Question

ATOP for Farming, Innovation and Online Business

Business diversification * Financial accounting * Financial reporting * Capital budgeting *Corporate governance * Duties of directors (Companies Act 2016) * Multinational operations and consolidation * Tax planning awareness * Cost implication * Non-financial implications * Internal control and management

Background

Azlan, who was 30 years old, had a 10-acre agricultural land that he inherited from his late father back in the 1980s, located in Kuala Selangor. The land was still a jungle as his late father did not do anything to the land. Without any capital, Azlan found it difficult to develop the land. He kept it as it was until he was ready to work on it.

Azlan, was not married yet and he was a very hardworking person. He was a bachelor of accounting graduate from a local university. He had left his 10-year tenure with a bank as an assistant branch manager in Jengka, Pahang, under a voluntary separation scheme. Azlan received about RM 300,000 and thought this would be a good amount of capital to work on farming and to utilize the land. He had always wanted to grow best quality durians and he was thinking of pursuing this idea.

The years on after Azlan left his full-time employment; times were really tough on him. The land took sometimes to be developed with issues in terms of administration and licensing as well as getting the resources needed to get the farm up and running. He was close to growing local fruits ad advised by his consultant-friend, but he thought the slow progress would eat up his capital and compromise fast income. Proposal after proposal on fruit farming were rejected as no one was well-convinced of its feasibility. Azlan took a break and asked himself, 'What should I do next?'

He consulted his ever-patient mother and she advised him to go for organic and quality vegetables. Azlan felt that his might limit customers as organic vegetables were expensive and quality was difficult to maintain. But a Japanese company which Azlan had encountered in an agricultural trade exhibition in Korea three months ago had innovated hygienic planting and fast-growing farming. It was costly but the turnaround was fast. Research and development had proven results and met expectations.

Investing in Japanese technology

After several rounds of discussion with his family members and close friends, azlan decided to invest in the Japanese technology. He was amazed by the simple method and easy maintenance as the Japanese were careful with space, resources, time and returns when it came to business. Azlan said to himself, 'This has to be right time!' For good one year, he made preparations and got everything ready to venture into this new highly technology-driven business, Azlan Tech Organic Produce, or ATOP for short. He used solar power to drive the machines in a big warehouse with state-of-the-art fixtures and fittings, with well-organized conveyor-belt processes which were highly automated. Fewer operators were needed but more skilled technical workers were required.

A lot of money had been invested and by the end of two years after the start of his operations, his cash flow was running thin. Could he sustain his business?

He brought in 'thinkers' and Japanese consultants. They debated and came up with more strategies and acted fast. Luckily for Azlan, a local bank owned by the Ministry of Finance had started a special farming scheme for new entrepreneurs who had only been in business for less than five years. There was a lot of convincing needed and several back-and-forth of information and documentation; Azlan preserved. He walked the talk and impressed the bank. Even though a grant was offered, he took it as a loan and promised to pay it back in a special financing agreement. The more he showed profitability, the more funding would be available, and that money was always available to roll. Letters of credit and overdraft facilities were granted as long as credit worthiness is maintained. There was a lot of requirements yet Azlan accepted and become a 'yes' man. He worked his way through and out of any issues he faced. He also registered himself and the business under the bank's 'Coaching Future Business' arm, where he had to follow its guidelines and be subject to regular audits as and when needed by the bank.

Azlan's record was so impressive that the bank offered a business diversification loan. He observed the conditions and agreed to the terms. He then opened an organic supermarket (wholesale and retail) in Klang. Due to the freshness of the vegetables, sales picked up ad rose in a matter of weeks. Quality and reliability of the support system was superb and employees seem happy to work with ATOP.

Diversification offline and online

His marketing head Ezra proposed selling vegetables online and using Food Panda for delivery of the produce. After testing this for a couple of weeks, Azlan decided to diversify into fresh juices, fresh salads, as well as sandwiches. In fact, after six months, he was competing with foreign brands as ATOP-SANDWAY.He opened the first outlet in a shopping mall in i-City, Shah Alam, then another two months later in a local university in Shah Alam, then Puncak Alam, Sunway, and several other locations.

From a jungle to the idea of growing durians, then local fruits, and then the brave decision to invest in Japanese technology, Azlan has expanded his business from an organic vegetables producer to a greens supermarket to an online business and deliveries, then to sandwich and juice bars. The business that started with humble beginnings in early 2000 with just a staff of fewer than 10 had grown into sizeable business drawing at least RM100 million per year, with a profit of at least 25%.

His record at the local bank where he took financing from had earned him a good reputation and he became a sought-after successful entrepreneur. He went around motivating other people to develop and entrepreneur mindset. In fact, he had a column in the local newspaper, a 500-words honest motivation for everyone to read.In the media, TV and radio, he was invited for talk shows and interviews, sharing his experience and advice.

Azlan got married to a Japanese consultant, Miji, just two years after the organic technology took off. Azlan was now 45 years old and Miji was 43. They were happily married with three children: Daniel, Daren and Sumia.

Miji learned that Malaysian culture included delicious food, but rich in carbohydrates, fats and oils. However, she was careful with her diet and encouraged healthy eating in the family. Once in a while, she would indulge in the delicious Malaysian food. After years of living in Malaysia, she suggested to Azlan that they venture into catering and parties. With all their connections and community work, they decided to adopt a charity home and give business to it as a way to pay back and help the community. The vegetables were supplied by ATOP, but manager sourced the other supplies for the ingredients, with Miji overseeing the process.

Public listing and taking over a Japanese warehouse

Then years after operations, Azlan felt that he was ready to list his company. Again, he underwent the hustle and bustle of documentation and failing, but he was lucky to be assisted by his own sister's secretarial firm. Benchmarked against similar business, he embarked into preparing for listing. He was very lucky that the online services by the Companies Commission and Bursa Malaysia facilitated the submissions and follow-ups. Nevertheless, the going back and forth with the regulators was somewhat burdensome, but he coped and managed well. Azlan's time was so taken up by these pre-listing necessities that Miji was forced to come in and handle the technology warehouse and the organic produce.

Miji's former partner in Japan in her former consultant firm contacted Miji recently and offered a take-over bid for a warehouse, Dora-Emu, similar to the one Miji and Azlan owned in Kuala Selangor. However, there was a large amount in loans that would be carried over as the management had failed in the operations and was struggling with working capital. Demand was of no problem but upfront investment to cover losses and to settle debt to suppliers was not possible for that warehouse owner, Dora-san. This below-market offer was too good to miss, so Azlan and Miji went over to Japan to deal.

There were a lot of requirements for local orders that had to be observes and meeting these requirements would cost more than expected. On top of that, the high loan amount was another problem to resolve. Azlan went through the papers showing the feasibility analysis by his investment team. The warehouse seemed to be intact but it left too long, it would rot to pieces and become a white elephant. A lower offer was presented to Miji by Dora-san. Azlan and Miji went home undecided.

On her return, Miji sat down with her team in Malaysia and studied Dora-san's offer again. In the short-term, they might be running at a loss due to having to serve the interests, loans and outstanding overheads. But in the long run, there were great prospects ahead, as people were becoming more knowledgeable about organic food and were more health-conscious.

Miji drew up a proposal and presented it to right the Agri-Industry Bank (Al Bank) in Kuala Lumpur. To her surprise, it did not reject the proposal; in fact, it facilitated and collaborated with the International Trade Department which provided incentives for that kind of business ventures. Of course, the Department offered to buy a stake in the business, and Miji accepted without further thought. As far as the local funder was concerned, the collaboration and takeover in Japan would bring Malaysian fruits to Japan in time to come. Harum manis was actually cultured in Perlis, and once in the past it was developed for Japanese market. Therefore, having it in Japan would be an advantage. This would also open opportunities for the mango farmers up north in Malaysia.

After a year of preparations, ATOP was listed in Bursa Malaysia. Dora-Emu was jointly-owned by ATOP and the Business Wing of the International Trade Department (BWIT) at a 70: 30 ratio. Azlan paid for Dora-Emu at an affordable price after much negotiation. Miji now travelled up and down the KLIA-Nagoya route often, like she used to travel back and forth between Kuala Selangor and Kuala Lumpur.

Five years on, the children were grown and ready for advanced studies. After a good discussion and because they had a flourishing business in Japan, Azlan and Miji agreed for the children to further their studies there in the heart of Japan. Costly as it can be, they managed to get into good universities with accommodations nearby.Miji was in Japan most of the time while Azlan travelled to and from Kuala Lumpur.

Dreams come true

One of the strengths Azlan had was an efficient chief executive officer and a diversified expertise on the boards of both ATOP Bhd and ATOP-BWIT Bhd. Azlan was so comfortable that he could even afford a private jet.

What was exciting now was that Azlan had come up to a level where he could now choose what business he wanted to venture into next. He was into investments, to a certain extent, and he could sponsor and coach small entrepreneur. Next to his organic produce farm, there was another 10-acre of durian trees. The owner Tasnim was an old school friend from way back in the 1970s.

Remember how much Azlan wanted to grow durian trees in his ATOP land? Well the dream was just about to turn into reality. Tasnim had been struggling with maintaining the durian trees. Sometimes there would be a lot of fruits but at other times there were hardly any. Maintenance and other overheads were the rise and he now wanted to sell the land off. Picked up by Azlan's marketing manager who had read the about the offer, Azlan considered buying the orchard.

After a couple of meetings and negotiations with Tasnim, Azlan finally close the deal. He was happy that he finally got to grow durians. To turn around the orchard, he brought in his innovation team.

The team now cross-pollinated the quality durian varieties and before long, the trees began to bear fruits, both the old trees as well as the new ones. Amazing and unbelievable, the durians tasted much better than the normal musang king, udang merah, kucing tidur and several other varieties. You would be surprised to see the short time taken for the trees to fruit and the quality produced from the cross-pollinating technology applied to the whole orchard.

So, to date, what does Azlan have to his and his family's name?

1The 10-acre land on which the Azlan-Tech Organic Produce Warehouse is located. The company ATOP Bhd is now listed company.

2The jointly owned subsidiary for Japan warehousing, including the harum manis venture

3The charity home food operations

4The franchise ATOP-SANDWAY in at least six locations in the Klang Valley

5The Dream-Come-True Durian Orchard

Accounting and financing

Every quarter of the year, comprehensive management accounts were presented in terms of income. The following statement refers to sales proceeds for each ATOP business for the year ended 31 December 2018:

The cost-to-income ratio was now 40%; therefore a good 60% of the income was on average a take-home income for Azlan.

After going through the books of accounts and some documentation in the back office, records showed a big outstanding financing figure from Al Bank of at least RM 100,000 for assets and working capital, where the interest was accumulating, as the level of financing increased over time due to diversification. Azlan was worried that the financial obligations were growing over time and wondered if they would ever get out from owing the bank and the sponsors, one of which was the BWIT. Was this a worrying situation? One would have thought Azlan could handle it.

Miji thought a good way to move away from increasing financing is to capitalize their own funds and assets, and go for a new business with minimal capital outlay. Azlan and Miji had a heart-to-heart talk in the little time together that they normally had, as they lived apart most of the time due of the Japan venture.

This time, while Miji stayed longer in Malaysia, she found contacts from her own charity networking and met someone who seemed to be very hardworking and had persevered in her business. An online business owner, Amirah sold clothing and needed a base to expand her operations. She needed more customers, so after a pilot test, her sales increased in just over six months after Amirah located her kiosk next to Sandway outlets. The commission that Miji received could pay for some overheads at the franchised Sandways that they have in operation. A win-win innovative partnership, the outlook seemed encouraging for the duo.

Supporting the next generation

By now, their children had completed their university programmes. Grown-ups and mature as they were, choosing a place of work could still be quite challenging. All three expressed interest to their parents to stay in Japan. Azlan offered them to work as management trainees in the Malaysia office but none of them wanted the position. In the end, they worked with ATOP-BWIT in Nagoya, Japan.

The 'kids' were very IT-savvy, as they completed degrees in IT, computing and biotech, respectively. They had taken after their father and liked to venture into new things, but on a small scale. Besides working for the family business, they each had their own online business.

Danial had an Amazon-like service where he connected with suppliers all over the world, selling just about everything under the sun. With no physical shops or locations, he operated on an upline and downline system. All transactions and payments were done online with no physical presence anywhere. The next thing you know, your order was at your doorstep.

Daren was more of gamer, and organizes online competitions that were educational with no violence. He made and gained from competitions in a timely manner. Amazingly, in just over a month, he had 3,000 followers and 1,000 subscribers. Perhaps due ti his youth, he found it exciting when he could satisfy his followers and subscribers.

Sumia was into animation and video-graphics. She liked cameras and video clips. She offered photography and video services and promoted her business via Instagram, Facebook and LinkedIn.

Azlan and Miji decided to assist their kids to encourage them. The business empire that they had built would be sustainable in the long-term for the family, in the hopes that one day, the kids would take over and continue their legacy. But for the moment, the kids enjoyed support from their parents, as long as the business they ventured into was profitable, they enjoyed doing what they were doing and they preserved through the ups and downs of the business.

So while ideas and innovations keep changing according to demand, the message that Azlan and Miji share all the time is, 'Keep on moving and never give up for as long as you are breathing. There is no failure but lessons to learn all the time, so stay positive!'

question:

1. what capital budgeting technique should have Azlan carried out in order to facilitate decision making in the business? Discuss?
2. is farming seen to be traditional and conservative? what new ideas can you assess in this case?
3. how do you think the supply chain expanded into an online business can improve the performance of ATOP?
4. what other innovations would you advise azlan to consider in order to diversify his business?