Measuring the Company's performance

Not necessarily, though it can be a useful mechanism for levelling out currency fluctuations and local taxation anomalies with a view to maximising profit from the operation.

Is the tax man on your back or the share holders moaning?

Has your accountant said you can make things look better or worse?

Have you an Enron complex?

I know per accounting standard, sales to intercompanies must be eliminated for consolidation reporting. I'm looking towards how to assess the holding company's performance where existing customers & products were transferred to subsidiaries in overseas. The effort and support from administrative, engineering & sales guys' cost are all captured in the holding company's book. The variance between actual and forecast sales were mainly due to this transfer of accounts. For all we know, if the holding company does not meet the budget, employees will be not rewarded accordingly.

Interesting that you should ask this question. I hope it's NOT because of an Enron complex! But, I'm glad you have brought a business question (more specifically, accounting) to this forum. In my experience, the most successful engineers have a good grasp of business fundamentals.

As the manager of a business unit within a larger corporation, I would want to record sales to a sister division in my profit-and-loss (P&L) statement; I would want the acknowledgement of what we had accomplished for this other business. So, that's why an inter-company sale should be included in internal financial statements.

But, from the corporate perspective, a sale from one business unit to another has little more tangible meaning than the movement of Work-In-Process (WIP) from one work station to another within the same factory. Yes, the costs, quality and overhead costs all matter to the folks in the business unit but, unless you want your investors and lenders to micro-manage your business, it's best to 'net out' or eliminate inter-company sales from the consolidated financial statements.

Why do you ask the question? And, please ask more questions of a similar nature!

Thanks, MillMatt.

I shared the same reasoning as you. For management performance assessment, should use the total revenue (external & internal). You see, the company that I'm working with, only uses sales to external parties. As such, company recorded sales below target. If total revenue is used, the result is OK. In my opinion, we treated the internal customer better than the external parties; we, as the holding company, provide the knowhow, training and "all sort of resources backup". Eg, when the subsidiaries couldn't meet the customer delivery; we deliver to them. So, for performance assessment, total revenue should be used. Otherwise, staff reward may be compromised as company must meet both the sales and PBT budget.

I hope to gather some good reason to support my views to the top guys who currently only uses the sales to external parties.. You see the problem - they are both finance and accounting trained!

Be careful not to harshly judge their measure before they provide you an explanation. It may be that they are under pressure from THEIR managers to focus on net sales only. Perhaps they have an incentive package that only address external sales. Now that doesn't excuse their possible short-sightedness but there may be good reason that they focus so heavily on the net figures.

BUT, you very definitely should keep an eye on the intercompany sales and assess as best you can. What I chose not to address in my earlier post is that inter-company sales can be a political nightmare and create a lot of ill-will between otherwise congenial employees. For example:

1. What happens to material that does not meet specification? Does the 'customer' HAVE to pay and find a way to make the material work? Or, does the 'supplier' have to take the faulty product back?
2. Does the 'supplier' have to drop everything to meet the unique and 'have to have it now' needs of this 'customer'?
3. What price is charged by the 'supplier' and what does the 'customer' pay? Is it set on a cost-plus basis? An agreed upon market rate? And, as such, who makes more profit?

These might not sound like thorny issues but for the production managers, quality managers and others whose performance can be affected by these decisions, some real brinksmanship can come to the surface. Sad but true. And, so it is that your management may be trying to avoid these issues all together. Maybe that's not a bad idea! But, there are still costs associated with this business, there are still opportunities, there are still resources allocated here that also are required to meet other customer needs and you, as the one who recognizes these issues, have a real opportunity to contribute to your business.

I thought you should seize the opportunity and make that contribution.

Thanks for your advice. I will take special care in putting my concern and views to the management.