Category Archives: Finance

A Great Argument for Carbon Taxes (and Credits)

A recent article in Knowledge @ Wharton Universia on “phishing, bribery, and falsification: combating the complexities of carbon fraud” provides a great argument on why cap and trade should be abandoned in favour of straight carbon taxes (and credits if the goal is to encourage corporations to be as efficient with carbon emissions as possible). According to the article, carbon trading systems, especially when coupled with lax Internet security and third party verification, pose a great opportunity for crooks who want to defraud honest companies out of millions of dollars.

The first example the article gave was of a group of rouge traders who, earlier this year, stole as much as $4 Million by posing as regulators, setting up a fake, but official-looking website, and using it to obtain carbon trading account information from companies and traders who thought they were complying with government requests. The scheme forced the German Emissions Trade Authority to suspend trading, but not before 250,000 permits had been stolen.

The second example was that of Carbon Harvesting Corp who’s director has been arrested and charged in connection in an alleged scheme to pay $2.5 Million to “rent” a fifth of Liberia’s forests and profit by selling the credits that could be obtained from the carbon absorbing trees.

All in all, Europol estimated that tax fraud associated with carbon trading reached 6.5 Billion over 18 months, and in some countries, up to 90% of trading volume resulted from fraudulent activities. A recent report on “Ten Ways to Game the Carbon Market” identified 10 scams common to carbon trading … and the list was not necessarily all-inclusive.

But if there’s no trading, there’s no opportunity for trading fraud. And there’s no need for trading if governments simply levy a tax on every tonne of carbon emitted. Furthermore, if the goal is to compensate companies that are being extra efficient about carbon emission, there can also be carbon credits where companies that emit below a floor can get tax credits. In fact, it only takes a simple algebraic formula to capture taxes and credits in a joint system: (tons emitted - tons allowed) * tax per ton. For example, if it’s $10 per tonne, the company has an allowance of 1,000 tons, and the company emits 2,000 tons, then the company would pay (2,000-1,000)*10 = 10,000. And if it’s $10 per tonne, the company has an allowance of 1,000 tons, and the company emits 500 tons, then the company would get a credit of (500-1,000)*10 = 5,000 on its tax return. Simple.

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Speaking Like a CFO — Part II

Today’s guest post is from Robert A. Rudzki, President of Greybeard Advisors LLC, who has (co-) authored a number of acclaimed business books, including Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise, On-Demand Supply Management, and the supply management best seller Straight to the Bottom Line.

Another important aspect of Speaking Like a CFO is knowing how to build a business case in support of your overall transformation agenda, as well as business cases related to specific subjects such as technology investments.

When we work with clients, we prefer to start with a business case from a total transformation perspective. Why? It is part of a logical sequence. Once you’ve assessed your current state and compared it to best practices, identified the opportunities from successfully transforming your practices, and designed the detailed roadmap to get you there, why not request the full amount of resources needed to do the job well?

It might sound optimistic to ask for more resources when the current business outlook for your company is weak — but it can work if you approach the subject in the manner I described. In fact, we’ve worked with several companies who — as a result of following the process outlined — added more resources to their strategic procurement staff during the recession. Today, they are receiving the bottom-line benefits of taking that bold leap.

The alternative, quite frankly, is to be subject to the same headcount reduction guidelines that often are widely applied to all departments in times of business stress. That’s not where you want to find yourself; and, quite frankly, there is no reason to end up there.

Thanks, Bob!

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By The Time You Detect Financial Risk …

… it’s too late. As per this article on “the quality and performance connection” of supply risk, indicators of financial risk are usually preceded by a slow decline in quality or performance that is difficult to detect from delivery to delivery as suppliers, looking to survive, begin to cut corners that they hope will go unnoticed but which often compound the farther up the supply chain you go.

As the author, Jim Lawton of D&B notes, you need to consider supplier performance metrics to be the best leading indicator of overall supplier financial viability. This means that you need to define a process to monitor quality and performance from a risk perspective. Do this by:

  • identifying which areas of supply where quality, performance, and/or financial risk factors are likely to be most pronounced;
  • defining a way to track and measure performance using delivery, performance, and other system data;
  • aggregating the data regularly for analysis;
  • creating corrective action plans to be implemented as soon as elevated risk is development; and
  • creating a closed-loop process that continually monitors and assesses risk information to insure that risks are detected early enough to permit the corrective action plans to be undertaken successfully.

And maybe you won’t be the one that finds out about an impending supplier bankruptcy after it’s too late!

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China (Kinda) Loosens Controls on the Yuan

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

China announced last week that they will no longer peg the yuan to the US dollar. Instead, they are going to control the currency against a market basket of the currencies of countries they trade with. This is what Singapore did a decade or two ago.

This is at best a stop gap measure. It complicates the task of the Chinese government in setting exchange rates. Just because it’s more complex, it increases the credibility of those who call the Chinese currency controls “manipulation”.

China really should just let the currency float. Apparently internal pressures from their business community are stopping them from doing that.

So what does this mean for people sourcing in China? It’s probable that the Chinese currency will get stronger against US dollar. But even that isn’t certain. They tied the value of the yuan partially to the value of the euro. If the euro were due to collapse due to fiscal problems in its “club med” (Spain, Italy, Greece) countries, the yuan could actually weaken against the dollar.

So, what happens to your costs if the yuan were to appreciate, say 10%? Would the price for your Chinese product go up 10%? Probably not. The answer depends on two things. First, what fraction of the manufacturing cost of the product is Chinese? You do know the answer to that question, don’t you? You should.

In assembled products, it’s rarely 100%, because a lot of the components are imported.

Second, how competitive is the market for the product you are buying? If there’s a lot of competition, sellers can’t always pass on cost increases to buyers.

I also expect change will be slow. It’s more likely that the recent labor militancy will have a larger and more immediate effect, particularly on the price of higher-technology products. More on that in my next post.

Thanks, Dick. (Global Supply Training)

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Finance Needs Spend Analysis and e-Procurement, Part II

In our last post, we noted that Basware recently released its annual “Cost of Control” study for 2010 and pointed out that Finance’s top 10 challenges could be easily solved with good, modern, spend analysis and e-Procurement solutions. The study also outlined the top 10 strategic finance priorities for 2010 … which can also be addressed by the adoption of good spend analysis and e-Procurement systems. For example:

Spend Analysis would address:

  • Increasing Profits and Top Line PerformanceProfit = Cash In - Cash Out

    Spend analysis reduced cash out.

    Therefore, spend analysis improves profit margins.

  • Maintaining or Improving Profit MarginsSpend analysis allows you to consolidate spend among fewer suppliers and fewer SKUs. This reduces overhead and increases profit margin.
  • Planning, Budgeting, and Revenue ForecastingOnce you know your actual year-over-year spend, volume trends, and market trends, your forecasts and budgets improve greatly.
  • Risk AnalysisAugment the data with (financial) risk information and quality/performance metrics, and you can quickly see which suppliers likely pose the greatest risk to your operations.
  • Regulatory ComplianceYou know what suppliers you’re spending on and how much is going to socially responsible suppliers and how much isn’t. Augment the product data with carbon emissions spending and you know if you’re within limits or not. Etc.

E-Procurement would address:

  • Reduce Overall PurchasingA modern e-Procurement system with approvals, checks, and balances would insure nothing is bought that isn’t approved, on-contract, and within-budget without managerial exception.
  • Cash Flow and Working Capital ManagementYou can see how many purchase orders are outstanding, how many invoices are upaid, what discounts are available to you if you pay early, how much cash is actually free, and even take advantage of receivables financing.
  • Improving Short and Long Term Operational EfficiencyYou can cut DPO and DSO in half, eliminate paper processing, and make your team 80% more efficient. Over the long term, you can reduce the headcount devoted to tactical “paper pushing” and increase the headcount dedicated to strategic spend analysis and sourcing, which increases organizational savings per employee.
  • Environmental PracticesNo paper. Spending to environmentally irresponsible suppliers can be denied. Etc.
  • Accessing CreditIf you know what you have, and you can demonstrate the reliable payment history, even if the banks turn you down, you can get receivables financing.

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