Financial Year End Getting Hotter..
We are at the end of the year; most companies follow the calendar year as their Financial Year end too. Certain countries/companies follow some separate schedules, depending on their statutory requirement.
Financial Year End is the time where in most of the business houses review their process weakness as it’s the time for the statutory audits, before a qualified auditor points out, most of them will try to ‘cover up’ their inefficiencies with the latest paintings to be spotless. All the CEO’s and Board of Directors fear the ‘Audit Notes/ Qualifications/ Observations’ appear in the Audited Financial Statements of the company. I am as a Chief Financial Officer, working over two decades with various international airline companies, I would like to highlight one major issue which we used to discuss every year in our professional forums. It’s all about ‘technical/engineering Inventory handling and it’s valuation matching with books of accounts’.
What is happening in most of the airline companies?
In airline business, Engineering/Technical division is a very important department along with Flight Operations department. The major responsibility of the engineering team is to ensure that the aircraft fit to fly ensuring all safety standards, or in other words ensuring airworthiness of the aircraft. In order to become a chief of MRO, airlines ask for vast/smart hands-on technical experience, management skills along with high technical qualification as this will be treated as a regulatory post holder, reports parallelly to the CEO as well as the Civil Aviation Regulator. Most of these MRO chiefs are really influential inside the airline organization.
When the Engineering team set-up their divisional process and systems, they want everything to be done independently without any interferences with other departments, especially the finance division who will be the custodian of company’s ERP systems. Engineering team will recommend buying their known systems, which is having the features of Continuing Airworthiness Management Organization?(CAMO) , Maintenance Planning, Technical Library, Technical purchases and stores management etc. On this bargain, most of them forgets about the significance of ?inventory module connecting with Company’s ERP system. Many of the MRO system providers are reluctant to integrate /interface their system to the main ERP. This creates major issues with the inventory issues with the airline during the year end.
Typically there are different types of items in an engineering store; Consumables/Expendables- which requires to charge to P&L, Rotables - ?Items on rotation and its amortization will be based on the extended cycle/life of that item and Repairable- Items which get repaired and used for an extended period. Other major feature is that the inventory items which is under warrantees and guarantees up to an expected wing life has to send to the manufacturer, freight handling, inventory tracking etc . Altogether, 100s of types of inventory items which needs to account differently as per accounting standards. A typical MRO system cannot establish all these accounting as the expected objective of the MRO system is different.
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When we view this from Engineering team, most the standard ERP’s neither understand nor provides a complete MRO (Maintenance Repairs & Overhaul) system, so they opt for specialized systems.
What to do to rectify this situation?
When an airline implements your major ERP, call a formal brain storming session between CFO & Chief of Engineering to discuss the importance of inventory management and the ways to achieve.
There is nothing wrong in going for a specialized sub-system for Engineering division, but please make sure that the opted sub-system got a capability to connect the main ERP system seamlessly. Finance division needs to report Purchase Commitments, Budgetary Control, Inventory Valuation, Consumption, Amortization and Assets Accounting. Importantly on the periodical stock count the auditors wanted to ensure ‘controls, checks & balances’ as part of their protocols. They may ask for the movements of the inventory too, as a typical engineering store carries huge value inventories.
End of the day, all departments work for the company and jointly we can make the internal process as strong as possible ensuing all compliances.
What do you feel? Waiting to hear from you! Please fee free to write to me : [email protected]