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on Monday, 29 August 2016
in Business in China

Finance Management is Critical in Operating Your Business in China

Interview with PTL Group CFO--Shirley Xia

Shirley Xia has over 10 years of experience as a financial controller and manager. She has successively worked in large state-owned manufacturing, trading, software and international freight companies, with extensive experience in financial management and tax planning. Joined PTL Group in June 2010, Shirley has overseen many projects in business auditing, WFOE set-up and operation and tax planning, etc.  

Q: Among the Auditing and Business Recovery projects you have carried out, which project did you manage to deliver satisfactory results for despite its challenging nature?  

A: My first project at PTL was to manage a turn-around project for an Italian manufacturing company. The company suffered from very tight cash flow and had many management issues. The company’s headquarter was hesitating whether to continue operating in China after having done so for several years yet without healthy revenue.  They asked the PTL team to audit and screen the company’s entire financial and HR situation, as well as the logistics and manufacturing work flows.

 


The first problem that we observed was that the company had taken a successful sales person from within the organization and placed him in the role of GM, despite him having no experience in managing a company. He was lacking experience of overall general management, especially lacking experience of how to manage the company from an HR and a financial point of views. He was also in constant conflict with the Italian factory manager. The biggest problem that we observed in the finance department was that nobody was able to prepare a budget, conduct budget control, and run stock/inventory checks. In addition to this, no one knew how to prepare a price list in RMB for the local market.  This was the main reason that although the company’s products were selling well in China, income from sales did not cover the production costs.


PTL helped the company restructure the team and set up an ERP system, creating an internal work flow from purchasing to sales and to finance, greatly optimizing the internal structure.  After two years of supervision by PTL Group, the company was back on track and looking far healthier. That was when I handed over the financial management of the company to an experienced, newly recruited GM.  The client was very happy with our work.

Q: What can go wrong if companies don’t have a competent financial controller in their local office in China?

A: Setting up a WFOE (Wholly Foreign Owned Enterprise) has become a lot easier in the past few years but managing it is still very tricky and complicated. Many companies try to save money by hiring junior staff to handle finances or hire a cheap and inexperienced accounting firm. One of the cases we handled proved that proper financial management will display a company’s real time situation and also save money in the long run:

One of our most unique case studies was a fragrance essence producer that had a WFOE in northern China. They contacted PTL and asked us to help closing the WFOE due to a change in their strategy. I traveled to their office in North East China and found that their bookkeeping was completely messed up; according to their financial reports they had a profit of 3 million RMB. This meant they had to pay an income tax of 25% - equal to 750,000 RMB - if they wanted to close the company. In 6 months we managed to straighten out the bookkeeping and actually figured out that there was in fact a loss instead of a profit. Even though this was not good news for sales, it still helped the company to avoid even bigger loss by not paying the “incorrect” tax. Their loss was also recognized as tax deduction and so in the end they won twice!

Taxable Income and rates in China

The 2008 Enterprise Income Tax (EIT) equally applies to both domestic and foreign invested enterprises. The EIT is imposed on worldwide income of a resident enterprise (established or has effective management in China) with a credit available for tax paid on foreign-sourced income. If a foreign company has an establishment in China, it will be subject to China tax on all income effectively connected with that establishment.

The Taxable income (amount remaining from its gross income in a tax year after deduction of allowable expenses and losses) includes profits, capital gains and passive income (interest, royalties and rents). The table below illustrates the three EIT tax rates based on the company’s business category:

EIT Tax rate

Category

25%

Normal Corporate Income Tax

20%

Special small and thin-profit enterprises

15%

State encouraged new high-tech enterprises

 

Q: Can you share some financial and operational tips for international companies first entering China?

A: I have been working with two companies that are both from the agriculture sector. Their different approaches resulted in very different results.

The first company contacted PTL when they were considering entering the Chinese market. After careful analysis they decided not to set up a WFOE, but chose a solution that PTL offers companies without an entity in China, i.e.  recruiting professional sales people on behalf of the client, employing and hosting them in shared  office space, importing their goods into China, purchasing from  local suppliers, reviewing and signing RMB sales contracts with their customers/vendors and anything else relevant .
The company has been able to deliver project after project without any delay in supplying the product and without facing collection issues from their customers ever since the entire process has been monitored, managed and controlled by  PTL’s  logistics and financial teams.

The other agriculture company had a different experience:  they signed a sales contract directly with a joint venture in China for a large project of several million dollars.  The people who managed the deal from the overseas company had very little knowledge of Chinese tax and finance laws and closed the deal without consulting with any professional people in the field.   Shortly after, they faced huge problems in successfully executing the deal; although they had provided $600,000 worth of goods to the local client, the local client claimed that they couldn’t pay the overseas company because the overseas company couldn’t provide an RMB invoice - a topic that was never discussed during the negotiations and not agreed upon before signing the deal. The overseas client contacted PTL to help him find a solution for this complicated situation. PTL is in the process of establishing a structure that will allow the overseas company to issue RMB invoices in China in order to start collecting the outstanding debt.

After this very pleasant interview with Shirley, I realized how important it is to work with an experienced and professional team when first entering the attractive but “complicated” Chinese market. PTL Group has 16 years of experience in assisting international SMEs to enter the Chinese market in a smoother, more sustainable, and cost efficient. We share the difficulties with our clients and we are happy to also share in their successes!

To learn more about PTL’s services in the spheres of Auditing & Business Recovery and Finance Management, please click here.

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