Though the PN has carried out a variety of economic activities, the leading sectors in its economic activities have always been diesel supply, ice supply, fish marketing and retail shop projects. The growth and profitability of these projects have directly or indirectly contributed to the prosperity of the PN on the whole.
The comparative income statement (profit and loss statement) of the fuel supply project for 1983, 1984, 1985 and 1986 is shown in Appendix VIII - 1 which contains the principal items of income and expenditure of the project.
Two unusual situations can be found in these income statements. The ratio of cost of sales to gross sales increased as the value of sales became lower, and vice versa. In 1984, the value of sales decreased by about M$40,000 from a value of M$760 thousand in 1983, and the ratio of cost of sales to gross sales in 1984 was approximately three per cent higher than the corresponding ratio in 1983. On the other hand, the value of sales increased by about M$50,000 in 1986 over the 1985, value of M$680 thousand, and the ratio of cost of sales to gross sales was less by 3.5 per cent from the corresponding 1985 figure.
If cost of sales was maintained at the same level of 1983, the results of operations in 1984 and 1985 would have obtained net profits of M$54,000 and M$51,000 respectively, adding M$42,000 and M$44,000 respectively to the actual net profits indicated in the statements.
The reason why the cost of sales was excessive in 1984 and 1985 could be ascertained only by a detailed study of the cost and selling prices of the individual items (diesel and lubricants). Because of time constraints, this was not done but it is clear that, on the one hand, the markup might have been too low, and on the other, the buying policy might have been unsound and high prices might have been paid for diesel and lubricants.
Since this activity maintains a competitive position in the fishing industry in the district, more care must be taken to establish sound policies on pricing and purchasing.
Another unusual situation was found in the total expenditure which increased over the years, regardless of fluctuation in sales value. This resulted in a rise in ratio of expenditure to sales of 2.5, 3.0, 4.4 and 6.3 per cent for the years 1983, 1984, 1985 and 1986 respectively. There was a large increase in administrative expenses in 1985 and 1986 and this included expenses of the General Meetings, Board of Directors, and contributions for various funds and for the State Fishermen's Association which should have been borne by the General Account since there has been little or no contribution to the said account from various projects in 1985 and 1986.
In addition, the personnel expenses of the General Account were also transferred to the Fuel Supply Account in 1986 for some reason.
Such malpractices in accounting procedures are not only infringements to the principles of accounting but will also cause the management and members of Board of Directors as well as member fishermen to misread financial statements, which may result in unhealthy, even dangerous, decision making, management and operation of the PN.
Comparative income statement (profit and loss statement) of the ice supply project for the years of 1983, 1984, 1985 and 1986 is also indicated in Appendix VIII - 1 which represent the principal items of income and expenditure of the project.
A major difficulty in analysing these comparative statements accurately is associated with two changes in operation and accounting procedures adopted in the operation of the ice plant in Geting. Until 1984, the PN had supplied ice to fishermen and fish dealers in Geting Fish Complex based on commissions paid by the LKIM Complex Authority who owned and maintained the ice plant, but the complete operation of the said ice plant was handed over to the PN in 1985 which is reflected in the accounting structure of the statement of the project. The total cost of ice production was, however, posted as an operational expense under the item of general expenditure and figures indicated as the cost of sales in the statement for 1985 only represent the cost of ice purchased from local suppliers. From 1986 onwards, both cost of production and purchase of ice have been classified as cost of sales. Therefore, one cannot directly compare the fluctuations in the amounts represented by individual items in successive income statements.
It is not unusual for changes in accounting procedure to result in material differences in individual items or a group of items from one year to another. If the figures are audited, it is the duty of the auditor to state in his report where different accounting practices have been used, together with the effect of the change on the statement. This was not done by the auditor for PN income statement in 1985.
Besides, large increases were observed in the personnel expenses for 1985 and 1986, which were mainly attributed to recruitment of additional staff in 1985, but in addition to that, large sums of overtime allowances were paid in 1986 amounting to 63 per cent of wages and salaries paid for staff in the year. As mentioned earlier, there seems to be no strict control of overtime work.
Comparative income statements of the fish marketing project for the years 1983, 1984, 1985 and 1986 are shown in Appendix VIII - 2 which contain the principal items of income and expenditure of the project.
Though the value of sales fluctuated widely from one year to another during the period, the ratio of gross profit (including sales commission) to gross sales have shown a normal values ranging from 4.5% to 5.3%; however, as the volume of gross sales shrank steadily from 1983 to 1985, the ratio of expenditure to the gross sales has gone up considerably, even though the absolute value of the expenditure has decreased to some extent.
Since the fish auctioning was enforced in January 1986, volume of gross sales has shown its most rapid rise which brought PN substantial net profit of nearly M$30,000. This steep rise in gross sales also resulted in a large increase of expenditure, especially of personnel, operation and utility expenses which were abnormally heavy. During 1984 and 1985, there were no personnel expenses paid by the marketing project as the staff engaged in this project were seconded by LKIM. New disbursement of personnel expenses in 1986 is attributed to the recruitment of an auctioneer and other staff with overtime allowances of about M$3,000.
Almost all of the operational expenses were disbursed for payment of commission to the LKIM Geting Fish Complex which provided certain services for the fish auction such as weighing, grading and recording of landings together with leasing of the auction hall.
Expenses for utilities and equipment in 1986 were largely for the purchase and maintenance of a second-hand lorry which was transferred to the PN from one of the fish dealers in lieu of payment for fish valued at M$7,000. The payment for the vehicle should have been posted as a “fixed assets” item, not as an item of operating expenditure following the principles of proper accounting. If the cost of the lorry had been posted as a fixed asset and only depreciation thereof deducted as an operating expenditure, total expenditure for 1986 would have been reduced by about M$6,000.
Furthermore, the commission paid to the LKIM Complex is low. According to the agreement made between the LKIM Complex and the PN, of the 5% sales commission charged to fish dealers, 3% should be paid to the LKIM Complex. This is estimated at M$47,000 or M$33,000 more than the value actually indicated in the statement.
The amount of commission posted in the expense item is the value of the payment made to the Complex in cash. An amount of another M$33,000 is payable to the Complex.
If adjustment is made for both commission and cost of lorry, the net profit for the year 1986 would be less than M$3,000 which is far below the net profit of 1983 when gross sales were less than one third of the value in 1986.
It must be noted here that the financial statement for 1986 presented to the author of this report is the provisional statement before auditing, and this statement was approved by the Board of Directors and distributed to all members at the General Meeting of 1987. The afore-mentioned adjustment should be made in the final audited report so as to show a net profit of less than M$3,000.
It seemed that the management and members of Board of Directors were satisfied with the results of the fish marketing operation in 1986, but if they recognized the errors in the financial statement for 1986, they will realize that the situation is serious and needs to be seriously reviewed.
The actual low profitability in the fish marketing operation for 1986 is mainly due to an abnormally heavy burden of expenditure especially of commission to be paid to the Complex. The situation may be improved if the services provided by the Complex, such as grading, weighing and recording of fish, are handed over to the PN and the rental of the auction hall is paid to the Complex.
The comparative income statement (profit and loss statement) of the retail shop project in Tumpat for the years from 1983 to 1986 is presented in Appendix VIII - 2 which includes the principal items of income and expenditure of the project.
The most serious cause for concern is observed in the net profits which showed not only chronic deficits but also continuous increases in deficits over the years. These losses are largely attributed to a steady shrinking of gross profit on sales, as the total expenditures have decreased successively and the gross sales have on the other hand increased until 1985. The most unusual situation can been seen in the gross profits on sales in 1985 and 1986 which has gone into the red. These losses in gross profit on sales were largely due to disposal or dumping of old stock. The disposal of the old stock has approved by the Board of Directors.
However, the value of merchandise disposed or discounted has not been recorded in the books nor in the financial statements. The extent of discount, especially, is an indication of whether the merchandise handled is meeting the reasonable requirements of the customers to which the management should always pay keen attention. And, excessive discounts thus greatly reduce the receipts from sales and may also affect unfavourably the future volume of sales as customers' (members') confidence decreases. Inadequate control over discounts may quickly convert profitable operations into unprofitable ones as seen in the operation of this project in 1985 and 1986.
It can be concluded that the cause of failure in the operation of the retail shop project was because of unsound buying policies in the selection of the merchandise and in the determination of the quantity of goods to be purchased and poor stock control.
In principle, a well-operated retail store of general merchandise always carries the stock at a value equivalent to 20% of the annual gross sales, but the value of stock in the PN shop has always exceeded 40%, and even 80% in 1983 of the annual gross sales, except at the end of 1986. If the management had understood the implication of the relative size of the inventory, and paid keen attention to it, such losses in the operations could have been avoided.
As mentioned earlier, the PN has carried out various projects other than the major projects whose profitabilities have been analysed in previous sub-chapters. Most of these minor projects have so far been inactive. It may be meaningful to analyse the total profitability of the PN which is shown in the statement of consolidated account.
The comparative income statement (profit and loss statement) of the PN consolidated account for the years from 1983 to 1986 is shown in Appendix VIII - 3 which contains the principal items of income and expenditure of the PN.
An unusual situation in the comparative income statement could be found in the fluctuation of ratio of gross profit to gross sales which ranges from a low of 1.8% in 1984, to a high of 7.2% in 1985. Another unusual situation was also ascertained in the fluctuation of the ratio of total expenditure to gross sales which ranges from a low of 4.7% in 1986 to the highest level of 11.6% in 1985.
The fluctuation in the value of other income has also contributed to the unstable results of net profit.
It must be mentioned here that the income statement for 1986 should be revised based on a re-arrangement of the income statement of the fish marketing project for 1986 of which the value of total expenditure should increase by M$32,000 thus making the net profit about M$3,000. As a result of these changes, the income statement of the consolidated account will register a net profit for the PN for the year as negative to the value of M$15,000.
Thus, the PN recorded a net deficit for three successive years from 1984. These losses are largely due to the unsatisfactory operation of the retail shop project, and it may be time for the Board of Directors and the management to review he operating policy of the project and decide whether the shop should be closed or privatised.
