CA. Manu NairCEO

INSIDE THIS ISSUE

The Emirates Chartered Accountant is a quaterly newsletter of Emirates Chartered Accountants Group addressed to all our registered members and media to update the news, activities and events of the organization.

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Newsletter

We once again thank all our readers, for the fabulous support and creative guidance

you provided us in the juncture of successfully completing one year of putting “The Emirates Chartered Accountant” into circulation. The fourth volume of this newsletter reaches you during the Holy Month of Ramadan and in light of this, I’d like to Wish you all “Ramadan Kareem”. May the almighty shower your path with light and knowledge and may this Ramadan remind you to forgive.

Small and Medium Enterprises (SME), the biggest Entrepreneur of UAE, faces many fold challenges in the business world. More than 90% of the companies registered in Dubai are SMEs. On the contrary, in the bank lending side, only 4% of the total bank lending is to SMEs, where the same is double digits in developed countries. Banks are reluctant to provide loans to SMEs, referring to numerous facts such as regulatory compliance, transparency in the business, collateral etc. During the global financial crisis, SME sector was resilient as only few companies went back, and the companies that survived the financial downturn have now rejuvenated, by taking challenges as opportunities. My partner Pradeep Sai, having practical experience in UAE in the SME sector for more than a decade, has done a research work financing SMEs in UAE in general. He tried to present the same in few pages in this edition along with a chart showing financial facilities available in different banks in UAE. I am sure the reader will enjoy the article.

In another article, my colleague, the Asst. Manager Audit and Assurance Mr. Susovan Sarkar has described the increasing Bilateral Trade Relationship

between India and UAE especially in the recent political scenario of India.

Student Editor Sakkira Hamza and her team have done an article on the significance of Inventory Management.

This edition of “The Emirates Chartered Accountant” will be reaching you while many of you are away on summer vacation. But we expect this edition to reach you through soft copy by way of mail. Wish you all a good read ahead.

April - June 2014 Volume -4

EDITOR’S NOTE

Financing SMEs in the UAE 2

An Outlook on India-

UAE Business Interests 7

Students Desk 9

Inventory Management 10

More than figures.....

CA. Manu NairCEO

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Buy & Use of Funds

What is the actual requirement of funds?

How much to borrow? How to allocate the costly funds etc? Are questions that demand

efficient solutions from businessmen? The business environment comprises companies that have just started up or are in various stages of their development. Each has its own reason for being in business and each has its own finance requirements.

A company requires financing to carry out its business plan. There are two main sources of business financing: through equity investors (owners or shareholders) and creditors (also called lenders). Financial markets are potential sources of business financing. While looking to financial markets, a company considers several issues including: the amount of financing necessary, source(s) of financing (owners or financial institutions), timing of repayment and structure of the financing agreement(s).

Borrowing from banks/financial institutions is different than equity financing in an agreement, or contract, is usually established requiring repayment of the loan with interest at a specific date(s). While interest is not always expressly stated in these contracts, it is always implicit.

Getting the right banking partner is the success of all business units which may support the growth cycle with solutions that meet all their financial needs in time. There are various types of bank facilities available in the market. Interest rate and the Facility amount depend on the length of the company’s business, the industry

of the client, historical performance, future plans, management profiles and the market reputation. Banks are taking initiative to understand the company’s business strategy and needs in order to design a tailored solution to match with the client’s requirements by reducing the risk and the interest burden.

Loan periods are variable and depend on the desires of both lenders and management of the companies. It may vary from short term (say, couple of months to one or two years) to long term (say, 3/5/10 years etc).

Like owners, the financiers are concerned with return and risk. From shareholders point of view one has to bear in mind always that the cost of funds is always less than the return anticipated while going for borrowing. Otherwise owners will be spending from their own pocket instead of taking money to their pockets.

A company’s capacity to borrow depends on several factors and is subject to change. It depends on profitability, stability, size, industry position, asset composition and capital structure. It also depends on credit market conditions and trends. Owners through proper finance team/personnel have to manage the borrowed fund effectively to ensure efficient utilization of the same.

Managing Corporate Finance

The finance director of a business has the responsibility for managing the financial resources of the business to meet the objectives of the business.

Pradeep SaiDirector - Emirates Chartered Accountants Group

“Financing SMEs in UAE”

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The finance director’s responsibilities involve:

● Raising and controlling the provision of funds for the business.

● Deciding on the deployment of these funds – the assets, new projects, and operational expenditure required to increase the wealth of the business.

● Controlling the resources of the business to ensure that they are being managed effectively.

● Managing financial risks such as exposures relating to movements in interest rates and foreign currency exchange rates.

What level of investments/ assets/ financing should the company have ?

● What level of assets should the company have?

● How should investment projects be chosen and how should they be funded?

● In what proportions should the company’s funding be regarding shareholders’ equity and borrowings?

● What proportions of profit should be paid out in dividends or retained for future investment?

The management of the company has various choices, selecting the best choice is highly important to get funds at cheaper rate for certain purposes / assets. Sometimes we noted that some companies are using wrong mixtures, for instance, when asset finance are available from banks for interest (flat rate) at 5 % to 7% per annum normally, companies are taking business loan/term loans at very high interest for acquiring assets which costs 8% to 13% per annum.

Equity Financing

• InstitutionalEquityInvestment

• StrategicPartnerships

Debt Financing

• WorkingCapitalandTradeFinance

I. LC and TR Facilities

II. Term Loans

III. SME Finance and Business Loans

IV. Project Finance

V. Over Draft - OD

VI. Check Discounting Facility

VII. Invoice Discounting Facility

VIII. Factoring – Loans based on confirmed sales orders or accounts receivables.

Lease Finance

• Plant, Machinery and Equipment LeaseFinance

• LeasefinancingforHeavyVehicleandFleets

The modes and various parameters by which the banks in UAE generally lending short term loans or facilities are tabulated below for ease of reference.

Different types of Financing

options available in UAE

“If you think nobody cares if you’re alive, try missing a couple of installments”

- Earl Wilson 3

WORKING CAPITAL FACILITIES AVAILABLE IN MAJOR BANKS IN UAEBANKS PRODUCT AVAILABLE TO TYPES OF BUSINESS ENTITIES FINANCED

MAX. BUSINESS LOAN AMOUNT *

TENOR - BUINESS LOANS

MIN.LENGTH

OF TIME IN

BUSINESS

MIN. ANNUAL

TURNOVER FOR BUSNICESS LOANS

MIN. ANNUAL

TURNOVER FOR TRADE FACILITY **

ADCBInsta loans

UAE nationals and expats All UAE-registered legal entities Dh1.5m 48 months 2 - 3 years Dh1m Dh15 Million and above Trade finance facility

ADIB BUSINESS

Small business finance UAE nationals and

expats

Industries: trading, services, manufactuing, transportation & logistics, and contracting Entities: LLC,Sole proprietorship,FZC, Partnership,

Up to Dh2m Up to 48 months 1 - 3 years Dh1m Dh15 Million and aboveTrade finance facility

CBI Business Finance UAE nationals and expats Sole proprietorship, LLC,FZE,FZC Dh500,000 36-60 months 2 years Dh1m N/A

FIRST GULF BANK

Medium-term business finance UAE nationals and expats

Free zone companies, Limited liability companies and Sole proprietors

Dh10m 12-48 months 1 - 3 years Dh1.2m Dh15 Million and aboveTrade finance facility

NOOR TRADE Business Finance Expat and national-owned companies

All business holding valid trade licence Dh3m 12-48 months 2 years Dh2m N/A

UAB-SMEBusiness Finance

UAE nationals and expats All UAE-registered legal entities Dh1.5m 48 months 3 years Dh2m Dh15 Million and above Trade finance facility

UNB Commercial SME loan UAE nationals and expats All except hotels, brokerage companies and real state companies

Dh2m 60 months 1 year Dh1.5m N/A

NBFMedium-term business finance UAE nationals and expats

Free zone companies, Limited liability companies and Sole proprietors

Dh1.5m 12-48 months 1 - 3 years Dh 2 m Dh15 Million and aboveTrade finance facility

MASHREQMedium-term business finance UAE nationals and expats

Free zone companies, Limited liability companies and Sole proprietors

Dh1.5m 12-48 months 1 - 3 years Dh2 m Dh15 Million and aboveTrade finance facility

DIBMedium-term business finance UAE nationals and expats

Free zone companies, Limited liability companies and Sole proprietors

Dh1.5m 12-48 months 1 - 3 years Dh2 m Dh20 Million and aboveTrade finance facility

EIB Small business finance

UAE nationals and expats Industries: Trading, Services, Manufactuing, Transportation & logistics, and Contracting Entities: LLC,Sole proprietorship,FZC, Partnership,

Up to Dh2m Up to 48 months 1 - 3 years Dh2 m Dh15 Million and above

Trade finance facility

RAK BankBusiness Finance

UAE nationals and expats All UAE-registered legal entities Dh 2.5 m 60 months 1 - 3 years Dh2.5 m Dh15 Million and above Trade finance facility

ENBDBusiness Finance

UAE nationals and expats All UAE-registered legal entities Dh 1 m 60 months 1 - 3 years Dh2 m Dh15 Million and above Trade finance facility

CBD Trade finance facility UAE nationals and expats Free zone companies, Limited liability companies and Sole proprietors

N/A N/A 3 years N/A Dh25 Million and above

CITI Bank Trade finance facility UAE nationals and expats Free zone companies, Limited liability companies and Sole proprietors

N/A N/A 3 years N/A Dh40 Million and above

AL HILAL BANK Business Finance UAE nationals and expats All UAE-registered legal entities Dh1.m 48 months 2 years Dh2 - 3 m N/A

* Subject to change as per bank norms.

** Turnover ceriteria again depends nature of business.

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STEPS TO SEE - WHILE GOING FOR LOANS/BANK FACILITIES

                                                                                                         STEPS  TO  SEE  –  WHILE  GOING  FOR  LOANS/BANK  FACILITES  

 

 

 

 

 

 

 

   

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FUND  REQUIRED  

FOR  BUSINESS  ?    

 

NO   YES  

   OWN  FUND      AVAILABLE  ?  

NO  YES  

   MINIMUM  CRITERIA  FOR  LOANS/FACILITIES  MET?  

               

 

                                               

CHOOSE  THE  LEAST  COST  FACILITY  WITH  GOOD  QUALITY  SERVICE  -­‐  FOR  A  PERFECT  

BANKING  PARTNER  

SEE  OPTIONS  AVAILABLE  IN  VARIOUS  BANKS  

AWARE  OF  BANK  SUPPORT/SERVICE  

 

S  

S  

UNDERSTAND  THE  CRITERIA                                                                                    TO  BE  MET  

               NEGOTIATE  WITH  BANKS  

STUDY  THE  TERMS  &  CONDITIONS  OF  BANKS  

ENSURE  SUITABILITY  TO  COMPANY’S  REQUIREMENT  

ANALYSE  AND  COMPARE  TOTAL  COSTS  (INTEREST  &  OTHER)  OF  EACH  FACILITY  

OPTIONS  BY  BANK  

 

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Being one of the closely related countries, the trade relationship between India

and UAE has significantly developed over the last 20 years. The business ties

have grown stronger by exchange of culture, commodities and ideas. It started with

the barter of pearls for cotton and dry fruits for grains many years ago. Today India

– UAE bilateral trade is close to US$75 billion (Dh275.5bn), making the UAE one of

India’s leading trade partners.

UAE mainly imports gems and jewelry, vegetables, fruits, spices, etc from India. UAE’s exports to India

mainly include crude & petroleum products, gold & silver, pearls, etc. Growing Indo-UAE economic

and commercial relations contribute valuable stability and strength to bilateral relationship between

the two countries. The UAE enjoys a broad and comprehensive economic relationship with India,

based on mutual interests.

COUNTRY IMPORT EXPORT

INDIA

Crude, petroleum products, gold & silver, pearls, precious and semi precious stones, metal ores & metal scrap, electronics goods and transport equipment.

Gems and jewelry, vegetables, fruits, spices, engineering goods, tea, meat and its preparation, rice, textiles and apparel and chemicals.

UAE

Gems and jewelry, vegetables, fruit, spices, engineering goods, tea, meat and its preparation, rice, textiles and apparel and chemicals.

Crude, petroleum products, gold & silver, pearls, precious and semi precious stones, metal ores & metal scrap, electronics goods and transport equipment.

Susovan SarkarAsst. Manager - Audit and Assurance

India is expected to become UAE’s biggest export destination by 2030, with a forecast for estimated

goods at 14%. Increased inward investment from the UAE could help India to create the conditions

for growth in the long term.

The main reason for strong INDO-UAE economic ties is the huge expatriate Indian population in UAE.

Almost 2 million Indian expatriates currently live and work in the UAE, comprising more than 30 per

cent of the national population and constituting the Emirates’ largest expatriate group. The profile of

the company has changed with the evolving needs of the country: In the 1970s and 1980s, when the

principal requirement here was for blue – collar workers, the Indian community was blue – collar

to the extent of 85-90%, with a negligible percentage of professionals. In the 1990s, as the need for

“ An Outlook on India- UAE Business Interests”

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professionals to meet the needs of the expanding service

sector emerged, the profile of the community changed,

and today, 15 to 20% of the Indian community is made

up of professionally qualified personnel. The Indian

community has played a major role in the economic

development of the UAE over the last 35 years. The total

remittances to India from the UAE in 2008-09 were about

US$ 10-12 billion, which is around one third of all the

total remittances from the GCC countries to India which

is around US$30 billion.

Recent political development in India has opened more doors to strengthen trade ties between

UAE and India. Both contries are working towards giving the final shape to a Bilateral Investment

Promotion and Protection Agreement (BIPPA), to enhance investments between the two countries;

the Department of Economic Development (DED), UAE has said.

The agreement is aimed at driving

investments into India from the UAE across

different sectors, including construction,

downstream manufacturing in the petroleum

and natural gas sector, as well as agriculture

and food processing.

Saed Al Awadi, CEO of Dubai Export, the

agency of the Department of Economic

Development in Dubai, was of the opinion

that “This agreement will enhance the

economic ties between the two countries

further”.

The recent decision by Abu Dhabi National

Energy Company (Taqa) to purchase two

hydropower assets in the northern State

of Himachal Pradesh, makes it the largest

private operator of hydroelectric plants in India.

Trade between the two regions has grown quickly, reaching US$75 billion in 2012-2013 up from

US$43 billion in 2009-10. The two countries have been selected in the United Nations Conference

on the Trade and Development list of ‘ top 10 most promising investor economies for Foreign

Direct Investment(FDI)‘ in 2012-14. Over the next 20 years, the Indo-UAE relationships based on

increased economic and strategic cooperation are expected to become more important to the

world economy. The relationship between India and the UAE could be a leading example for

future business relations between other foreign countries.

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Watching Dubai grow day by day in the field of business and commerce, me and my friends feel proud choosing this amazing place for pursuing

our articleship training as it pave ways and open numerous doors for excelling in the field of auditing, accounting, business valuation and so on. Getting practice and training in such a growing economy is the dream of every student who is looking forward to join the working community in the nearby future.

Articleship training, the most crucial part in the Chartered Accountancy course, plays an important role in molding the student with concrete understanding of the subject, both practically and theoretically. Hence, the place and firm of undergoing articleship matters a lot. Working under highly qualified professionals is a great advantage as they impart their knowledge on various topics making us better prepared in real life scenarios. A business’s inventory is one of its major assets, and represents an investment that is tied up until the item is sold or used in the production of finished goods. It also costs money to store, track and insure inventory. Inventories that are mismanaged can create significant financial problems for a business, whether the mismanagement results in an inventory glut or an inventory shortage.

Hence, in this issue, our senior, CA. Sarat Nair writes a brief article on Inventory management for better understanding of the students. I trust it will help gain a clear cut picture about Inventory Management and prove prolific in your future accomplishments.

Ramadan Kareem and happy read ahead!!

S T U D E N T ’ S D E S K

Sakkira HamzaStudent Editor

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As we all know, revenue generation is one of the

primary objectives of any business, and the purpose behind the investment of any entrepreneur’s hard earned money. Inventory is one of the

primary sources of revenue generation and is one asset that is closely monitored and managed by an organization. Hence, Inventory control is an attempt to balance inventory needs and requirements with the need to minimize costs resulting from obtaining and holding inventory.

WHY KEEP INVENTORY?

• TOKEEPOPERATIONSRUNNING

When it comes to manufacturing entities, it is vital that the manufacturer has certain items purchased and stocked in order to manufacture its product. As the end product is dependent on the work centers and the inputs involved in each of them, insufficiency in any one of the centers will hinder the smooth running of the entity’s regular operations.

• TOMANAGELEADTIME

Lead time is the time that elapses between the placing of an order and actually receiving the goods ordered. This means that if the lead time

of a product is three months, a firm will have to maintain inventory and place orders for the product at least three months in advance of their need. The longer the lead time, the larger the quantity of goods the firm will have to carry in its inventory.

• HEDGINGInventory can also be used as a hedge against price increases and inflation. Firms usually take advantage of a situation where prices are set to increase, by purchasing extra quantities of materials at a lower price and keeping excess inventory of the same.

• QUANTITYDISCOUNTOften firms are given a price discount when purchasing goods in bulk. This may, on occasion, lead to inventory which is excess of what is currently required to meet demands. However, if the discount is enough to set off the extra holding costs incurred as a result of the same, the decision of buying goods in excess is justified.

BALANCINGINVENTORYANDCOSTS

As stated earlier, inventory management is an attempt to maintain an adequate supply of goods while minimizing inventory costs. Given the reasons we require to keep adequate supply of inventory, it is essential to validate the same with the costs incurred in the process. Let’s take a look at the different costs that are involved.

Inventory Management

CA. Sarat Nair ACA.Asst. Manager - Audit and Assurance

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• HOLDINGCOSTSHolding costs, also called carrying costs, are the costs that result from maintaining the inventory. If the inventory held by the firm is in excess of current requirements, then the cost of maintaining the inventory will be high.

Maintenance costs include storage costs, personnel costs to handle the goods, power and electricity expenses for the storage facilities as well as loss due to pilferage, shrinkage and obsolescence.

• PURCHASINGCOST

Simply put, purchasing cost is the cost of the purchased goods. If the firm purchases a material that goes into its finished product, the firm can determine its annual purchasing cost by multiplying the cost of one purchased unit by the number of finished products demanded in a year.

SCHOOLSOFTHOUGHTIN INVENTORYMANAGEMENT

• JUST-IN-TIME(JIT)

Just-in-time (JIT) is a philosophy that advocates the lowest possible levels of inventory. It involves keeping inventory in the right quantity at the right time with the right quality. The ideal lot size for JIT is ‘one’, even though one hears the term “zero-inventory” used; which implies no excess inventory.

• THEORYOFCONSTRAINTS(TOC)

Theory of constraints (TOC) is a philosophy which emphasizes that all management actions should center on the firm’s constraints. While it agrees with JIT, that inventory should be at the lowest level possible in most instances, it advocates that there be some buffer inventory when it comes to the bottlenecks before finished goods.

THE FUTURE OF INVENTORY MANAGEMENT

Passing times and dynamic management techniques has added new dimensions to inventory management. It has expanded the concept from mere stock-in-hand of raw materials, work-in-progress and finished goods, to broader classifications such as scrap, returned goods, reusable or recyclable products and products that require repairs and services. This promotes the implementation of new and innovative policies, such as JIT & TOC as seen above, which helps highlight the importance of inventory management in current times.

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