Accounting Practices in SIX12 Investments Nigeria Limited

Author: Iloka Benneth Chiemelie
Published: 15th May 2015

Company's Contacts:
Customer care line: 08140766160 (Call, SMS, Whatzapp, Viber etc.)
Website www.mysix12.com
Facebook: www.facebook.com/six12ltd
Twitter: www.twitter.com/mysix12

1.      Brief description of company

Founded in 2014, SIX12™ Investments Nigeria Limited prides itself in the area of “offering quality and innovative beverage products” to its customers. This can be visualized from its first product, the SIX12 APPLE CIDER, which is Nigeria’s first natural apple alcoholic wine. Although there are other brands within the same category, SIX12 is the first brand to offer pure and natural alcoholic wine to the general public.

Since its inception, the brand has enjoyed huge sales in the Nigeria market but it is currently being sold as a regional product within the eastern states of Nigeria (such as Enugu, Ebonyi, Anambra, Imo, Cross River, and Port Harcourt). It operates a centralized management system where final decisions come from the CEO.

2.      Budgeting process in SIX12™

As Elizabeth (2010) noted, budgeting process is the way corporations go about building their budgets. Thus, a good budget process is one that is capable of engaging those who are responsible for accounting to such budget and implementing the organizational objective which is the main reason for creating such budget. The budgeting processes in SIX12™ are as discussed below:

·         Write down the budget – the process begins with writing down what the organization aims to achieve and the right budget for achieving such aims.

·         Identify people to be involved and when – since the budget covers all aspects of the business process, what the company does next is to identify people to be involved in the course of implementing such budget and the stage at which they will be involved.

·         Establish annualized timeline – based on seasonality of demand (e.g. drinks are consumed more during dry seasons than rainy seasons in Nigeria), the company adopts the next step of stipulating when budgets will be implemented more within a given business calendar.

·         Specification of tasks and responsibilities to individuals - those who have been adopted into implementing the budgets are also accorded necessary tasks and responsibilities, thus making them accountable in certain areas of the budget implementation process.

·         Ensure that budget line items are synced with accounting line items – once the above four steps has bene accounted for, the next step is to align budget items with accounting items in order to avoid creating issues for the management with respect to reading meaning into the budgeting process.

·         Develop worksheet – finally, the company develops worksheet for reading and translating the budget. The worksheet is also used to amend the budget as the implementation process goes on.

3.      Management accounting information system

In accordance with Sheila (2014), management accounting information system is crucial because it can aid better running of business by providing managers with timely information on the internal operations of the business. In SIX12™, a number of steps are undertaken in the development of its management accounting information system and it follows the standards steps highlighted by Sheila (2014) to include:

·         List needs – the purpose of owning such information system is listed in the company and this marks the beginning of developing a management accounting information system in SIX12™. Such needs can be accounting, inventory etc.

·         Search for computerized solutions - once the need has been established, the company goes in search of computerized solution as it is the best way to keep track of all processes in the company.

·         Budget considerations – the solutions are acquired in relation to budgets. That is to say that the more valuable and affordable a solution is, the chances of such being chosen will increase.

·         Detailing implementation plan – with the right solution adopted, the company goes to detail all parties involved in relation to usage and how the process should be integrated to ensure efficiency.

·         Check with employees and management - since the employees are the one to utilize such system, a number of checks are made following implementation to ensure that they accept such system.

·         Utilize the system to its best advantage – further checks and controls are made in order to ensure that the management system is being fully employed in all its functionalities.

A number of managerial accounting information systems are used in the company and they can be grouped into the following:

·         Cost accounting systems – this systems are developed to compare actual cost in delivering a project with the planned cost for such project. A good example as utilized in the company is Microsoft spreadsheet.

·         Lean accounting – from the figure obtained in cost accounting system, the company examines processes and results with lean accounting systems in order to determine the best way to create more value for less cost and eliminate waste of resources in the process.

4.      Costing process

Identifying the costing process in SIX12™ can be described as the easiest task in the course of presenting this business report. The company adopts ABC costing method and  process costing. Process costing is a method of costing used mainly in the manufacturing companies where units are continuously mass-produced via identified processes (ACCA, 2011). This is exactly the case of SIX12™, which is a manufacturing firm. Cost are determined based on activities (in which the higher the activities, the higher the cost and vice versa).

As demand for the products increases, the production will increase and the cost will follow suit in line. Although the process doesn’t change, the cost increases as a result of increase in demand and activities. This is basically why the costing process in the company is easy to determine.

5.      Capital decisions

Once a given project has been identified in the company, the management will then start the financial process of determining the chances of pursuing such project. Three major capital budgeting decision tools are used in the company and they are:

·         Payback period – this tool determine the time required to reacquire the investment made in a given project. That is the point at which the company will breakeven in a given project (Shan, 2014). In SIX12™, the shorter the time, the higher the chances of the company investing in the project. This is very typical of the company’s first product, which is based on innovating in an area that other Nigerian beverages have lacked interest and using such to conquer the market. Thus, huge budget was allocated for the SIX12™ Apple Cider.

·         Net Present Value (NPV) – this involves calculating the difference between the cost of establishing such project (cash outflows) and the revenue generated by the project (cash inflows) (Shan, 2014). The higher the cash inflow, the higher the chances of the company taking up the project. This is typical of the company with the decision to establish distributorship for Token Giant Whole Wheat Meal (by Token Giant Enterprises Nigeria) and AS Yogurt (by Acity Food and Packaging Company Nigeria) in the Nigeria market. The company discovered that the cash inflows from being the distributor for the two brands named above would be much higher than the cash outflows to incur.

·         Internal Rate of Return (IRR) – this is a discount rate which is commonly used to measure the extent of return an investor can expect to realize from a given project (Shan, 2014). This implies the expected benefit once the project breakeven or NPV is equal to 0. The higher the IRR, then the project should be adopted. This is typical of decisions in the company also exemplified in the two cases above.

Thus, the company adopts its capital decision based on demand (expected return from sales) in which the higher the demand, the higher the capital to be allocated for producing such products – effectively increasing sales and profitability in the process – and vice versa.

6.      Capital acquisition and structure

In terms of definition, Joshua (2013) defined capital structure as the percentage of capital (money) which is being employed at work in a given business. In SIX12™, the capital acquisition and structure adopted is equity based structure – contributed capital and retain earning. From the onset of the business, the investors contributed the initial capital that was used to fund the business. As time passed, the business generated money and this capital are also being pushed back into funding the business. In essence, the company is not owing any external entity and the investors are liable to enjoy full benefits from such investment with respect to profits generated from the business.

This is a very good capital structure in the sense that it eliminates pressures from repayment of borrowing and huge debts on the company. However, it is limiting in the sense that the company can’t easily expand at will due to limited capital available.

7.      Conclusion

From the above discussion, one could easily visualize that SIX12™ is atypical modern day capitalist firm which doesn’t want to earn a dime to the outside world but wished to control huge profit from the market it operates. The company is purely profit-oriented and this can be seen its approach to budgeting, capital allocation, capital acquisition, costing and other management process in the company in which demand influences cost  - in the sense that the higher the demand for their products, the higher their investment on such. This can also be attributed to the company’s present success as it focuses on reducing cost while increasing profit from its business process.

8.      Reference

ACCA (2011). Management Accounting. Available at: http://www.accaglobal.com/content/dam/acca/global/pdf/sa_june11_process2.pdf [Accessed on: 15-April-2015].

Elizabeth, H., F. (2010). The Budgeting Process. Available at: http://www.nonprofitaccountingbasics.org/reporting-operations/budgeting-process [Accessed on: 15-April-2015].

Joshua, K. (2013). An Introduction to Capital Structure. Available at: http://beginnersinvest.about.com/od/financialratio/a/capital-structure.htm [Accessed on: 15-April-2015].

Sham, G. (2014). Capital Budgeting: Capital Budgeting Decision Tools. Available at: http://www.investopedia.com/university/capital-budgeting/decision-tools.asp [Accessed on: 15-April-2015].

Sheila, S. (2014). How to Establish a Management Accounting Information System. Available at: http://smallbusiness.chron.com/establish-management-accounting-information-system-3953.html [Accessed on: 15-April-2015].