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  • Writer's pictureArvind Dang

Developing Standard Operating Procedure (SOP)    


                             

The purpose of the SOP document is to provide step-by-step instructions to users to carry out business activities correctly, uniformly, and efficiently.

Availability & implementation of SOP helps accomplishment of the following.

·      Enhance productivity

·      Reduce errors and minimize delays in executing business processes

·       Maintain consistency/uniformity across the organization

·      Establish a clear chain of command

·      Reduce training time of employees &  business associates like vendors, channel partners, and customers.

·      Meet statutory requirements accurately and timely.

 



 

This article  includes the following processes related to the development of SOP for the F&A function.

1. Planning the structure of  SOP (4 sections proposed)

2. Developing Section 1 of SOP - Processes, business activity narrations, and activity flow diagrams

3. Developing Section 2 of SOP – Associated Documents, manuals, configuration tables, and master data tables

4. Developing Section 3 of SOP – Authorisation Profiles for accessing section contents in 1 &2 

5. Developing Section 4 of SOP- Activities for managing emergencies/disaster-like situations

6 . Review of the SOP

7 Approval of SOP by CEO/MD 

8 Controlled circulation and training

9 Periodic review of SOP implemented 

10. Potential activities (including unethical) that can adversely impact business

 

 You can also listen to my video on the subject as per the link below.



  1. Planning for initiating the development of  SOP -6 activities

  • ·       1. Forming the SOP cross-functional team (CFT) -All functions

  • ·      2. Assigning a BU-level SOP -coordinator to monitor progress and facilitate conflict resolutions among interfacing functions

  • ·       3. Deciding structure of SOP- Propose developing four sections  as below

  • ·      4. Deciding  frequency for review of SOP by CFT

  • ·      5. Identifying the persons (within each sub-function in Corporate F&A )will initiate, edit, delete, view, and approve SOP

  • ·      6. Drawing timelines for completing SOP

2. Developing section 1 of SOP -5 activities 

  • 1. Narration of sub-processes in Part 1 of Section 1 as per the illustrations below.

  • 2. Narration of business activities in Part 2 of the Section 1 as per specimen below

  • 3. Timelines for the throughput time for executing each process

  • 4.  Activity flow diagrams

  • 5. Navigation chart or & transaction codes embedded in case of ERP package

An overview of 15 primary processes,140 sub-processes, and 963 activities is tabulated below.

 

Primary Process

No of the processes

No of activities

Identifying and Developing Competencies

5

16

Carrying out Performance Appraisal of F&A based on KPIs and KRA

3

23

Joint Ventures

6

91

Mergers &Acquisitions

6

100

Treasury investments

8

113

Intangible assets

8

30

Equity build-up & Dividend payments

13

75

Borrowings-Long term and short term

27

156

Role of CFO in pricing decisions

9

41

Conducting risk assessment in the F&A function

9

51

Developing Financial Authority Manual

6

48

SOP

9

29

Developing Budgets

3

18

Performing Internal Audits

15

120

Corporate Governance

13

52

Total

140

963


 

These are not being narrated here considering the sheer size of 963 activities as it will run into 346 pages as per details given in my book, for which Amazon links are given below.


Paper back-amazon link: India

 

Paper back-Amazon link-Global

 


However, for easier understanding, for one primary process, say “Borrowings-Long term and short term, “- a listing of a few subprocesses (out of 27) and a few activities  (out of 156 ) are captured below.

Listing of Few sub-processes out of 27

  • ·       . Long-term Borrowing -Identifying sources for funds borrowing (Local sources

  • ·       . Determining the cost of Borrowings

  • ·       . Evaluation of loan rates & terms and Negotiations for finalizing the

And so on, the remaining 2 sub-processes

 

Listing of a Few activities for sub-process (Identifying sources for funds)

1.    Identifying a list of a few local Indian players like

  • ·       Commercial banks: Both public and private,

  • ·       Financial institutions (for infrastructural projects and industrial development)

  • ·       NBFC: For project finance, infrastructure finance, equipment leasing, etc

  • ·       Infrastructure finance companies: for infrastructure projects like Airports,

2. Filing applications with shortlisted lenders for seeking long-term borrowings,

3. Identifying a list of a few overseas players who lend money, like

Multilateral development banks: (Funding for long-term projects and investments)

  Export credit agencies supported by governments (provide financing and guarantees for

  • international trade)

  • ·       Global banks:

  • ·       Development financial institutions (for development projects)

  • ·       Global technology investors-

  • ·       Private equity firms:

  • ·       Sovereign wealth funds (Investment funds owned by Govts)

 

And so, on balance, 153 activities

3. Developing  section 2 of SOP

This section includes copies of Documents(hard or soft), a listing of Tables, etc., relevant to the Corporate F&A function, such as below:

  • ·      I) Compiling & enclosing a List of Core documents:

  • ·      Ii) Compiling & enclosing a List of Statutory documents:

  • ·      Iii). Compiling & enclosing a List of Configuration tables:

  • ·      Iv) Compiling & enclosing a List of Master data tables

  • ·      v). Compiling & enclosing a List of applicable fields

 i) A list of core documents -30 types identified in the book is below.

  1. ·      Chart of accounts

  2. ·      Cost center details

  3. ·      Audited P&L and balance sheets with supports

  4. ·      Audit reports for costs, operations, etc.

  5. ·      M&A agreements

  6. ·      JV collaboration agreements and matters 

  7. ·      Due diligence checklists for JV, M&A etc

  8. ·      Risk assessment reports

  9. ·      Listing agreements with exchanges

  10. ·      Financial authority norms

  11. ·      Credit policy document for “sales  receivables“ for different OEM, Channel

  12. ·      Purchase policy documents for “Payment terms and credit periods for PO” for

  13. ·      Bill processing /passing guidelines for each type of vendor  

  14. ·      Inventory policy document  for valuation and perpetual verification

  15. ·      Treasury investment policy document

  16. ·      Borrowing policy document

  17. ·      Depreciation policy document

  18. ·      Assets requisition cum justification0document

  19. ·      Write off the document

  20. ·      Asset disposal document

  21. ·      LC requisition document

  22. ·      LC document template

  23. ·      Payment requisition document for advance payments

  24. ·      Bank Guarantee requisition document

  25. ·      Policy document for obtaining various insurance policies

  26. ·      Purchase vouchers template

  27. ·      Sales vouchers template

  28. ·      Journal Vouchers Template

  29. ·      Debit Notes  & credit notes template

  30. ·      Coding schemes for various types of financial documents

And more can be added  

ii) A list of statutory documents -12 types identified in the book is as below.

  1. ·      Checklists for compliance vis a vis each applicable Statutory Act

  2. ·      Specimen/blank copies of all types of tax-paying documents

  3. ·      Specimen copies of statutory returns

  4. ·      statutory calendar of return filings

  5. ·      statutory audit reports

  6. ·      Approved Documents for board meetings, AGM, EGM, and board sub- committee meetings

  7. ·      Corporate governance   reports

  8. ·      PAN, GST etc  documents

  9. ·      Approvals related to Company Act/other statutory bodies

  10. ·      Imports licenses

  11. ·       Tax /statutory fees paid documents.

  12. ·      Replies to Statutory agencies.

 

And more can be added.

 

iii) A list of configuration tables -23 types identified in the book is as below

  1. ·       Companies types/codes    

  2. ·       Chart of account

  3. ·       Sourcing of funding types  

  4. ·       Investments types 

  5. ·       Finance organisation

  6. ·       Document type

  7. ·       Account type for posting

  8. ·       Payment methods

  9. ·       GL account group

  10. ·       Customer account group

  11. ·       Vendor account group

  12. ·       Tax keys /codes 

  13. ·       Valuation area

  14. ·       Depreciation types   

  15. ·       TDS types

  16. ·       Tax procedures for pricing

  17. ·       Company- wise divisions

  18. ·        Assets types

  19. ·        Withholding tax types

  20. ·        Exchange rates-currency wise

  21. ·        Tolerance limits for invoice value

  22. ·       Document serial control

  23. ·       Interest payment type

 And more can be added.

iv) A list of Master data tables -9 types identified in the book is as below

  1. ·      GL-General Ledger account  master

  2. ·      Asset Master

  3. ·      GST rate Master

  4. ·      Depreciation master

  5. ·      TDS rate master

  6. ·      Materials master (F&A -related columns/rows)

  7. ·      vendor master (F&A -related columns/rows)

  8. ·      Customer master (F&A -related columns/rows)

  9. ·      Employee master (F&A -related columns/rows)

And more can be added

v) A list of fields -76 types identified in the book is as below

Fields Unique for F&A (34)

 

  1. ·      Asset type

  2. ·      Asset name

  3. ·      Asset code

  4. ·      Account document no

  5. ·      Amount in account document

  6. ·      Account type

  7. ·      Account description

  8. ·      Chart of account no

  9. ·      Chart of account description

  10. ·      Credit control area

  11. ·      Cost center

  12. ·      Tax type/classification

  13. ·      Goods & service tax rate group

  14. ·      Drawback rate group

  15. ·      Exchange rate

  16. ·      Fiscal year

  17. ·      GL account no

  18. ·      GL account group

  19. ·      GL account text

  20. ·      Special GL indicator

  21. ·      Tax jurisdiction

  22. ·      Tax code

  23. ·      Tax amount

  24. ·      Inventory Valuation category

  25. ·      Vendor account group

  26. ·      Customer account group

  27. ·      Currency type

  28. ·      Document posting key

  29. ·      Fiscal year variant

  30. ·      Bank key

  31. ·      Terms of payment-vendor

  32. ·      Payment-method

  33. ·      Vendor tax registration number

  34. ·      Customer tax registration number

 

Fields common for all functions (42)

  1. ·      Company code

  2. ·      Cost center

  3. ·      Table

  4. ·      activity

  5. ·      condition type

  6. ·      city

  7. · Date of the document

  8. ·. Date of entry

  9. ·. Date of posting

  10. ·. Date of creation

  11. · Date of payment

  12. · Date of bill

  13. ·      net value

  14. ·      quantity

  15. ·      payer

  16. ·      UOM

  17. ·      User name

  18. ·      Customer  name

  19. ·      Customer number/code

  20. ·      Vendor name

  21. ·      Vendor number/code

  22. ·      Address

  23. ·      City

  24. ·      State

  25. ·      Country

  26. ·      Country code

  27. ·      Date of document creation

  28. ·      Date of document posting

  29. ·      Date of the document

  30. ·      Material type

  31. ·      Material name/description

  32. ·      Material code

  33. ·      Material  number of manufacturer

  34. ·      Quality check -Yes/no

  35. ·      Quality parameter

  36. ·      Specification

  37. ·      Created by

  38. ·      Edited by

  39. ·      Viewed by

  40. ·      Approved by

  41. ·      Deleted by

  42. ·      Net weight

And more can be added

4. Developing  section 3 of SOP

Each Functional SOP Coordinator must Incorporate a cross-reference of the SOP Authorisation manual relevant to other interfacing functions considering the workflow to & fro 

 This section includes copies (hard or soft) of the authorisation matrix/manual capturing profiles for the following.

  • ·      1. Compiling & enclosing Profiles for accessing activities in all  processes vis a vis roles applicable for performing business activities

  • ·      2. Compiling & enclosing Profiles for accessing  Configuration tables & fields listed above  vis a-vis roles applicable for performing business activities

  • ·      3. Compiling & enclosing Profiles for accessing  Master data tables & fields listed above vis-a-vis roles applicable for performing business activities

  • ·      4. Compiling & enclosing Profiles for accessing  Documents  & fields listed above  vis vis roles applicable for performing business activities

There can be thousands of permutations and combinations of (business activity to be performed, sub-function, position, level ) that make authorisation profiles and to be included

 

5 Developing  section 4 of SOP

 

1. This includes preparing and enclosing communicating guidelines for managing emergencies or disaster-like situations such as those below.

a)    CFT to capture possible causes, from the list below that may be relevant for F&A -

Corporate services function :

  • ·      Avalanches

  • ·      Biological emergencies

  • ·      Chemical emergencies

  • ·      Cold wave

  • ·      Cyclones

  • ·      Droughts

  • ·      Earthquakes

  • ·      Fire

  • ·      Floods

  • ·      Forest fire

  • ·      Heatwaves

  • ·      Landslide

  • ·      Lightening

  • ·      Nuclear-radiological

  • ·      Smog/air pollution

  • ·      Thunderstorms/dust storms

  • ·      Tsunamis

  • ·      Urban floods

b) IT/System outage causing partial or complete shutting off ERP/Software system by any reason

c) Emergency due to strikes, riots, civil commotion, war, terrorism causing or likely to cause work stoppages, risk or endanger to life and property

d) Sudden Statutory /regulatory changes necessitate sudden stoppage of business activities or need immediate/urgent mandatory compliances.

e) Sudden non-availability or scarcity of critical resources like below likely to adversely affect business profitability or customer demands or service:

  •  i) Assets or equipment or tools and jigs and fixtures essential for the manufacturing of BOQ materials or for construction or for rendering customer services

  • ii) Human resources

  • iii) Critical inputs like Software Bill of materials or other inputs

2. This must also include actions /measures to be triggered in emergency-like situations in the F&A function.

  • ·       Commencing of business processes/activities as soon as possible to ensure business continuity in case of disruptions caused by emergencies

  • ·      Initiating countermeasures and putting in place alternate standby processes and systems, including manual/standalone IT solutions, which can enable the performing of Mission-critical activities in each process.This may require using alternate methods like manual or Microsoft office-based applications- solutions to maintain continuity.

3. Proposing financial transactions related to empowerment norms for managing emergencies as per policy/directives of Top management

6 Review of the SOP prepared earlier

1. The extracts of the  SOP relevant for interfacing functions must be circulated to concerned HOD of the relevant function like Purchase, Manufacturing/operations, Sales & distribution functions also and comments must be received in a pre-defined time frame.

2. CFT Periodically meets at the Organisation level SOP coordinator for the following:

  • i)Resolving interfacing issues

  • ii) Deciding access rights to another function vis-à-vis each other

  • iii) Resolving throughput time/cycle time for completing each activity vis-à-vis Process

3. Amending the draft SOP to final for seeking approval from the CEO/MD as relevant.

7 Approval of SOP by CEO/MD 

Reviewing amended SOP and CEO/MD  giving formal written/documented approval for releasing and implementing   SOP

8 Controlled circulation and training

This activity involves controlled circulation of the approved SOP (hard copy or soft copy as appropriate ) and imparting of training to the HOD’s of F&A and other interfacing functions as also key process owners.

9 Periodic review of SOP implemented 

The activities include periodic (say six monthly or annually) reviews by the CFT to incorporate the changes in processes/resolve inter-functional conflicts.

Changes in the internal business processes

 

10 Potential activities (including unethical) that can adversely impact business.

 

  • ·      Assigning members to CFT who do not possess core competencies to develop

  • ·      CFT Not devoting enough time to developing a comprehensive SOP for each of

  • ·      Inadequate review and resolutions of the conflicts by the respective SOP

    • ·      Changes triggered by the statutory bodies

    • ·      Enhancing efficiencies by improving business processes/activities through

    • ·      Incorporating changes in the ERP module due to amendments

    • ·      Changes in document’s  designs if any 

    • ·      Seeking fresh approval of the changes in the SOP from the CEO/MD

    • ·      Circulating the revised  controlled version of the SOP, providing training, and

 

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