relevant. When our deliveries consist of information, we are able to automate the process. This requires initial resources, but it requires those resources only once. It doesn’t take a lot of analyst resources thereafter. When we say that a department generates knowledge, this doesn’t mean that it generates just information to the user, but that this information has been analyzed and interpreted. This means that the department, as an example, offers some suggestions regarding why bread sales have fluctuated in the last three months. Reasons could be seasonal fluctuations, campaigns, new distribution conditions, or competitors’ initiatives. It is therefore not a question of handing the user a table, but instead of supplementing this table with a report or a presentation. This means, of course, that when the department delivers knowledge, it is not a result of an automated process, as in connection with report generation, but rather a process that requires analysts with quantitative methods and business insight.

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Prepares your debtors or Receivables report and tells you how old each customer's debt is

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Inventory Analysis: Tips, Methods and KPIs

Inventory analysis helps a company understand how to fill customer orders while keeping inventory costs low. We provide tips and the formulas and key metrics you need to analyze your company’s inventory.
What Is Inventory Analysis?
Inventory analysis helps you determine the right amount of stock to keep on-hand to fill demand while avoiding spending too much on inventory storage.
Inventory is an asset on a balance sheet and represents the product a company plans to sell to its customers eventually. In addition to finished goods, inventory includes the raw materials needed to produce those goods and work-in-progress goods (a washing machine that workers are assembling, for example).
Goals of Inventory Analysis
The goals of inventory analysis include lowering the types of inventory.costs, reducing theft, managing cash flow and ensuring you always have the goods available that customers want to buy.
Here are more details on some primary goals of inventory analysis:
 Increase Profits:
Keeping the right amount of inventory on hand to grow sales while reducing expenses will increase profits.
 Decrease Storage and Related Expenses:
Avoid keeping more inventory on hand than you need, which will lower storage and related costs. (To learn more about inventory control, read the Essential Guide to Inventory Control.)
 Reduce Capital Costs:
When you avoid buying too much inventory, you retain more cash and capital for other investments.
 Improve Cashflow:
Having the goods customers want to purchase increases cash flow.
 Find Areas to Improve:
Closely watching inventory helps you identify products that are selling exceptionally well or poorly. Understanding this dynamic can free up shelf space and improve supplier relationships.
 Minimize Stockouts and Backorders:
When you don’t have a product to deliver to a customer who wants to buy it, that creates an unhappy customer who may have to wait for it on backorder—or even buy it from a competitor.
 Stop Project Delays:
When using inventory to build products for a special project, an inventory analysis tracks the stock needed. Use this information to make sure there’s enough lead time to reorder that inventory, so you don’t run out of materials and delay a project.
 Diminish Wasted Inventory:
If you buy and store too much product, it can turn into a loss when it becomes obsolete, degraded or otherwise loses its value. Perform an inventory analysis to prevent that from happening.
Types of Inventory
The four primary types of inventory are raw materials, work-in-progress goods, finished goods and maintenance, repair and operating supplies (MRO). To go more in-depth, read about the 12 types of inventory for business.
How Do You Analyze Inventory?
Companies use stock and sales numbers to analyze inventory. Experts also use ratios and metrics—sometimes known as key performance indicators (KPIs)—to see how well an organization manages its stock.
Inventory Analysis Techniques
There are several methods you can use to perform your inventory analysis. The best way to do it depends on your industry and your inventory type. Here are the most common techniques or methods and the industries that use them:
 ABC Analysis:
ABC Analysis is the most popular inventory analysis method (especially for retail) ranks inventory from the highest revenue and profit margins to the lowest using three buckets: A, B and C.
 VED Analysis:
This method is based on how vital it is to have an inventory item in stock. Manufacturing companies use this technique to assess the components and parts they must have on hand. With this analysis, they measure inventory based on:
o Vital: Inventory that must always be in stock at sufficient levels
o Essential: Have at least a small number of these items in inventory
o Desirable: It’s not critical to always have these items on hand
 HML Analysis:
Often used in manufacturing, this analysis measures the inventory based on high, medium and low cost.
The accounting cost of inventory also depends on whether a company uses Last in, First Out (LIFO) or First in First Out (FIFO) accounting. LIFO companies sell the inventory first that they bought last. FIFO companies sell the inventory first that they bought first. In First Expire, First Out (FEFO), expiration dates drive the sales, with companies exhausting the stock with the earliest expiration date first. To learn more about LIFO, FIFO and other cost accounting methods, read The Key to Using Inventory Cost Accounting Methods in Your Business.
 SDE Analysis:
This inventory analysis method considers how scarce an item is and how easily you can acquire it. This technique often involves components that make up a manufactured good. With this analysis, a company measures inventory based on:
o Scarce: A component that is scarce and takes a while to get
o Difficult: A part that is less scarce but still may take several weeks to arrive
o Easily Available: Components that are easy to acquire
For example, a furniture manufacturer might make a dining room table using marble inlays available from only one supplier. The manufacturer would track that inventory (scarce) differently than the unique wood components for the top of the table (difficult) or the screws that hold the table together (easily available).
 Material Requirements Planning (MRP):
In this method, manufacturers order inventory based on sales forecasts and stock data from various areas of the company. So, a company that manufactures swimwear will order more inventory in the months before demand increases.
 Economic Order Quantity (EOQ):
This method assesses the sales rate for an item, along with its ordering costs and storage costs. Using these three variables, EOQ determines how often and how much the company should order. The goal is to keep the ordering and storage costs as low as possible while still meeting all customer orders. Learn more about EOQ in our inventory forecasting guide.
 Fast, Slow and Non-moving (FSN):
In this approach, the company categorizes inventory into three buckets: fast-moving, slow-moving and non-moving inventory. Managers assess the inventory and make new stock purchases based on the category. Companies using FSN re-order fast-moving inventory most often.
 Custom Par Levels:
This analysis sets an inventory amount at which the company must re-order each item. This technique requires extra work at the beginning of the process but can ensure an organization rarely runs out of stock.
How Do You Choose Which Inventory Analysis Technique to Use?
The inventory analysis technique that works best for your company depends on your industry and type of work. Some methods are ideal for retail sales, for example. Others are better for manufacturing.
Check the effectiveness of a technique after using it for a while. Is your company experiencing fewer stock outs? Are you lowering storage costs for unsold inventory because of how you’re analyzing and managing inventory?
Key Inventory Analysis Metrics
Sometimes called KPIs, use these metrics to analyze how your company handles inventory. Popular metrics include turnover rate, available to promise, stockout rate and sell-through rate.
Gross Margin Return on Invested Inventory (GMROI)
Retail businesses use this formula to see how well they are turning inventory into profits.
The formula is:
GMROI = Gross profit margin / average cost of inventory on hand
Your final result should be above 1.0.
Available to Promise (ATP)
This formula provides insights into the product a company has or will have to fulfill customer orders. A company uses the result to quote a delivery date to a customer.
The formula is:
ATP = Quantity of product on hand + supply (or planned orders) – demand (or sales orders)
Inventory Turnover Rate
The inventory turnover rate measures how many times a company has sold its average stock in a specific period. An indicator of how well you’re managing inventory, the formula also reveals how your products are selling.
The formula is:
ITR = Cost of goods sold (COGS) during specified period / Average inventory during the period
Stockout Rate
This KPI measures how often an item a customer orders is not available. You want this number, expressed as a percentage, to be below 10% and as close to zero as possible. That’s especially true for a company’s most popular items.
The formula is:
SR = (Stockout order / total customer orders) x 100
Customer Service Level (CSL)
Use the CSL to measure the probability of not having a stockout, and thus a lost sale, during a specified period. The calculation is expressed as a percentage.
The formula is:
CSL = (Products delivered on time / total products sold) x 100.
Average Days to Sell Inventory, Days Sale of Inventory (DSI) or Days on Hand
This KPI measures how many days on average it takes a company to sell an item. Use the formula to see how quickly a company turns inventory into sales revenue. A lower number shows a more efficient operation.
There are two possible formulas for this:
ADS or DSI = (Average inventory value in a year / cost of goods sold in the year) x 365
ADS or DSI = 365 x Inventory turnover ratio
Sell-Through Rate
This calculation measures how much of an item you’ve sold during a period compared to how many items you received in inventory. This KPI is critical in the retail industry and expressed as a percentage.
The formula is:
STR = (Total sales during period / inventory received during the period) x 100
Back Order Rate
This KPI measures what portion of your customers’ total orders are for items that are back ordered, which means a delay in delivery. Express a back order as a percentage.
The formula is:
Back order rate = (Total back orders / total orders) x 100
Qualitative Analysis of Inventory
Companies will want to analyze their inventory beyond set KPIs and consider other practices that are crucial to managing inventory effectively. These include:
Just-in-Time (JIT) Ordering
In JIT ordering, a company keeps just enough inventory to fulfill all customer orders. While the company saves significantly on storage and related costs, it requires careful planning to receive materials and products on time.
Order Fulfillment Philosophy
To have a consistently quick turnaround for orders of popular products, a company will keep a large amount of those goods in inventory.
Inventory Obsolescence
In some industries, like beauty and fashion, goods hold value for a limited time. These companies need to limit their inventory for products that become obsolete and unsellable (aka inventory obsolescence).
Cash Availability
Some companies have limited cash and can’t get financing for more, which may limit how much they spend on inventory.