Bio Locks – Unlocking Accounting Mysters

Bio Locks – Unlocking Accounting Mystery

It was end of summer season in North India and monsoon was few weeks away. Salaam Beg, who belongs to Aligarh, a small town in western part of UP, an Indian State had just finished his engineering in Mechanical branch. Being a topper of his branch, he has some very good job offers. But he has other plans. He showed no interest in these offers and instead convinced his father, Arif Beg, a retired Psychology Professor, to allow him to start manufacturing and selling locks.

Aligarh is a small town in Western Uttar Pradesh, an Indian state. Majority of the population follows Muslim religion. The town is famous for Aligarh Muslim University (AMU), a renowned university with a glorious past. The University offers courses of wide variety and attracts the scholars across the world.

The Industry

Aligarh has also been famous for locks manufacturing of various types. Approximately 500-600 micro, medium and small enterprises are engaged in manufacturing Steel Lever Mortise locks, Europrofile Cylinder locks, Steel Door locks, Brass Door & Dead locks, Aluminium Door locks & Handles, Latches of wide variety, Furniture locks, Brass Handles etc. The lock manufacturing industry came into existence around late 1870s, 125 years back when an Englishman established a small factory in Aligarh. Since then, the lock manufacturing industry in Aligarh has been growing in leaps & bounds.

The Beginning

During his Engineering course, while working on one of his projects, Salaam Beg had developed a special biometric lock. The lock will open only if the user puts his thumb/finger on the lock. The lock could take thumb/finger touch of more than one user also. The main difference between his lock design and designs available in market was that it was more very cost effective. He had shared the work with his professors and everyone encouraged him to go first for patenting the design and then for commercial production and sales. Unanimously, they all observed that the product has user friendly design and will generate huge demand from fast developing flat system and nuclear family system in India. Before graduating in June 2013, Salaam Beg had applied for received a patent for his design. Equipped with patent rights of his invention and encouraging words from his professors and friends, Salaam Beg decided to start his own venture which will manufacture and sell Biometric locks. He was not having much knowledge of how to run a business but he was confident that he will make up for this with his hard work and determination to succeed. Once again he spoke to his father and explained him what he was planning to do. He also asked for some initial funding which can be used to start the venture. Mr Arif Beg agreed to provide Rs 20, 00,000 for startup. During the last quarter of Financial Year 2013-14, Salaam Beg established BioLocks. Rs 20, 00,000 which he received from his father were invested in the business as initial capital. Out of this amount, Rs 17, 50,000 was deposited in IDBI Bank A/c No 56432. Beg brought in his patent, valued at Rs 750000, as additional capital in BioLocks. Beg hired 3 locksmiths to manufacture locks on a salary of Rs 10000 p.m. per person payable by the end of the month. He also hired one salesman on a monthly salary of Rs 12000 payable by the end of the month. He used his garage as his factory and took a shop on rent at Rs 15000 per month in city main market. He contacted IDBI Bank where he was maintaining firm’s account and applied for a loan for startup firms. The bank offered a loan facility for Rs 250000 secured against building. The loan is to be repaid after 3 years in lump sum but he will have to pay 12.5% p.a. interest on this loan on yearly basis.

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When the quarter and Financial Year ended on March 31, 2014, BioLocks had following balances:

Machines Rs 2400000; Patents Rs 750000; Stock of Locks Manufacturing Raw Material Rs 250000; Stocks of Finished Locks Rs 95000; Garage Building Rs 550000; Cash at Bank Rs 576000, Cash in Hand Rs 24700; Receivables Rs 480000; Capital Rs 3300000; Profit Earned Rs 275000; Suppliers Credit Rs 187000; Machine Vendor Credit Rs 1000000; Taxes payable Rs 113700; Bank Loan Rs 250000.

The Meeting

In the month of April 2014, Salaam Beg met his father to discuss the performance of his venture. His father showed his displeasure over the dismal performance of BioLocks. In his opinion, business has lost majority amount of cash and there is nothing much to show. Salaam tried to explain him that it is just three months’ results and it was a very short period performance to reach to any conclusion. But his father remained dissatisfied as his lifelong savings had been invested into the Business. After a long discussion, Salaam Beg and his father agreed that they should give more time to BioLocks and meet again exactly after one year to study the performance of BioLocks. Salaam Beg had full faith in his design and he was of strong opinion that in one year, he will have some substantial numbers to show to his father.

The Year Ahead

During financial year 2014-15, BioLocks did manage to go in full swing. Salaam Beg hired a part time bookkeeper, Amit Goel who with the help of firm’s bills, invoices, bank passbook and other relevant documents produced following data at the end of the year:

1. Total revenue generated out of sale of locks during the year was Rs 2550000. Of the total sale, cash sale amounted to 30% while credit sale was 70% of total sale. Out of the amount received from cash sales, Rs 500,000 was deposited in bank.