Metrics Linking KPIs with Business Strategy

In most organizations, the accounting or finance group is responsible for assembling a series of reports after month-end and after the accounting close. The reports are assembled and distributed to senior managers to provide them with a clear understanding of the state of the business. An effective reporting package should include four items: an Income Statement, Variance of Actual to Plan, Production and Financial Forecast for the Balance of the Year, and a Scorecard with Key Performance Indicators (KPIs).

The first three reports in the package present economic and production information, while the last report provides metrics associated with company objectives and department-specific initiatives. As a general rule, the KPIs provide information about the organization’s success from a strategy perspective (i.e. financial, operational, and risk/compliance). The benefits of key performance indicators are that they . . .

  •  Quickly show senior management the measurable progress that has been made toward the achievement of company strategy.
  • Provide a fast way to explain variances in income statements.
  • Make it easy to link departmental contributions to strategy attainment, which aids in performance measurement and management.
  • Allow nonfinancial individuals to understand the organization’s success at achieving goals and strategies by tracking how the KPIs change over time.

Aligning KPIs with Strategy

KPIs should be part of every department’s initiatives and be closely aligned with the company’s annual business plan. When the business plan is produced, supporting strategies must be formulated, vetted, and approved among the senior managers.

At the department level, initiatives must then be developed that foster the attainment of the company’s overall business strategy. In turn, KPIs are established to measure the success of the initiatives.

Common strategies with corresponding key performance indicators include the following:

Strategies, Initiatives, and KPIs

Company Strategy Department Initiative Key Performance Indicator
Increase Employee Satisfaction CompanywideHuman ResourcesHuman Resources % Respondents Satisfied or Extremely Satisfied from Employee SurveysHeadcountEmployee Attrition
Increase Customer Satisfaction Companywide % Respondents Satisfied or Extremely Satisfied from Customer Surveys
Increase Profit Margin Sales Profit/Units Sold
Improve Credit Quality Sales Ensure Client Credit Files contain all executed documents and background checks
Reduce Seriously Delinquent Account Receivables Sales 90 Day + AR/Total AR
Execute Targeted Marketing Campaigns Marketing # of ProgramsReturn on Marketing Investment %
Contain and Control Costs Operations Personnel Expense/Units SoldNon-Personnel Expenses/Units Sold
Improve Vendor Compliance Compliance Vendor CostsVendor adherence to Service Level Agreements (SLA)

The strategies presented here are basic and need to be adjusted based on each organization’s specific business model. Also, if the product or service sold includes multiple steps, it is appropriate to include KPIs for each step; the key performance metrics can take the form of values and/or ratios.

Controllers can play a valuable role in establishing KPIs across the organization and helping management at all levels to ensure that strategies will attain the desired financial results, in support of the company’s business goals (growth and profitability).

To develop a KPI scorecard, take the following steps:

  1.  Identify a dozen or so important activities the team can accomplish that will contribute to the strategic objectives or compliance obligations of the business.
  2. Group the variables in a logical order, such as Production, Operations/fulfillment, Post-purchase Customer Care, Audit, and Compliance.
  3. Set targets and tolerance ranges.
  4. Benchmark against your top competitors and add benchmarks for each KPI on your scorecard. This will help in tracking how you are performing vs. the desired performance level.

Once established, the KPIs can be presented to senior managers during regular financial reporting for their review. The KPI report should always include an explanation of why you fell short of, or exceeded, the targeted KPIs. After a few months you will be able to see how the company is trending.

A Few Caveats

Be careful about creating KPIs that, if maximized, could cause problems in another area. As soon as you place a number on a table and publish it, the responsible individuals will do all they can to improve the value and reach the target that is set.

For example, time to complete a process has a very large impact on customer satisfaction. Intuitively, shortening the time element will have a positive impact on satisfaction, except when quality is reduced. If you are going to track time, you should also track error rates or rework required. If time declines and rework also declines or at least stays the same, then you’re on the right track.

Another issue that can occur is when financial people hide behind the metrics. When asked a question, a person responds with the metric, which is appropriate at first. However, especially with ratios, you must understand the ingredients of the ratio.

For example, if a KPI is “90 Day + AR/Total AR” and if the ratio declined (a good factor), did 90 Day Collections improve (which is what you want) or did Total AR increase (which is what you do not want)? Do not just look to the ratio without understanding the significance of the numerator and denominator that generated the metric. There is no replacement for understanding the numbers cold.

I wrote this post for the Institute of Finance Management “Controller’s Report Member Briefing.”  It was published in the June 2015 edition.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Growing through Productivity Increases

Productivity is an economic concept that is discussed in the press quite often.  Growing through productivity increases occurs when the quantity of inputs declines, to produce a measure of output.  The sub-set that is referred to is labor productivity, i.e. the amount of labor required to produce a measure of output.  The importance of the statistic is based on its relationship to growth.  If productivity increases, so does economic growth, to some extent.

When an individual states that they are going to become more productive, it usually relates to a desire to increase their organizational habits and improve their time management.  Essentially they are looking to increase their efficiency (inputs), to do a better job (output).  The result is a benefit associated with time saved.

At the company level, when productivity improves, fewer resources are being used to produce the output.  Fewer resources equates to lower production costs, which translates to excess funds in the form of profits, for reinvestment into the business or distribution to investors.  Following are strategies companies employ to increase productivity.

Automation – For a manufacturer this relates to purchasing a machine to make better widgets faster.  However for a service this improvement relates to the efficient storage of information that can be shared and accessed by any department in the organization.  This information will be used for order fulfillment or reporting.  This approach can be costly and time consuming.  If you wish to utilize this strategy, please review “Tips to Mitigate Technology Implementation Challenges.”

Process Improvement – Most processes work best when there is consistency.  Variations in activities and manual processes create a higher probability of error and expose the organization to unnecessary risks and time wasting.  The task of mapping out processes and documenting policies and procedures makes you critically look at the process and identify how things may be accomplished more efficiently, i.e. understand bottlenecks, remove inefficiencies, remove bureaucracy.  If you wish to utilize this strategy, please review “Process Improvement to Eliminate/Contain Non-Value Added Costs in the Services Industry.”

Business Management – As the business grows, so does the complexity of the business. More decisions require more analysis. There are increasing fixed and variable cost considerations and cash flow becomes more important to understand and manage.  Success begins with Strategy and Planning; and subsequently ongoing measuring and reporting.  When Accounting Management, Financial Management; and Risk Management are all optimized and running efficiently; business development can be performed without reservation.  If you wish to utilize this strategy, please review “The Frequency of Best Practices with Small and Medium-Sized Businesses.

The previously mentioned strategies of Automation, Process Improvement and Business Management have historically been the drivers of productivity increases.  But I predict that in the next five years, two additional strategies will emerge as drivers of productivity increases.

Labor Support and Development – High labor turnover is wasteful to any business.  Filling an open position is costly – posting a job; interviewing candidates; hiring an individual; and training the individual.  Once you obtain the right employee, a business should do as much as possible to keep the employee.  A business should invest in an employee, as long as the value received from the employee exceeds the investment by the company in that employee.  Some ways organizations invest in their employees include – providing financial support for job related training; considering non-standard work arrangements; ensuring compensation is at the market rate; and supporting retirement and health care benefits.  From the time the Great Recession began in December 2007, until it officially ended in June 2009, employees continually lost benefits including training and retirement benefits.  Companies that return to pre-recession benefits will experience a jump in morale, sooner than competitors.    For an example of how to utilize this strategy, please review “The Value Embedded in Tele-Commuting.”

A recent example of the support to labor includes – “Blackstone Group LP said Wednesday that it is extending its maternity leave benefits from 12 weeks at full pay to 16 weeks. The move, announced in a memo to employees, is designed in part to help the company compete for talented Wall Street women.”  Lauren Weber and Ryan Dezember.  “Why Blackstone Is Giving New Moms More Time Off” Wall Street Journal Online.  The Wall Street Journal, 22 April 2015.

Data Management – The ability to read data, i.e. Big Data, to understand how to best allocate company resources efficiently, should be a large driver of productivity in the future.  The firm combines price, product, place and promotion in the hope of finding the appropriate relationship to appeal to the target market.  The degree at which these variables are manipulated is based on available data, i.e. geographic assumptions and customer qualities within the geography.   As reported in Game changers: Five opportunities for US growth and renewal a McKinsey Global Institute study (July 2013), “Amazon has taken cross-selling to a new level with sophisticated predictive algorithms that prompt customers with recommendations for related products, services, bundled promotions, and even dynamic pricing; its recommendation engine reportedly drives 30 percent of sales.  But most retailers are still in the earliest stages of implementing these technologies and have achieved best-in-class performance only in narrow functions, such as merchandising or promotions.” (page 75)

In conclusion, firms focused on improving productivity should consider implementing Automation, Process Improvement and Business Management enhancements, as these are proven strategies; as well as additionally incorporating newer opportunities in the areas of Labor Support and Development and Data Management techniques.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Business Disruption Survival Techniques

Establishing a twelve month budget/business planand a business continuity plan are still the best ways to prepare a business for the most probable known threats. But what can you do for unanticipated shocks that negatively affect your ability to achieve your profit goals? When companies are faced with unanticipated situations, that threaten their business, and they realize these disruptions are not short-term issues, they may need to employ “business disruption survival techniques.”

Examples of situations that few saw coming include – The sudden drop in the per barrel price of oil, i.e. NYMEX closing price $99.75 (6/30/2014) vs. $52.78 (02/13/2015), negatively impacting oil and gas companies, and the businesses that support them. Union disagreements and work stoppages at US ports along the West Coast, negatively impacting the inventory of many businesses that sell imported goods. This situation is believed to be resolved, after nine months. The climb in the value of the dollar against most currencies, resulting in exports becoming more expensive, while imports become cheaper.

In reacting to these shocks, businesses implement three main types of cuts, for the sake of temporary relief, i.e. expense personnel, expense non-personnel and investments. If not done correctly, these approaches may do more long-term harm, than good. Activities are as follows –

Slash budgets (Personnel Expenses) – As personnel expenses are the largest cost associated with every business, targeting this expense is usually the first move. This tactic includes implementing hiring freezes and job eliminations.

Additional approaches include salary freezes; bonus reductions; and reducing or eliminating the company investment in the employee, i.e. usually related to education subsidies. More often than not these approaches will leave you with a large exodus from among the high performing dis-satisfied employees that can move to your competitors.

A popular technique which I believe is a big mistake is to provide a stay bonus to a select few. The message relayed with this last strategy, “If you did not receive a bonus, you are not considered critical to the organization.”

Slash budgets (Non-Personnel Expenses) – In the short-run, fixed expenses cannot be slashed, i.e. rent, insurance… The target of this tactic is usually variable expenses, i.e. marketing. But during this time of a disruption, marketing is very important to bring in new sources of revenues.

Delay Investments (Revenues) – To preserve cash during tough times, companies may place a hold on investments until the difficulties pass. But why would you wish to delay the opportunity for revenues, associated with a new product or service?

To avoid the slash and burn mentality, establish an environment of constant review and analysis. Do not wait until you are forced to make a large correction. Make small adjustments to your business, continually along the way. Suggested areas to monitor include –

Review Client Arrangements – Obtaining a customer that becomes unprofitable is a common situation. It only becomes an error of management if you do not constantly review the situation to understand the returns.

Review Products or Services – Periodically every business should review its product lines and services, to understand the profitability generated. The natural result will be an emphasis on the most profitable activities; while de-emphasizing the less profitable or money loosing activities.

Review Accounts Receivables – If you extend credit to your customers, which is required for almost all businesses, a certain amount of bad debt will result. At a certain point, you will need to ask for what you are owed. Resolving this bad debt efficiently and quickly, while not disrupting the possibility of future business from the customer takes tact and experience.

Understand Variable Expenses – Review your needs – Contracts represent your needs at a point in time, i.e. when they were executed. It makes sense that a contract will include items you no longer need – understand needs; understand pricing alternatives; seek opportunities to bundle; and avoid the warranty trap with new technology.

Consider Business Management Practices – The solution to counter an underperforming small or medium-sized business is a redesign. Interestingly, the method to redesign a business is the implementation of standard business management “best practices.”

Continue to Review Investment Opportunities – A company should only allocate cash to the most profitable uses, with the highest return on investment, which will provide potential distributable benefits to its investors, within the shortest amount of time.

Survival will be based on your ability to shift quickly, but strategically.

You can never plan for external disruptions, but you can prepare. Do the analysis today.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

CFO Concerns 2015

In 2015, the CFO will continue to be tested in a challenging market.  After the Great Recession, growth has not returned to pre-recession levels.  The macro-economic environment is anything but stable.  In addition to individual concerns that are industry or market specific, following is a selection of issues that face all CFO’s regardless of the organization industry, size or geography.

Brand Protection – A new area of concern and focus will be brand protection.  Not the brand protection associated with intellectual property.  While that concern does exist with the growth of on-line market places, the brand protection in this context relates to avoiding blemishes to your brand associated with vendor mis-management.

In the normal course of business, companies purchase inputs for their products or services from external vendors.  Interacting with vendors is critical for all businesses.  However, third party vendors create a certain level of risk that should be controlled and managed.  What would be the impact on your organization if your vendor fails?

Consider the following – Defective air bags from a vendor are causing recalls to be issued for Honda, Toyota, Nissan and General Motors Co.; faulty ignition-switches are central to General Motors recalls and  a lawsuit.  One year after the announcement of a strategic partnership, an Apple vendor filed for bankruptcy.  Hackers breached the systems of both Target and Home Depot by going through vendors of the respective companies.

Update – Apple Watch: Faulty Taptic Engine Slows Rollout, WSJ (4/29/2015) – “A key component of the Apple Watch made by one of two suppliers was found to be defective, prompting Apple Inc. to limit the availability of the highly anticipated new product, according to people familiar with the matter.”

Vendor Management should be a part of your Business Continuity Plan.

Regulation and Taxation – The adoption of increased regulation is associated with increased costs.  With every change an organization is required to analyze the new regulation, develop a plan to implement the regulation, develop training for current staff, potentially be required to hire new staff, and monitor implementation.  It is for this reason that time is a very important element when adopting new regulations.

Patient Protection and Affordable Care Act

Healthcare is now moving into the next phase as penalties for not covering employees are set to take effect.    With respect to ensuring compliance with the law, employers must comply with certain IRS reporting and disclosure requirements, which are important for the administration of the individual and employer mandates.  This reporting will be required beginning in 2016 for coverage provided during the 2015 calendar year.  By January 31, 2016, you must provide a notice called the 1095 to everyone who was on payroll in 2015; as well as file a form called the 1094 with the IRS.

To alleviate the burden in 2016, it is recommended that the following steps be adopted – Review IRS Reporting requirements under Sections 6055 and 6056; determine what applies to your organization; determine the information that must be gathered; develop an approach; and establish a procedure to collect and maintain the data.  It will be far easier to collect data going forward then to scramble in January 2016 to complete a form.

Taxation

In 2013, 55 tax provisions expired, of which 24 would be categorized as business provisions.  In 2014, 6 tax provisions are slated for expiration.  Of the six, three provisions relate to Alternative vehicle/fuel; while three provisions relate to defined benefit pensions.

It may make sense to review the 61 provisions, as Congress can extend them retroactively for 2014.

Debt Collection

The Consumer Financial Protection Bureau (CFPB) filed a lawsuit against a firm for its debt collection tactics ((http://files.consumerfinance.gov/f/201407_cfpb_complaint_hanna.pdf).  As stated in the law suit – “…the Firm operates less like a law firm than a factory. It relies on an automated system and non-attorney support staff to determine which consumers to sue. The non-attorney support staff produce the lawsuits and place them into mail buckets, which are then delivered to attorneys essentially waiting at the end of an assembly line. The Firm’s attorneys are expected to spend less than a minute reviewing and approving each suit.”

You cannot help but see the parallels between this situation and the robo-signing scandal relating to foreclosures which took off in 2010.  As a result of that scandal, in February 2013, a settlement deal was entered into with 13 banks over foreclosure abuses.  The cost of the settlement – $9.3 billion.

If you extend credit to your customers, which is required for almost all businesses, a certain amount of bad debt will result.  Now with the potential of legal action, it is more important to develop a strategy to efficiently and legally assert your rights of collection.

Optimizing the Business – When business is good, it is very easy to overlook inefficiency.  But if sales decline or stay static and costs continue to rise, profits must decline.  To thrive, a business must evolve and stay focused on optimizing business processes by removing inefficiencies and waste, to contain costs.

  • Focus on Cash Flow. Poor cash flow management will impact a business by constraining its ability to fill orders timely if inputs and/or inventory purchases are delayed; replacing outdated equipment; and, implementing process improvement which historically has upfront costs, prior to the savings.
  • Review product lines and services, to understand the profitability generated. The natural result will be an emphasis on the most profitable activities; while de-emphasizing the less profitable or money loosing activities.
  • Review customer/client relationships,to understand the relationship value. Obtaining a customer that becomes unprofitable is a common situation. It only becomes an error of management if you do not review the economics of each client periodically, or ignore the results after the review. If you discover that a client is unprofitable, try to correct the situation or walk away from the client.
  • Review and Improve Business Management and Production Processes. Process improvement is undertaken for a multitude of reasons which include – improve customer satisfaction, improve employee satisfaction, eliminate/contain non-value added costs.  Several back-office tasks should be consistently managed closely. More than likely these areas represent straight expense, but are critical to the successful management of any business, i.e. Accounting, Finance, Administration.

No doubt 2015 will be a challenging year.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

“We’ve reached the halfway point of HP’s turnaround”

In a letter dated June 2014, Rob Binns Vice President, Hewlett-Packard (HP) Investor Relations stated, “We’ve reached the halfway point of HP’s turnaround.”  The turnaround journey began when Meg Whitman joined Hewlett Packard as President and CEO in September 2011.  She was preceded by Carly Fiorina (1999 – 2005); and Mark Hurd (2006 – 2010).  This ten year period prior to Ms. Whitman’s arrival was marked by mergers including Compaq and EDS, headcount reductions, executive attrition, and sending jobs offshore.

Additionally, since 2002 HP transformed from a printing company, where 40% of revenues and 95% of profits came from this line of business; to a diversified technology company today, where printing accounts for only 20% of revenues and 30% of profits at HP.  Even after these changes, it became clear that a Business Turnaround was required.

The clearest indication that a Business Turnaround is required, is after a steady erosion of your business economics.

Since a peak experienced in the fourth quarter of 2010, declines were seen in several key statistics.

Annual Statistics Revenues ($000) Gross Profit ($000) Operating Margin Long-Term Debt ($000)
10.31.2010 $126,033,000 $30,181,000 9% $15,258,000
10.31.2011 $127,245,000 $29,827,000 8% $22,551,000
10.31.2012 $120,357,000 $27,972,000 9% $21,789,000
10.31.2013 $112,298,000 $25,918,000 6% $16,608,000

Source: http://www.nasdaq.com/symbol/hpq/

Once the decision is made to Turnaround a Business, a detailed internal assessment is undertaken to identify areas that require a redesign. 

Fiscal years 2012 and 2013 were the years of assessment at HP.  Problems identified as needing correction included –

Strategy and Planning – As is common in situations where management turnover occurs, strategy becomes inconsistent, which is confusing to customers, negatively impacting sales.  Detailed business unit strategies, tightly linked to desired financial outcomes, are required.   HP needs to assume a focus on customer needs; and competitor offerings.

Cash Flow and Reporting – HP requires a cost management program; as well as a disciplined capital allocation strategy.  Periodic business reviews are required to review success and modify plans, if needed.  A performance management system should be implemented; where compensation and accountability are linked.

Business Processes and Support Functions – Business activities should be streamlined, with inefficiencies and duplications removed.  A consistent level of quality should be established.  Automation should be utilized whenever possible, i.e. labor and contact relationship management systems.

Business Development – Marketing should be centralized to take advantage of unified media buying and the potential for discounting.  Sales – Improve the sales processes.  Implement a renewed focus on solution selling; and re-train, if applicable; Products – Weed out unprofitable products and identify product gaps.  Move faster at commercializing innovations investment; and, Customers – Improve the results from underperforming accounts.

But on October 6, 2014, it was announced that HP will split into two companies.  Hewlett-Packard Enterprise – a company that will compete within the IT market, serving key markets that include – servers, networking, software, converged systems, storage, services, and cloud; and, HP Inc. – a company that will compete within the IT market, serving key markets that include – notebooks, mobility, ink printing, managed print services, desktops, graphics, and laser printing.  The split is slated to be completed by the end of fiscal year 2015.

What will be interesting to see is how these two different approaches will be integrated successfully.  In a perfect world, HP would solve the deficiencies outlined above, prior to the break-up into two companies.  In this way each entity that will be launched will be an efficient entity, with all processes optimized to be profitable.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Competing on Price is Unsustainable

Pricing is a critical task that all businesses manage.  However, there are many different ways to approach the pricing requirement.   In simple terms, price = cost of inputs (or raw materials) + profit margin.  Costs include personnel expenses + non-personnel expenses (IT, accounting, compliance, insurance, Infrastructure…); while margin is dependent on your profit and return on investment requirements.  Companies run into problems when they disregard the math, and do not understand the returns they require.

An incorrect approach could jeopardize your business and have dire consequences.    Several popular strategies include –

The low price option in the market – This strategy requires your material costs to be substantially lower than competitors in the market, on an ongoing basis.  Your business processes must be very efficient.  Inefficiencies cause waste, which have a cost and add no value.  A short-term dislocation in costs will make this approach damaging to your business.  The goal in business should never be to become the low cost provider; but to become the most profitable provider.

Discounting – This strategy is used by companies in an attempt to garner new business from competitors by offering a discounted introductory price.  The goal is to provide an incentive to the client, to make a change and try your product/service.  However, once you provide a discount, it is very hard to remove it.  You will risk your clients moving to another competitor when your discount ends, as they will not appreciate an increase in costs.  Consider the approach of mobile phone companies and cable TV providers.  Each provides a discount for new customers to migrate to their service, if the customer agrees to stay with the provider for a certain amount of time.  But once the Agreement term expires, customer attrition is high.  The only time this approach will work is when the cost of converting to a new provider is high.   Customers will change providers unless the penalty for changing is greater than the cost of staying.

Selling certain products/services at a price below costs – For this strategy, a subset of your products/services is sold at a very low price, while other products/services are premium priced.  The assumption is that your clients will come for the low priced products/services; and additionally purchase other items which have a higher price.  But problems will occur if your projections are far off the actual results.  A situation was reported in the Wall Street Journal where Staples Inc. offered the State of NY (government agency) a promise to offer some items for one penny in exchange for the state’s office supply business.  “Staples delivered penny items with a list-price value of $22.3 million in the contract’s first few months, for which it was paid $9,300…”  (07.23.2014 – WSJ “When Staples Offers Items for a Penny, New York Buys Kleenex by the Pound”)

Relationship pricing – With this strategy, businesses offer an across the board price reduction to win large contracts.  The base price is reduced only for this client.  But, I have seen profitable relationships become unprofitable when this approach is not monitored and modified continually.  This approach will work in the first year once prices are set.  However, if you have agreed upon a very low margin and the period between dates of re-setting prices is long, a relationship can quickly become unprofitable.  For example, if you provide a fixed fee to your clients, you are assuming risk associated with price increases, which you will need to absorb until the fee is adjusted.

“…in general, corporations that hire real-estate companies to operate their facilities have been leaning harder on costs and are moving toward fixed-price contracts; under a fixed-price contract, the real-estate company must deliver its facilities management services within the price of its bid or absorb any cost overruns.”  (04.14.2014 – WSJ “Cushman & Wakefield Scores a Big One: Citigroup Contract”)

The solution to competing on price is to compete based on value, i.e. a value proposition.  In a world where most products/services are offered by multiple providers, clients need a reason to trust you with their business.  “The reason I use XYZ Inc., for my needs is that I am assured that they will provide me with –expert sales support that is knowledgeable and committed to providing a high level of customer service; a full menu of products/services that allow for one-stop shopping; a great brand reputation and presence in the market; and, they have the ability to deliver on promises, i.e. follow-through.

Customers/clients will be less sensitive to price if they understand the benefit of working with you, i.e. understand the value proposition you offer.  Additionally, satisfied customers will generate repeat business and be a source of recommendations for new business.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The Company Lifecycle

The classic lifecycle is used to describe the phases that most products go through, i.e. Introduction, Growth, Maturity, Decline. Products move from one phase to the next phase in succession. The most successful products move slowly through each phase.

Similar to a product that has a lifecycle, companies have a lifecycle.  The company lifecycle includes Introduction, Growth, Redesign, Maturity, and Merger & Acquisition. The goal of any business is to completely avoid the decline phase. During the decline phase it is not uncommon for a successful business to be acquired by a larger entity. But companies do not move from one phase to the next phase in sequence. The most successful companies will constantly shift back and forth between the growth to redesign to the maturity phase.

For a company, the phases are as follows –

Introductory Phase

This period is characterized by a heavy marketing focus. The company consumes cash to establish and build a brand. It is possible to lose the profit focus and instead be driven by revenues and customer acquisition counts. Pricing is set to promote client purchase. Within the business itself, staffing is low. Multiple tasks are being performed by a few individuals. These individuals may be required to manage different aspects of the business, which are not representative of their primary skill set. It is in this phase where a large number of start-up entities perish.

Growth Phase

A victim of its own success, a company grows production and distribution rapidly. The company reacts to the sudden increase in business and creates processes that are inefficient; contracts are signed quickly, increasing the potential for error; employee overhead rises through increased overtime or additional headcount; and cash outlays jump to manage the increased business.

Redesign Phase

In this phase the focus turns to stream-lining processes and cost containment. Interestingly, the method to redesign a business is the implementation of standard business management “best practices.”

  • Focus on Cash Flow. Poor cash flow management will impact a business by constraining its ability to fill orders timely if inputs and/or inventory purchases are delayed; replacing outdated equipment; and, implementing process improvement which historically has upfront costs, prior to the savings.
  • Review product lines and services, to understand the profitability generated. The natural result will be an emphasis on the most profitable activities; while de-emphasizing the less profitable or money loosing activities.
  • Review customer/client relationships, to understand the relationship value. Obtaining a customer that becomes unprofitable is a common situation. It only becomes an error of management if you do not review the economics of each client periodically, or ignore the results after the review. If you discover that a client is unprofitable, try to correct the situation or walk away from the client.
  • Review and Improve Production/Service Processes. Process improvement is undertaken for a multitude of reasons which include – improve customer satisfaction, improve employee satisfaction, eliminate/contain non-value added costs. A non-value added cost is an expense that is incurred, but does not add to the value or perceived value of your product or service. Simply stated, it is a cost your customers will not want to pay. Instead you will assume the cost out of your profits. Company owners should attempt to protect their profit margins by eliminating or containing non-value added costs.
  • Review and Improve Back-Office Processes. Several back-office tasks should be consistently managed closely. While more than likely these areas represent straight expense, all are critical to the successful management of any business.
  1. Accounting Management tasks include – Processing accurate state and federal filings; producing timely monthly financial statements; managing cash flow, i.e. receivables and payables; and responding to senior managers’ ad hoc questions.
  2. Financial Management – Providing critical financial and operational information to partners, with actionable recommendations on both strategy and operations, will allow your business to maximize profits: developing budgets/plans and analyzing financial variances to plan; installing a system of activity-based financial analysis; and managing vendor relationships to control expenses.
  3. Risk Management – A solid risk management program will reduce the probability of business disruptions, i.e. ensuring maintenance of appropriate internal controls and financial procedures; implementing financial and accounting “Best Practices;” and establishing metric(s) for each risk with corresponding tolerance range(s); and implementing a process of the timely distribution of critical success measures via a scorecard.
  4. Strategy Development – Analyzing business initiatives to determine expected cash flow, i.e. opening/closing offices, asset acquisition, new service launches; projecting impact of relationship pricing over time; and implementing processes that may open up new sources of business, i.e. sustainability, business continuity, engaging past customers.

Maturity Phase

In situations where offerings are similar, differentiation must be established at the company level. Why would consumers buy from me vs. my competitors, if I offer similar products? In this situation the company must adjust the value it delivers to customers, i.e. its value proposition. The answer to the question – you should buy from me because my product/service is superior and my knowledge, experience and customer service expertise will provide you with enhanced benefits.

As mentioned previously, the most successful companies will constantly shift back and forth between the growth to redesign to the maturity phase.

What phase is your company in?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Diversification or Divestment – Opposite ends of the same Strategy

When an entrepreneur starts a business, there is usually one product/service in mind.  They are focused on marketing and distribution.  As they grow, they begin to think about diversifying the business mix.  But whether your business sells Real Estate, Insurance or widgets, the primary reasons for diversification are to reduce risk, stabilize cash flow, and preserve a competitive advantage.  Through diversification, you can

-Ensure sales during seasons when the demand for your primary product is low.  In this situation, a firm should sell a related product that is active during business lulls, i.e. firm sells heating systems, as well as air cooling systems;

-Satisfy customer demands for related products.  One mistake in business is to refer your client to a competitor, to satisfy a need which you cannot fill.  More than likely, once they go, they will never come back.  One stop shopping for customers is always preferable over visiting multiple vendors;

-Assume control of a supply or distribution chain, i.e. Amazon begins Sunday deliveries, to increase customer satisfaction;

-Stay competitive by exploring growth opportunities, i.e. develop new markets and/or attract new customers; and,

-Balance a business which has long periods between sales with a quick sales cycle, i.e. automotive sales which may occur every five years, offering auto service which occurs every six months.

From a purely finance perspective, when investing capital to achieve growth, only commit capital to those projects that meet your profit expectations, return on investment requirements and results in a positive free cash flow position.

Profit – Funds available after total expenses are deducted from total revenues.  The basis from which taxes are calculated.  Pre-tax profits can be calculated monthly, quarterly, annually.  This value is ideal to plan annually.

-Return on Investments (ROI) – Ratio of Income generated over dollars invested in a process or product financed, to stimulate the growth of the company.  ROI is usually tracked for three to five years.  This statistic should be used to ensure that financial resources are being allocated to growth opportunities with the highest returns.

-Free Cash Flow (FCF) – Funds available after paying expenses, adjusted for non-cash items, minus capital expenditures to maintain the firm’s current productive capacity, i.e. the amount available for distributions or future growth prospects. FCF is an annual measure.

A company that incorporates a diversification strategy should be prepared to also at times consider a divestment approach.  Periodically every business should review its product lines and services, to understand the profitability generated.  The natural result will be an emphasis on the most profitable activities; while de-emphasizing the less profitable or money loosing activities.  Through this exercise, you will quickly identify problems in products and service fulfillment.

When you discover a line or business that is not performing as planned, there will be three questions that need to be asked – Is the business inefficient, but can be optimized?  Is the business being managed by the correct person?  Is the activity important to the overall strategy of your business?

If this line or business is not critical to your strategy, it may be time to divest.

It is not uncommon to read the press and see an article about a company divesting of a subsidiary.  The next day, there is another press article that the same company is acquiring an entity.  There are multiple reasons why a business may divest itself of a product line or subsidiary – the business does not meet expectations of profits, return on investment, or free cash flow targets.  These success targets may have been missed due to faulty production assumptions in the planning of the new line or subsidiary; or external factors may make the business no longer profitable.  Common external factors include unexpected regulation or taxes that make the business more expensive than previously planned; or a new competitor enters the market with a lower cost of doing business.

But the greatest reason for divesting an unsuccessful line or business is to free capital, so it may be allocated to more profitable activities.

When was the last time your business mix was reviewed?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Why are so many companies announcing a Turnaround?

So far in 2014, turnarounds have been discussed domestically at Radio Shack, Yahoo, Best Buy, Lowe’s and JCPenney, to name a few.  Internationally, word of turnarounds have been reported at Sony, HTC, Carrefour…   So what has caused this trend?

Simply stated, when business is good, it is very easy to overlook inefficiency and waste.  But the macroeconomic weakness that is affecting the US is resulting in sales declines; while at the same time costs continue to rise. As a result, profits decline.  A business may find itself in need of turnaround assistance based on unforeseen external factors, i.e. a natural disaster, competition, new regulation, new taxation assessed federally or at the local level.  While internally, rapid unplanned growth can be very disruptive, if the focus turned away from profitability.  This growth may have been attributed to organic growth or a merger or acquisition.

The most detailed and transparent turnaround discussed is the turnaround at Hewlett Packard –

Meg Whitman joined HP as the President and Chief Executive Officer in September 2011.  After a year of assessing the HP situation, Ms. Whitman announced a Turnaround.  At a Security Analyst Meeting (10/03/2012), Ms. Whitman attributed the need for a turnaround to several factors, including a change in the IT industry; constant change in executive leadership of the company; decentralized marketing; integration of acquired companies; misalignment of compensation and accountability; lack of metrics and scorecards to manage the business; lack of a cost containment focus; product gaps; and ineffective sales management.  The turnaround which began in 2012 is expected to take hold by 2016.

The solution to counter this situation is a redesign, i.e. a focus on stream-lining processes and cost containment.  Interestingly, the method to redesign a business is the implementation of standard business management “best practices.”  But to fully implement a turnaround, innovation and growth will be required.  Customers’ needs must be placed at the center of your decision making and a focus on business development will be required.

Start by assessing and understanding the amount of change required and develop approaches that will minimize the potential for disruption.

Superior management and flawless execution will be required.  Each member of the management team should understand their responsibility and be committed to work together as a team to redesign to turnaround the underperforming business.  A commitment to financial discipline and a returns based capital allocation strategy is required.

Going forward, managing the business should be accomplished from a data based perspective.  Any decision regarding the use of funds and or the changing of strategies needs to be quantified.  Opinions should be the basis for investigation, but data should be the reason for actions.  An executive needs to be able to read financial and production numbers; as well as understand the significance of combining the data sets to grow.  If you do not understand the drivers of revenues and expenses, or the significance of production data, any decision will be a best guess on how to proceed.

If you understand the current situation with respect to the market, competitors, customers and employees, you will be better able to develop detailed strategies that allow you to minimize weakness, maximize opportunities, and mitigate threats.

Managing cash flow is critical.  The optimal approach is to employ conservative and sound financial and accounting policies; maintain a strong working capital position; and implement accurate and responsible reporting that looks at variances to established plans.

In a turnaround situation, a “best practice” is to document and review policies and procedures; to stream-line and remove inefficiencies; discontinue manual tasks through automation; and, enhance security through segregation of duties.  The outcome will naturally be cost savings.  Circumventing established policies and procedures exposes the firm to errors, unnecessary risks and costs associated with wasted time.

If you are in a business turnaround situation, it is very easy to think the proper decision is to slash the marketing budget to cut expenses.  But, it is during these tough times that marketing and sales are the most important.  As expenses keep increasing, revenues at the very least must keep pace, or profits suffer.  Annually, new customers must be sourced.

The role of your marketing department is to collaborate on strategic campaigns and point of sale initiatives; while fostering a consistent and standard sales approach across all corporate communications and marketing efforts.

The redesign steps are as follows –

  • Communicate the need to redesign to senior managers and the board of directors, to gain concurrence;
  • Select a respected executive with the authority to cross department lines to lead the project.  This individual will be the champion of the project and facilitate the integration of change;
  • Perform a key assessment of the organization to prioritize the trouble spots;
  • Set strategy and establish a cash flow plan for the next 12 months, based on the current situation;
  • Communicate the strategy companywide, as well as the intentions to redesign companywide processes, to gain employee understanding and involvement in the process;
  • Optimize support functions; and,
  • Emphasize business development to grow.

Communicate with the Board of Directors, throughout the process.

The speed at which the process can be completed will be based on the amount of redesign required and the commitment of your management and staff to make required changes.

 

In 2014, Regis published Redesign to Turnaround Underperforming Small and Medium-Sized Businesses.  To read chapter one of the manuscript, click Here.  Recommendations so far have been positive.  To order your copy, click

Redesign to Turnaround Underperforming Small and Medium-Sized Businesses

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The Frequency of Best Practices with Small and Medium-Sized Businesses

Business failures are all too common.  You may be an excellent doctor, accountant, architect or engineer.  You may be a specialist in your field, but respectfully, it does not mean you know the nuances of running a successful business.  Sadly, mismanagement is one of the primary reasons for business failures.

“Best Practices” are techniques that businesses employ to control costs, stream-line processes and avoid disruptions.  Over the years I have worked for three very large companies; and worked with a great many small and medium sized businesses.  I have found that small and medium-sized businesses incorporate some Best Practices, but not consistently.  However each large Fortune 100 company I worked with incorporated best practices consistently.

On March 6, 2014, CFOTips published a quick 32 question survey to understand the existence of standard best practices in small and medium-sized businesses.  Questions were general, so the concepts would have applicability to all responders, regardless of the business model.  Select results were as follows –

  • To understand the success of your business, it is recommended that an annual business planning process be conducted.  But when asked, only 47% of responders had a long-term plan of where they expected to be in five years; while only 47% of responders had a documented, detailed business plan for the next 12 months.
  • A best practice for an entity is to annually set strategy for the coming year.  This activity requires external information to validate your approach and direction.  Interestingly, only 41% of responders conducted competitor surveys; while 59% conducted customer satisfaction surveys; and 41% conducted employee satisfaction surveys.  Only 59% of entities conducted an analysis of their place in the market, similar to a Strength, Weakness, Opportunity, and Threat (SWOT) analysis.
  • To ensure processes are efficient and reduce expenses, a best practice is to establish policies and procedures and document job descriptions.  Only 41% of responders have policies and procedures for most, if not all processes; and 59% of responders have job descriptions.
  • To ensure your cash flow is not disrupted, a best practice is to have a collections process and utilize it when required.  Based on our survey, only 65% of responders have an established collections process.
  • To reduce the risk, of fraud annually a segregation of duties analysis should be performed.  Yet only 47% of responders performed a segregation of duty analysis.  And to ensure an environment where all employees act on behalf of the company’s best interests, ethics policies should be established, with a system available by which employees can identify unethical behavior.  While 75% of responders have an ethics policy, only 35% of responders have a whistleblower program.
  • To control costs, periodically vendor agreements should be reviewed to understand what you are paying for and what you are receiving.  Yet, only 35% of responders review vendor agreements and company needs periodically.
  • But the most surprising results were related to the prevalence of a business continuity plan.  Only 29% of responders reported a documented business continuity plan for their business.

Note, as less than 100 responses were received, this information should be considered directional only.  How do you compare?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Redesign to Turnaround Underperforming Small and Medium-Sized Business

There are many reasons why an organization may require business turnaround assistance.  Rarely is it due to a single factor.  A business may find itself in need of assistance based on unforeseen external factors, i.e. a natural disaster, competition, new regulation, new taxation assessed federally or at the local level.

Internal reasons for turnaround assistance may be attributed to a period of high growth.  Rapid unplanned growth can be very disruptive, if the focus turns away from profitability.  It is not uncommon for any or a combination of the following situations to occur – customer service declines, as well as customer satisfaction; company reacts to the sudden increase in business and creates processes that are inefficient; contracts are signed quickly, increasing the potential for error; employee overhead rises through increased overtime or additional headcount; and cash outlays jump to manage the increased business.

Years later you stop and look at the business and discover things are inefficient and costly.  An Accounting colleague once advised that often times he is asked to look at an established business to help them correct a low profitability issue.   He reflected on the fact that, “Most of the time when a business comes to me for help, it is already too late.”  You need to understand when a problem exists.

The clearest sign that turnaround assistance is required is after a steady erosion of your business economics.  Profitability continues to decline because –

  • Revenue increases year-over-year are anemic due to continual price pressure in a mature industry;

  • Marketing efforts are not organized and occur sporadically, i.e. the volume of new business, only serves to replace terminating relationships;

  • Employment and administrative expenses increase; and,

  • Competition is fierce.

But even after pointing out the data that shows a sustained economic decline, do not be surprised to hear management colleagues provide the following excuses –

  • The company’s economic issues are attributed to only one department or product.  Just fix that area;

  • There are quick fixes that can solve all our problems;

  • A problem does not exist.  We are just experiencing a rough patch that will self-correct;

  • Recent short-term revenue increases signify that a problem no longer exists; and,

  • We can solve the issues through expense reductions only.

The solution to counter an underperforming small or medium-sized business is a redesign.  Interestingly, the method to redesign a business is the implementation of standard business management “best practices.”

Following are six areas, that when optimized will increase the probability of success for your organization –

Management

Understand the economic drivers of your business; and study the production results of your efforts.  Make a commitment to financial discipline and prudent growth.

It is important that the entire management team of the organization is in agreement that a business redesign is necessary.  I have seen situations where one manager recognizes an issue, while another does not.  To be successful, you will need complete support from all managers.

There will be times when hard decisions will need to be made.  Complete commitment to the process is required.  If during the course of the redesign, things improve for a short period; do not stop implementing the corrective measures.  Trust your analysis.  Improved returns may not mean the problems are solved.

Diagnose the Depth of the Issues

The first step is to critically look at your establishment to understand the state of your business management practices.  As a result of this review you will be able to develop a list of areas that need adjustment.  Some improvements may require only a slight modification to your current processes; while other improvements may represent a large change to your approach.  Once the issues are identified, you will need to prioritize the adjustments to your business model.

Develop an Appropriate Strategy

Understand the market and survey internally and externally, i.e. competitors, customers and employees.  Develop detailed strategies that allow you to minimize weakness, maximize opportunities, and mitigate threats.  Communicate the strategies throughout the organization.

There are many strategies that a company could adopt.  However, if you are in a turnaround situation, your business energies and the corresponding strategies should be focused on efficiency and growth – become the low cost provider; differentiate your product or service in the market; be the value provider; and, adopt a customer centric approach.

Plan and Actively Manage Cash Flow

Cash Flow can be considered the barometer of the financial health of any organization.  An effective cash flow policy includes ongoing financial management.  In a perfect world, your monthly revenues cover your monthly expenses and leave a surplus, i.e. a profit that increases cash reserves.  But the perfect world is a theoretical place.

Success requires planning and a constant review of how your actual results compare to your plans.  Through this approach, you will be better able to make small adjustments to help you reach your financial goals.

Communicate the overall plan company-wide.  Involve employees and managers in the company redesign.  Set a plan and establish metrics.  Monthly distribute a one page document to the employees in the organization that clearly tells how the organization is doing compared to the metrics established during the planning process, i.e. a Scorecard.

A redesign to turnaround a business cannot be completed behind the scenes.  Progress sharing with your employees is very important.

Optimize Support Functions

Most processes work best when there is consistency.  Variations in activities and manual processes create a higher probability of error and expose the organization to unnecessary risks and time wasting.

Out of the ordinary tasks should be the exceptions.  Not the rule.

The task of documenting policies and procedures makes you critically look at processes and identify how things may be accomplished more efficiently.  A natural outcome in the short-run will be a reduction in costs.

Optimize Business Development

Marketing is a service that supports the sales efforts of the organization, by providing tools to foster lead generation, customer retention and relationship development/management.  This area should ensure the business is efficient, effective, and provides top tier product/service delivery capabilities. The focus should be to maximize profitability and increase customer satisfaction while maintaining appropriate risk controls.

Regardless if your organization has an extensive marketing group or not, there are a few staples critical to a successful approach to generating new business: create clear and concise brand positioning; produce targeted promotional materials which may include a selection of brochures, ads, flyers, and e-newsletters; build an on-line presence that may include a social media component; measure and track business results; and, manage the organization’s Customer Relationship Management (CRM) system.

Implementing adjustments to these six areas may represent a change in the way you have been conducting business to date.  New ideas cause disruption.  Closely monitor process change results and adjust, as required.  It is the commitment of your managers and dedication of your employees that will be required to ensure flawless execution and success.

You will benefit from an immediate savings through cost containment, once business operations are optimized.  But a complete turnaround requires successful marketing and sales.  A complete turnaround requires both revenue enhancements, as well as cost containment.

I have found that small or medium-sized businesses may incorporate some of the concepts, but rarely all of the concepts.  However each large Fortune 100 company I worked with incorporated every one of the concepts.  These are proven methods of success.

The blog you just reviewed is chapter one of a book that I published.  This book is a little different as it is experience based vs. academic based, i.e. what has worked in my career.  The book discusses each solution in the context of how it was observed in business.  I wanted a tool that a business owner could pick-up and use with practical recommendations, that can be applied across industries.

If you wish to read more, the complete book is available here –

Redesign to Turnaround Underperforming Small and Medium-Sized Businesses

 

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

2014 Concerns to the CFO

The concern of all senior finance professionals in 2014 will continue to be the proper management of cash flow in an environment of shrinking margins and soft demand.  To foster revenues, companies will need to improve responsiveness and meet customer expectations through innovation.   Productivity advancements will come from the implementation of new technology.  To contain costs, the focus will include overall spending; technology spending; and the efficient use of marketing.   All of these actions are internal in nature, i.e. the CFO will be able to exert some amount of control.

However there are three very specific issues in 2014, which will consume the thoughts of CFO’s as they potentially have a direct impact on the cost structure of the business model.  All of these activities are external in nature.  The CFO will have little control, but will be responsible for integrating change within the organization.

Data Security – Gregg Steinhafel Chairman, President and CEO, Target announced on December 19, 2013 – “We wanted to make you aware of unauthorized access to Target payment card data. The unauthorized access may impact guests who made credit or debit card purchases in our U.S. stores from Nov. 27 to Dec. 15, 2013.”  As a result of the breach, up to 40 million credit- and debit-card accounts may be compromised.  The true impact of the theft to consumers will not be known for some time; but the impact to Target will be immediate and may include a loss of confidence by its consumers with a corresponding decline in business.  It will be important to watch this situation unfold to understand what Target does correctly vs. what Target does incorrectly.  What regulatory actions will evolve out of this issue?

Tax – On January 1, 2014, the IRS’s new requirements regarding when taxpayers capitalize vs. expense for acquiring, maintaining, repairing and replacing tangible property becomes effective (T.D. 9636).  The exact impact to your organization is based on your business model.  The regulation is complex and should be reviewed early on to maximize the benefit to your organization.

With respect to state tax, twenty-three states have either expanded or proposed sales tax nexus expansion laws, i.e. click-through nexus for internet sales.  A firm without physical presence within a state, but sells goods and services, may be required to pay sales tax to the state.  This trend is expected to continue to evolve.  Check with the tax body in the states where you operate to understand if you will be newly impacted.

Compensation – Various unrelated actions are occurring in the compensation space, which will result in this area as a main focal point in 2014 –

  • CEO Compensation Ratio – On October 1, 2013, the SEC Pay Ratio Disclosure proposal was published in the Federal Register for a 60 day comment period.  “As required by the Dodd-Frank Act, the proposal would amend existing executive compensation disclosure rules to require companies to disclose: the median of the annual total compensation of all its employees except the CEO; the annual total compensation of its CEO; and the ratio of the two amounts.  [SEC Proposes Rules for Pay Ratio Disclosure, Press Release 2013-186] From October 1 through December 2nd – 493 comments were received.  Expect the SEC to publish its analysis during 1Q2014 with a final rule published soon after.
  •  Minimum Wage Changes – Thirteen states will have minimum wage increases effective January 1, 2014 – Arizona;  Colorado; Connecticut; Florida; Missouri; Montana; New Jersey; New York; Ohio; Oregon; Rhode Island; Vermont; and Washington.  The smallest increase is $0.10/hour; with the largest increase $1.00/hour.
  • Cost of Healthcare Benefits – The cost of health insurance is evolving and should be closely watched.

The success of your business is directly related to your ability to execute on your plans, i.e. internal factors where you have some control.  However, it is important to understand external actions that may impact your business in the future, to allow for their future integration, if required.

What issues are of concern to you?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

2013 Year End Tax Strategy

With four months remaining in the year, a sound approach would be to review expiring business tax provisions and plan accordingly.  Are there tax benefits today that you would like to take advantage of before the opportunity passes?

According to the Joint Committee on Taxation, List of Expiring Federal Tax Provision 2013-2023 (01.11.2013), there are 55 provisions that will expire, of which 24 would be categorized as business provisions.  While many of these provisions have been extended previously; it is unlikely they will be extended again, based on the current tax policy environment.

Are there activities that you are considering implementing in 2014 that if you moved to 2013 would allow you to take advantage of tax benefits?  Some of the more general provisions include –

15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (secs. 168(e)(3)(E)(iv), (v),(ix), 168(e)(7)(A)(i) and (e)(8)) – In 2014, the straight-line recovery period will revert back to 39-years.

Increase in expensing to $500,000/$2,000,000 and expansion of definition of section 179 property (secs. 179(b)(1) and (2) and 179(f)) – In 2014, deduction and qualifying property limits will be $25,000 and $200,000, respectively.  Additionally, off-the shelf computer software qualifies for Section 179 expensing in 2013, but not in 2014.

Tax credit for research and experimentation expenses (sec. 41(h)(1)(B))

To understand what expiring provisions will impact your specific situation, it is recommended that you consult with your tax advisor.

To review the full listing of expring provisions, please see – https://www.jct.gov/publications.html?func=startdown&id=4499

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Big Data for Pricing Optimization

If you study Marketing, you learn that pricing is part of the “marketing mix.”  The firm combines price, product, place and promotion in the hope of finding the appropriate relationship to appeal to the target market.  The degree at which these variables are manipulated is based on available data, i.e. geographic assumptions and customer qualities within the geography.  If your product has features that are different from what is currently offered in the market, it may be possible to garner a higher price, if consumers can distinguish the feature differences.

But in situations where offerings are similar, differentiation must be established at the company level. Why would consumers buy from me vs. my competitors, if I offer similar products? In this situation the company must adjust the value it delivers to customers, i.e. its value proposition.  The answer to the question – you should buy from me because of my knowledge, experience and customer service expertise.  It may be possible to garner a higher price, if consumers can distinguish the value difference.

It only makes sense that if you improve the quality of the data used to make decisions regarding the marketing mix components and the value offered, the firm will benefit financially.  Through the use of large data sets that consider consumer preferences and actions “Big Data” analytics may help you achieve this goal.

As reported in Game changers: Five opportunities for US growth and renewal a McKinsey Global Institute study (July 2013), “Amazon has taken cross-selling to a new level with sophisticated predictive algorithms that prompt customers with recommendations for related products, services, bundled promotions, and even dynamic pricing; its recommendation engine reportedly drives 30 percent of sales.  But most retailers are still in the earliest stages of implementing these technologies and have achieved best-in-class performance only in narrow functions, such as merchandising or promotions.” (page 75)

Big Data analytics are typically used for the following –

-improve internal processes;

-improve products or services;

-develop new products or services; and,

-enhance targeted offerings.

Implementing a “Big Data” approach requires hardware, software and highly technical quantitative analysts that have the specific knowledge to glean results from large data sets.  If you were looking to investigate the potential benefits that you may receive from a Big Data analytics program, it would make sense to outsource a test.  If the test is successful and you believe that an internal resource should be developed, you will be in a better position to develop that function internally.

There are a few companies today that offer “Big Data” services – Accenture, Deloitte, Oracle, PROS Pricing, SAP, Vendavo, Vistaar, and Zillant.

Does your company use “Big Data?  How?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Is it time to Plan for Growth?

A sample of recent survey results published, showed that finance professionals will be looking in the near future, to stimulate company growth, after years of focusing on cost containment, reducing debt and risk management.

– “79 percent said they would, in part, reinvest in their businesses and/or fund acquisitions using their cash holdings.”  (Accenture 2013 CFO Survey)

– “80 percent of CFOs plan to spend liquid cash on hand on investment in operations and growth initiatives, further emphasizing the importance of operations to many companies’ overall business strategies, as well as the CFO’s involvement in the execution of those plans.”  (Korn/Ferry 2013 CFO Pulse Survey)

-“ CFOs say their top uses of cash will be investments in organic and inorganic growth – well ahead of alternatives like funding operational improvement efforts and holding cash as a risk hedge.”  (Deloitte 2Q13 CFO Signals ™ What North America’s top finance executives are thinking – and doing)

Statistics support the notion that since the “Great Recession,” capital expenditures have not yet recovered.  According to the US Census Bureau’s Annual Capital Expenditures Survey, from 2008 to 2009, capital expenditures declined 20.63%.  For the following two years, increases have been minimal, 1.38% from 2009 to 2010 and 10.84% from 2010 to 2011.  While this survey is not all inclusive, it serves as a good proxy of activity for all companies and may point to pent up demand by businesses to invest in profit generation activities.

From a purely finance perspective, when investing capital to achieve growth, only commit capital to those projects that exceed the firm’s cost of capital.  But the piece that is very difficult to quantify is related to the disruption generated that accompanies a change to the organization.

Broadly, growth comes from increasing the current products and services offered.  The difference comes in to play in how that goal is achieved and executed –

-Expansion of current capacity (least disruptive), to drive down the cost of production and increase sales capacity.  In this situation, current policies and procedures and risk mitigation measures, need not change.  Profit growth is essentially related to driving down expenses through productivity increases.  The effects of changes in this area may be realized within twelve months.

-Expansion of a related product or service (minimally disruptive), that compliments your current offering.  This approach may require the addition of headcount that are experts in the new product or service.  Current policies and procedures and risk mitigation measures, may need to be enhanced.  This approach may lead to incremental profitability increases.  The effects of changes in this area may be realized within twenty-four to thirty-six months.

-Merger/Acquisition (most disruptive) associated with the integration of the current organization with the acquired organization.  This approach may lead to a sharp increase in profits, if done correctly.  In addition to increasing capacity, this approach will serve to remove/eliminate a competitor.  The effects of changes in this area may be realized within sixty months.

Prior to the implementation, perform a rigorous review and analysis – set a plan, manage the investment approach, validate assumptions, and modify if necessary.  Timing required and profitability gained will be directly related to the ability to Execute on the established plan to achieve the projected financial results.

Every business should constantly consider options to grow or risk losing market share to a competitor that has invested in growth.

How will your organization grow in the next 24 months?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The Three Financial Metrics Every Business Should Track

There are 100’s of ratios used to analyze financial statements if you are an investor.  Some of these ratios are specific to industries and business models, i.e. manufacturing vs. service.  Regardless, if you are the owner or a partner in an entity, there are three primary metrics that measure the financial health of your company, that should be reviewed periodically –

Profit – Funds available after total expenses are deducted from total revenues.  The basis from which taxes are calculated.  Pre-tax profits can be calculated monthly, quarterly, annually.  This value is ideal to plan annually.

Return on Investments (ROI) –  Ratio of Income generated over dollars invested in a process or product financed, to stimulate the growth of the company.  ROI is usually tracked for three to five years.  This statistic should be used to ensure that financial resources are being allocated to growth opportunities with the highest returns.

Free Cash Flow (FCF) – Funds available after paying expenses, adjusted for non-cash items, minus capital expenditures to maintain the firm’s current productive capacity, i.e. the amount available for distributions or future growth prospects. FCF is an annual measure.

A company should only allocate cash to the most profitable uses, with the highest return on investment, which will provide potential distributable benefits to its investors, within the shortest amount of time.

The preferable way to present this data is via a Scorecard that highlights Key Performance Indicators (KPI’s) that the company deems appropriate to gauge success at achieving strategic goals.  These reports are metric centric and show results over time.   As a general rule, KPI’s provide information which gives the reader a quick glance of success from a financial, operational, and risk perspective.  A successful scorecard will assist the company drive profitability, reduce costs and provide insight into risk.

What ratio do you use to track your success?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Are Defined Benefit Pension Plans becoming too much of a cash drain?

It is not uncommon to read about very large companies taking non-cash charges associated with their defined benefit plans – UPS $3 billion, Boeing $3.1 billion, Ford $5 billion…

A defined benefit pension program is a retirement plan funded by the employer, which promises a monthly benefit to the employee upon retirement. Contribution amounts are based on a benefit formula which takes into account employee income, age and years of service.   Simply stated, employers set aside an amount today that is expected to grow over years, to be able to satisfy a future commitment.  If you have ever discounted cash flows, you know that low interest rates will slow the projected  growth of the dollars set aside.

It is these low rates that are a primary cause of a trend in under-funded pension liabilities.   “Defined benefit pension assets for S&P 500 Index companies increased by $113 billion, from $1.11 trillion to $1.22 trillion, while liabilities increased $174 billion, from $1.39 trillion to $1.56 trillion. The median corporate funded ratio is 76.9%, which represents a modest decline from 77.7% last year.” (94% of Pension Plans Underfunded: Wilshire, by John Sullivan, AdvisorOne 04.11.2013)

While the goal should be to have a funded ratio of 100%, rating agencies use this statistic as a factor in judging the soundness of programs. The scale is as follows – Strong Funded Ratio >= 90%; Above Average > 80% but < 90%; Below Average > 60% but < 80%; and Weak <= 60%.

Based on this rating scale, on average, defined benefit pension assets for S&P 500 Index companies are below average.

In response, companies are setting aside large sums of money to fund programs, rather than invest or issue dividends to shareholders. “Between 2009 and 2012, companies in the Russell 3000-stock index have added $1 trillion in assets to their pension plans through investment returns and contributions, but their overall deficit still increased to an estimated $441 billion from $392 billion over that period, according to data from J.P. Morgan Asset Management.” (WSJ, Why the Corporate Pension Gap Is Soaring, 02.26.2013)

However, “Pension sponsors can’t sustain having to make large contributions year after year to finance their pension plans; they have to depend also on favorable investment markets and reasonable interest rates to contribute toward funding.” (Pension & Investments, The cost of low rates, 02.20.2012)

A protracted low rate environment will continue to make this pension plan structure a drag on corporate balance sheets for some time.  The likely impact will be a further decline in the usage of this pension plan structure.  According to the U.S. Department of Labor, the number of defined benefit plans fell 55% from 103,346 plans in 1975  to 46,543 plans in 2010.

Results are similar within the public sector –

According to Morningstar (The State of State Pension Plans A Deep Dive Into Shortfalls and Surpluses) using the rating scale revealed that in 2011,  70% of state pension funds were below average or weak: 7 programs were  strong with Wisconsin the strongest. 8 programs above average, 23 programs below average; and 12 programs weak with Illinois the weakest.

The only way to counteract this trend is to enter an environment with sustained, higher rates.

What are your thoughts?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Periodic Self-Assessment to Free-up Capital to Grow

“The strategic CFO and finance organization must spend considerable time and effort understanding the company’s markets and customers, competitors and suppliers. Which markets and customers represent the greatest value-creating potential? What are competitors doing, and likely to do, relative to the company’s customer base?” (CFOs: Not Just for Finance Anymore by Robert A . Howell, Wall Street Journal 11/12/2012)

Potential outcomes in response to this intelligence gathering will be as follows –

1) Do nothing, as your business perfectly aligns with the market and customer’s needs;

2) Modify the order fulfillment process;

3) Alter products and services offered; or,

4) Combination of 2 and 3.

As most businesses have a limit on financial resources available, a product or process investment will require an adjustment or elimination in the current offerings of your company, i.e. a reallocation of your working capital.

Periodically every business should review its product lines and services, to understand the profitability generated.  The natural result will be an emphasis on the most profitable activities; while de-emphasizing the less profitable or money loosing activities.  Through this exercise, you will quickly identify problems in products and service fulfillment.  You will also begin to analyze the value of your largest customers.  You may notice that certain customers are not as profitable as others, potentially requiring you to change pricing.

For example – In an organization where I was employed, we reviewed credit products every other year.  How were these products performing?  Was usage as expected?  What were competitors offering?  These products were portfolio products, and a certain allocation of the portfolio was held exclusively for the product being reviewed.  If we found that the product was no longer in demand, it would be canceled, to free up capital within the portfolio for new credit products.

This strategy will help you understand if funds are being allocated properly to support the most profitable endeavors.

Interestingly, based on a recent survey conducted by American Express and CFO Research, working capital for mid-size businesses will be obtained through an emphasis on receivables – “In a survey of 275 senior finance executives at companies with $4 million to $2 billion in annual revenue, 38% said that receivables performance would be their top priority for working-capital improvement over the next year, compared to 34% who cited inventory management, and 7% who pointed to payables performance. Another 20% said that all three categories would be a top priority.” (CFOs at Mid-Size Firms Target Working-Capital Improvements: Survey by James Willhite, Wall Street Journal 5/21/2013)

These survey responses from the CFO’s are counter to what has been disclosed in the press.  Large customers have recently adopted a strategy of paying vendors within 90 to 120 days, benefiting from the use of the vendor’s cash.  Note my recent blog posting – The New Cash Management Approach – Pay Slower (http://cfotips.com/?p=513)

Alternatively, if re-allocating cash resources are not an option, you may need to consider factoring receivables, acquiring a bank loan, issuing a debt offering or issuing an equity offering, to finance your growth.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The New Cash Management Approach – Pay Slower

Could you continue unscathed, if your customers stopped paying you for two to three months and instead paid within 60 and 100 days? On April 16, 2013 an article was published in the Wall Street Journal, “P&G, Big Companies Pinch Suppliers on Payments.” The WSJ article discussed a trend among large companies to push payments out.

If you do not have any large clients, you may not be immune to this trend.  If you provide materials to suppliers of large clients, these clients will attempt to delay payments to you, i.e. attempting to push the payment issue down-stream.

The immediate impact to your business will be the evaporation of your free cash flow.  Your ability to develop new products, make acquisitions, pay dividends, reduce debt, and hire will be greatly reduced.

So what can you do?

I recommend you anticipate the issue.  The following tactics are simply “best practices.”  If you are not affected by this trend, none of these tips will harm you.

– Increase required down payments/retainers. A non-paying customer may be worse than no customer at all, if you incur costs to obtain the business or advance funds to complete the business.

– Tie sales compensation in some form to payments received, i.e. commissions tiering and/or quarterly bonuses.  This tactic will ensure your Sales force is providing quality customers that pay on-time and they stay engaged in the collection process.

– Document and distribute payment terms that provide discounts for early payments; but late fees if payments exceed established timing.

– Stay engaged.  If you are owed, ask for payments.

Doing nothing is ill-advised, as the message relayed to your customers will be, “its ok to pay me late.”

However, if you implement the above recommendations without success, you may need to consider the following two options to address an expected cash crunch –

– Establish a short-term borrowing facility – Short-term financing based on your credit worthiness through a bank.  This option will have a cost which you may not be able to pass to your customer, i.e. negatively impacting your margins; or,

– Consider factoring – Receive an advance against accounts receivables from an asset based lender called a factor.  This option may be required if you don’t quite qualify for a traditional loan.   This option will have a cost which you may not be able to pass to your customer, i.e. negatively impacting your margins.

It will be interesting to see how the credit agencies handle these situations, as a lack of timely payments should impact the credit quality of the delinquent payers, i.e. D&B, S&P, Moody’s…

It will also be interesting to see investors’ perceptions of this change.  There are several financial ratios calculated by investors and analysts that use Current Liabilities as the denominator.  It makes sense that if payments are put-off, Current Liabilities will increase which will impact – Working Capital (Total Current Assets – Total Current Liabilities); Current Ratio (Total Current Assets / Total Current Liabilities); and Quick Ratio (Cash + Accounts Receivable) / Total Current Liabilities).

What are you seeing?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Expense Control through Vendor Management

A primary role of a Chief Financial Officer is to oversee long-term budgetary planning and cost management; as well as oversee cash flow.  It stands to reason that if an expense does not add value to a firm, it should be eliminated.  Unchecked, vendor expenses can quickly become out of control. Are you spending more than you should be with your current vendors?

At different points in my career I have been asked to review the expense side of the company’s Income Statement, specifically vendor costs.  The following approach has been utilized successfully many times over to achieve real savings, from vendors of all sizes –

  • Analyze Vendor expenses – understand the flow, i.e. fixed, variable, and seasonal. 
  • Review the contracts – Are you receiving all services and/or features that you were expecting?  It is not uncommon for technology agreements and/or data agreements to promise everything, but fall short of expectations. 
  • Review your needs – Contracts represent your needs at a point in time, i.e. when they were executed.  It makes sense that an expiring three year contract will include items you no longer need. 
  • Understand pricing – Is pricing today different from when the agreement was established?  What is the pricing from your vendors’ competitors, for new accounts?  Consider in your analysis the cost of conversion, i.e. cost to substitute one vendor for another. 
  • Seek opportunities to bundle – At times a vendor will seek more revenue opportunities by migrating to related services.  Are there cost savings for bundling, that you may benefit from?

Avoid the warranty trap with new technology.  Every new piece of equipment starts with a two year warranty.  When the warranty is close to expiring, you will be offered a warranty extension.  Depending on the price of the equipment, extended warranties may not make sense.  Consider replacement costs.

Decide based on the data you have collected what the proper fee is, for the service or product in question.  Contact your Vendor’s Sales representative and request a concession/discount to obtain your target price.  Do not threaten to leave or reference your data.  A good sales person already knows what competitors offer.  Be prepared to negotiate.

As a policy, review agreements at the time of renewal, at least every three years.  Prior to signing any agreement, be sure you discuss service expectations.  Require that all automatic renewal language, be removed from your agreements.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Mid-Year Look-Back and a Look-Forward

July is a perfect month to look back at the full-year plan established in January and re-forecast the balance of the year.  While a “best practice” for any business is to monitor success monthly, at reaching targets established at the beginning of the year (Communicating and Monitoring Success at Reaching Strategic Goals http://cfotips.com/?p=26); there is additional value in reviewing your full-year plan to understand if you are reaching your goals?

Look Back

Items for your consideration with references to topic specific CFOTips blog posts are as follows —

Review company success at generating revenue through marketing and sales

– Marketing Economics http://cfotips.com/?p=226.

-Activity Based Costing and Sales Management http://cfotips.com/?p=57.

-Bridging the gap between Sales and Finance http://cfotips.com/?p=133.

Review your company’s financial health

– For a Business – Cash Flow is King http://cfotips.com/?p=139.

– Bad Debt Strategies http://cfotips.com/?p=69.

Review if your company is operating efficiently and as expected

– Process Improvement to Eliminate/Contain Non-Value Added Costs in the Services Industry http://cfotips.com/?p=42.

-Internal Audits – “Inspect what you Expect”  http://cfotips.com/?p=325.

Review customer accounts

-Relationship Development after the Sale http://cfotips.com/?p=353.

-The Voice of the Customer http://cfotips.com/?p=154.

Review your position in the market

– How You Compare, i.e. Competitive Analysis Tactics http://cfotips.com/?p=328.

Look Forward

If after this review you are confident that you understand the reason for any variance, plan for the balance of the year –

-Re-forecast your projections.

-Evaluate if strategies identified at the end of last year make sense for the balance of this year.

-Ensure optimal tax planning – state and federal.

Finish the year strong!

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Is Tax planning even possible in this environment?

With six months remaining in 2012, a sound recommendation would be to review expiring tax provisions (individual and business) and plan accordingly, to ensure you are prepared.  Are there tax benefits today that you would like to take advantage of before the opportunity passes?

Every year the Joint Committee on Taxation produces a list of expiring tax provisions over the next ten years (https://www.jct.gov/).  The most recent version was published January 6, 2012. According to this document, the number of expiring provisions, by year, is as follows –

List of Expiring Federal Tax Provisions
Joint Committee on Taxation
2011 60
2012 41
2013 8
2014 6
2015 0
2016 5
2017 1
2018 1
2019 0
2020 1

Now consider the proposed 2013 federal budget which extends, enhances and adds new tax provisions.  Some of the business recommendations include: extending first-year depreciation deductions for certain property; granting a temporary income tax credit for job creation and wage increases; offering tax incentives for locating business activity in the US and prohibiting tax deductions for shipping jobs overseas; changing the Research & Experimentation credit; and, increasing the amount of deductible start-up expenditures.

Are there activities that you are considering implementing in 2012 that if you waited until 2013 would allow you to take advantage of proposed tax benefits?

How do you plan if you do not know for sure what will end and what will be enacted? You can expect that during the last four months of 2012, while the US is focused on the Presidential election, Congress will be considering approving a 2013 Federal Budget, which may include extending expiring tax provisions.

As recently as June 6, 2012, Bloomberg reported, “Former President Bill Clinton said Congress may have to temporarily extend all expiring tax cuts and spending into early 2013 to give lawmakers time to reach a deal on deficit reduction.”  While extensions are common, the suggestion of extending “all” seems very aggressive, but plausible.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Relationship Development after the Sale

The amount of time and energy, not to mention money that is required to develop a relationship can be quite large, depending on what you are selling.  All too often do Sales professionals make a sale and move on to the next potential customer, rather than further cultivating the relationship.  The very best Sales professionals recognize – a customer today can be a great source of referrals; maintaining a customer is less expensive than cultivating a new customer; if they purchased today they are likely to purchase again in the future; and a current customer offers the best opportunity to cross-sell other products and services.

In my experience, I have heard multiple excuses for not contacting a current customer.  Quick Test – If you ask your Sales Force about their most recent contact with their customers and they respond with any of these statements, you have a problem – My product is intuitive, this customer understands. They have my phone number if there is an issue.  I haven’t had a reason to call.

Following is an approach that has been very successful in the past, for a Service provider –   

Pick up the phone.  Do not send an e-mail.  It is very easy to ignore e-mail.

Prior to any call review the customer’s situation.

-Review dates of last service – What occurred?

-Review billing history – payment status.

-Check files to see if all documentation is up to date.

-Ask staff of any recent conversations with this client.

Call the Customer

Hi. My Name is ____________________ from _________________________.

General Customer Satisfaction

I see from our records that we provided service to you on ______________________ at the ___________________ location. Please tell me about this experience.

Were you satisfied? Why or Why not? What could we have done to improve your satisfaction?

We send out a customer satisfaction survey periodically. Your feedback is very important to us. I want to confirm that this survey should be going to the _______________________@ ______________________.

Billing

I see from our records that your current outstanding balance is $_______________.

Either thank the customer for timely payments or ask If there any problem with the billing?

Files

I see from our records that we are missing an updated and accurate Client Information sheet. If you do not have one, please give me your e-mail address and I will send it to you now. But before we hang-up, there are a couple of pieces of information I would like to get from you right now.

Our records show that __________________ is the General Manager, please confirm that this information is still accurate. Our records also show that the phone and e-mail address are _____________________________.  Ask this same question for the Controller and Accounts Payable Manager.

I know that we send all invoices to ______________________ at ________________________ e-mail address. Does this process work for you?

After Call

-Document the conversation.

-If a problem was discovered, refer the issue to the appropriate Manager for resolution.  Never leave it to the customer to call.  Once the issue is resolved, call the customer and discuss the outcome.

By touching these three areas (satisfaction, billing, records) you will discover information about your customer you did not know; as well as identify future issues prior to them becoming a large distraction.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Marketing Economics

The marketing department is a service that supports the Sales efforts of the organization, by providing tools to foster lead generation and customer retention. Regardless of the geographic reach, a centralized marketing department ensures consistent messaging across the organization. Additional activities should focus on identifying low cost, highly targeted approaches to messaging.

 
But this department should not be a financial drag. Most Marketing Managers create a Marketing Plan/Budget which includes a list of activities and the associated costs. This document is submitted to Executive Staff and approved. However, the lack of program justification makes it very easy to slash the Marketing budget during tough times. But interestingly, it is during these tough times that Marketing is critical.

An alternate approach is to project ROMI (Return on Marketing Investment) for every proposed activity. ROMI is simply a derivative of Return on Investment (ROI). The formula is as follows – (Gross Profit-Marketing Investment)/Marketing Investment. An example is as follows –

$600,000 Revenue from Marketing Program
$120,000 Gross Margin @ 20%
$100,000 Marketing Investment
20.00% ROMI

Programs should only be considered if they generate a positive ROMI or exceed a pre-established level. In this situation, a 20% ROMI would justify proceeding with the Marketing Investment. Now imagine all of your programs with an associated projected ROMI. Clearly the priority would include executing programs with the highest ROMI first.

Now let’s look at activities where a ROMI measure could be calculated —
• Lead Marketing – Programs that support Personal Sales efforts. For this area, a selection of brochures and materials that discuss the services you offer should be available for sales force use.

• Lead Source Management – Any sales organization should have the capability to track lead contacts centrally; as well as current customers. This database becomes the main source listing of Customers and is a focus of Retention efforts.

• Customer Retention – Programs to strengthen new and past relationships, i.e. thereby minimizing missed opportunities. ROMI should be calculated for all activities to justify their use. Sample activities include –

1. Monthly e-mail announcements with links to marketing flyers;
2. Direct Mail, i.e. targeted campaigns to leads retained in your Contact Management system; and,
3. Website / Social Media activities – please note an earlier blog post – “Is Your Company Maximizing Social Media”

Critical to the roll-out of any program, is the ability to collect pertinent data and accurately track results, to refine the process or adjust projection variables.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

H.R. 3606, aka the Jumpstart Our Business Startups (JOBS) Act, is Law

The U.S. Senate granted approval March 22nd; while the House of Representatives approved March 27th.  The Act was signed into law by the President on April 5th.  This law creates a category of companies called “emerging growth companies” that stay under the radar of the Securities and Exchange Commission (SEC), for up to five years.  This class of companies includes entities with gross revenues of less than $1 billion in the most recent fiscal year.  Reportedly, this population includes 14% of companies.

The logic – relax rules that limit the ability of small businesses to garner capital, thereby assisting their growth.  As these businesses thrive, hiring increases.

Benefits afforded to emerging growth companies by this law include –

-Exempt from the requirement of separate shareholder approval of executive compensation;

-Need only to provide audited financial statements for two years, as part of their IPO registration;

-Exempts external auditors from attesting to the assessment of internal controls provided by management;

-Exempt from any firm rotation requirement  being considered by the Public Company Accounting Oversight Board;

-Raises the number of investors to 2,000 and investment value to $50 million, prior to SEC registration;

-Eases certain conflict-of-interest restrictions between the analysis and investment banking sides of a firm with respect to offerings; and,

-Exempt from soliciting investment from only sophisticated investors.  Reportedly, this provision will allow companies to seek funds over the internet, i.e. crowdfunding.

But don’t expect any sudden changes on Monday (4/9).  The SEC has 270 days to review the law and revise current regulations.  Items of this law alter elements of the following laws – Securities Act of 1933; Securities Exchange Act of 1934; Investor Protection and Securities Reform Act of 2010 (title IX of the Dodd-Frank Wall Street Reform and Consumer; Sarbanes-Oxley Act of 2002; Reg D; Rule 144A…

Detractors believe that loosening regulations will only lead to abuse and fraud.  According to the final version, the SEC will report to Congress every two years, tracking the incidence of fraud associated with these changes.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The International Financial Reporting Standard (IFRS) is coming. When and how should you prepare?

The adoption of IFRS standards is well underway globally.  PWC has a great map which provides integration details by country (http://www.pwc.com/us/en/issues/ifrs-reporting/country-adoption/index.jhtml).  How these changes will affect your company specifically is not obvious. The impact varies based on business complexity, industry and geographic presence.

Following is a recommended approach on how to integrate the standard within your US Company.  The approach is broken down between pre-approval and post approval –

Pre-Approval, i.e. now

  • Collect available information and analysis from AICPA, SEC, and the Big 4.
  • Determine the appropriate form of IFRS to adopt, based on your company, i.e. IFRS for Small and Medium Size Entities (entities without public accountability) vs. full IFRS.
  • Identify the standards that represent a change in the way you track the financial success of your business, i.e. revenue recognition, expense recognition, assets, liabilities, financial liabilities and equity, derivatives and hedging, Consolidation, business combinations…
  • Choose a team of experts within your company that will integrate the new standard, once approved.

These four activities can be completed internally, with little or no budgetary impact.

Within the US, the SEC reaffirmed its commitment to a global standard, but has yet to establish a timetable.  The plan is expected in the next couple of months.

Post Approval, i.e. 2012

  • Consider potential IFRS integration issues –
    • Data gaps, i.e. new standards may require the tracking of data not previously collected;
    • Entity consolidation not previously required; and,
    • Accounting policy choices.
  • Test the impact of these changes within your company.
  • Develop a project plan and budget, with appropriate deliverable dates.
  • Present the plan to your company Board of Directors to gain approval.
  • Integrate the standards into your business through plan implementation.
  • Issue IFRS 1 – established approach to issuing the first IFRS financial statements for your company.

In conclusion, with the time remaining prior to the SEC accepting the IFRS standard, a CFO should be studying the issue and increasing his/her knowledge base.

How are you preparing?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

For a Business – Cash Flow is King

Cash Flow can be considered a barometer of the financial health of any business.  An effective cash flow policy includes planning and management.  In a perfect world, your monthly revenues cover your monthly expenses and leave a surplus, i.e. a profit that increases cash reserves.  But the perfect world is a theoretical place.

In reality, businesses have cycles.  Retailers that survive lean months are able to benefit from the peak shopping season that occurs from the end of November through the early part of January.  Drug companies invest large sums of money today in research and development, to offer a medicine in the future for a finite time period, prior to patent expiration.  These are examples of industries that excel at the planning and management of cash flow.

But the benefits of proper cash flow management or the penalties of poor planning can affect companies of all sizes.  Drains on a company’s cash flow fall into two categories –

  • Controllable – expenses where management has a potential impact, which include – salaries, rent, advertising and marketing, travel & entertainment expenses.  This impact can be defined as controlling the amount of the expense or the timing of the expense.
  • Uncontrollable – expenses where management has little or no ability to impact, which include delayed payments from individuals or companies where you extended credit i.e. customers 60, 90, 120 days past due.

Poor cash flow management will impact a business by constraining its ability to fill orders timely if inputs and/or inventory purchases are delayed; replacing outdated equipment; and, implementing process improvement which historically has upfront costs, prior to the savings.  As a result of these issues, a business may be forced to seek financing from a lender; and/or, seek outside investors.   If unsuccessful at these activities, the business may need to close its doors or sell to a competitor.

In my experience, the best way to avoid these business constraining impacts is to ensure an annual budget is established.  Subsequently, monitor actual results to understand if these results are in line with your expectations.  Monitoring should occur monthly with the results reviewed with senior management.   If needed, expectations should be adjusted to account for any unanticipated business change.

Even after all the planning, it is prudent to maintain a cash reserve cushion.  The proper size of this cushion is dependent on the business.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Bridging the gap between Sales and Finance

The sales and finance relationship is tricky, but necessary.  The Sales Team interacts with current and potential customers.  The Finance department is responsible for ensuring the company’s cash flow can support Operation’s efforts to meet these customers’ needs.  Following is an approach to make the partnership easier –

Establish Process with Controls

Sales activity should be flowed out to identify bottlenecks and risks.  If need be, policies should be established.  For example, it is difficult to ensure that decentralized national sales forces obtain the proper approval signatures from both the client and senior management.   A process should be established with timelines to make sure all approved documentation is collected and retained in one central location.  If during the course of the relationship, legal proceedings are necessary to ensure the collection of outstanding debts, these executed contracts will be required.

Production Planning

At the beginning of the year or at the time a new Sales Manager is hired, a full twelve-month sales plan should be established and approved by the Sales Executive.  The plan should include discounts offered and expected Marketing dollars utilized.  Expect that increased discounts and marketing dollars will be needed in highly competitive markets with a strong competitor(s).

Model Development

The most successful sales team I worked with was provided a simple financial model in excel, for their use.   Areas requiring variable inputs specific to the relationship were yellow shaded.  With this tool, sales personnel could easily input the variables missing and see the value of the relationship, at the point of sale.  Slowly but surely the sales team began to understand the drivers of revenues and expenses, when establishing a relationship.

Escalation Process

There will be situations when the model does not show the relationship is as profitable as required, by Finance department standards.  In this case, if the sales manager believes that the relationship should be established for strategic reasons, they need to have the ability to escalate the approval.  There are times when entering a relationship which is not as profitable initially, makes sense after some seasoning.  Other reasons may include a new product/program introduction or establishing a referral relationship.

Activity Tracking

Sales activities should be tracked via a sales manager specific scorecard which shows each individual and each of the contracts they manage.  Examples of items to be included  – revenues less discounts used, less marketing dollars used, customer service hours provided, commissions paid…  When this information is presented in one document, it is possible to see the profitability of every sales manager and the profitability of each relationship.

Scheduled Meetings to Discuss Results

Tracking reports should be discussed at monthly Sales meetings that include the Sales Executive and the responsible Finance Executive.  As the Sales Manager is intimately involved with the relationship, details not obvious by “the numbers” can be learned, which may impact collections and the future of the business.

The process established above provides a controlled, risk free way to achieve sales.  As outlined, finance will not be surprised by the results of the sales team.  Sales Managers will  have the independence to achieve company and personal goals.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Financial Modeling is an Art, not a Science

Financial Modeling of proforma returns is a task that should be performed by every business, annually.  It is the act of quantifying the anticipated revenues and expenses, associated with implementing your business strategy.  While the expected outcome of a Balance Sheet or Statement of Cash Flow can be completed, the statement modeled will most likely be the Income Statement.

The primary driver of the success of this process is related to the quality of the assumptions used, i.e. data based estimate vs. a gut guestimate.   The ease of choosing assumptions is directly related to the age of your company –

  • Established businesses within a mature industry – The assumptions used will be mainly based on the history of your company, but slightly modified to take into account your strategy.  The model output would be an annual budget.
  •  New businesses within an established industry – The assumptions used will be based on the activities of competitors, whose business model closely match yours, but slightly modified to take into account your strategy.  The model output should be a three to five year plan.
  • New business for a new or young industry – Assumptions chosen should be conservative assumptions provided by senior managers of your company, i.e. the experts.  The model output should be a three to five year plan.

The first model produced is your expected scenario.  Now produce two more models, i.e. run the model for revenues 25% greater than previously expected and 50% lower than expected.  This process is valuable to understand what you will do if actual results differ from your first model projection.  If your company is 25% more profitable than expected, what will you do with the enhanced revenue?  If your company is 50% less profitable than expected, will you survive the next 12 months of Operations?

Once the model(s) are completed, the iterative analysis process should begin.  Understand the drivers of revenues and expenses.  What adjustments can be made to cost inputs and revenue strategies that could create different results?  What Risk components (opportunity, threats) alter this cost vs. revenue relationship.   Adjust the model accordingly and re-analyze.

The process discussed can be completed by any experienced modeler using a spreadsheet program, to predict the economic outcome of any business, new product or service.  A more in-depth analysis can be performed (Monte Carlo Methods/Simulations) using a statistical package or spreadsheet “add-in” that can model the probability of different events occurring, based on changing variables.

The last and final step – document the model.  Document the assumptions you employed so monthly you can compare actual results to plan results.  This documentation will help you understand the cause if a variance exists.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Rules are Changing

The market turmoil of 2008 changed the business landscape dramatically.  In addition to integrating new rules into the business, today’s CFO, must keep up to date on rules still yet to be implemented.

Following are some of the federal rules affecting Human Resources, Finance, Accounting and Financial Management.  This list is in no way exhaustive.  There may be additional rules specific to your industry or at the state/local level that require your attention.

2012 Regulation Table

Note – it is not unusual for implementation dates to be delayed for various reasons.

It is true, currently, that depending on the size of your company, implementation of these rules may be delayed, if even required at all.  But keeping up to date on the latest regulations can only benefit you and your company.

If these rules must be integrated, my suggested implementation approach is as follows –

  • Review the requirements with your General Counsel;
  • Identify the items that will impact your company;
  • Collect data from your industry affinity organization i.e. how are competitors integrating these rules; and,
  • Develop a plan to implement the rules within your company – implementation, monitoring effectiveness, altering policies & procedures…

Caution – new rules have the immediate impact of increasing your expense base either through new processes, requiring additional headcount and/or training staff on the new requirements.

What has worked for your company?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

An Approach to Compare Actual to Plan

It is February 16th.  By now you should be finalizing your January 2012 P&L.  What matters now, is what you do with the information.   While one month should not cause you to make changes to your business plan, it is a data point in an evolving trend.  Following are recommended activities —

Measure

Compare actual results to your planned results.   In theory, these plans have only been around for 45 to 60 days.  The actual for the month of January should be the closest to your plan than any single month in 2012.  How do your January Actual Revenues compare to your 2012 January Planned Revenues compared to your 2011 January Actual Revenues?  Complete this type of comparison for all p&l line items.   Compute the numerical variance and distribute the data to the appropriate cost center manager.

Variance Analysis

The most productive process I participated in, included monthly meetings where cost center managers discussed revenues and expenses achieved in the current month, compared to the plan they developed, with the responsible executive manager.  This approach was vital in creating an environment of accountability.  The purpose of the meeting was not to brow beat the manager, but to understand if the budget created was unrealistic or a situation where subpar performance needed to be addressed.  The greatest value in this process was to gather information from the point of sale, i.e. what was working vs. what was not working.

Forecast

In some instances, a production shortfall in the current month will be made up in a later month.  But sometimes that will not occur.  After the first quarter, monthly reports should show four different comparison points, i.e. actual vs. plan vs. variance vs. forecast.  This last value will provide executive management and the board with an accurate representation of what to expect in the current full year, financially.

Corrective Actions

If results vary widely from what was expected, the conversations during the cost center manager meetings gravitated to “what can be done to fix the shortfall” or “how do we prepare for the unexpected increased business we are experiencing, to ensure customer service does not suffer.”  Many constructive ideas were borne out of these meetings.

After following this process for a few months, you should see a slight change.  Managers will  understand they are accountable for their respective cost center; and that process corrections are being implemented quickly and efficiently.  Most importantly, executive management will be in the communication loop monthly.

Please share your thoughts.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Bad Debt Strategies

If you extend credit to your customers, which is required for almost all businesses, a certain amount of bad debt will result.  Resolving this bad debt efficiently and quickly, while not disrupting the possibility of future business from the customer takes tact and experience.

Following are a few strategies that will help with this situation:

30 days Past Due

  • Analyze the customer history.  Fully understand the relationship to date.
  • Contact the client, as soon as the bill becomes past due.  Do not leave a voice mail message.  The first call should always be administrative in nature to understand if there are any issues with billing or the service provided, i.e. missing or lost invoice; waiting for approval…  During this call, ask directly when you should expect to receive the past due payment.
  • Send a letter to the client with the agreed upon new terms.

60 days Past DueIf the issue is not resolved, follow-up will be required.

  • Contact the client, as soon as the newly established commitment date lapses.  Do not leave a voice mail message.  This call should be considered the initial Collections Call.  If not discussed in the first call, try to understand the reason for the bad debt, i.e. cash flow problems; default due to being out of business, bankruptcy; or other serious problem.  During this call, ask directly when you should expect to receive the past due payment.
  • Discontinue service until the outstanding debt is satisfied.
  • Send a letter to the client with the agreed upon new terms.

90 days Past Due – If the issue is not resolved, follow-up will be required.

  • Prior to this call the Collections Manager should speak with the responsible Executive to discuss options that include legal actions.
  • Contact the client, as soon as the second established commitment date lapses.  Do not leave a voice mail message.  Try to understand what new situation occurred that justifies the missing of this second day.  Advise the client of the actions you will be taking to try and collect the debt.
  • Send a letter to the client with the agreed upon resolutions discussed.

Every customer interaction should be documented and maintained in the client file, as part of their history.

Bad debt should be tracked via a Scorecard that includes dollars delinquent, for each of the following time periods – 30, 60, 90, 120, 180 days.

Prior to a bad debt situation –

  • Document your collections policy, to ensure the customer experience is consistent.
  • Make sure your credit application and policies are compliant based on state guidelines.  Engaging a Collections Attorney to review your application and approach is a worthwhile expense.
  • Audit your client files to make sure that you have a current credit application, signed by an individual with the authority to enter agreements; as well as the contact information for your customer’s Accounts Payable contact.

Please let me know your experiences.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Activity Based Costing and Sales Management

Activity Based Costing (ABC) is a process by which you attempt to identify the discrete costs associated with a product, service or process.  Activity Based Management (ABM) is the process of using ABC derived information.  The primary uses for ABC include new product/process development and process improvement.

  •  New Product Development – Prior to implementing any new product or process you want to understand the costs of development and the expected returns.  Anyone that has experienced a major system conversion, understands that the true cost of the conversion is more than just the monthly licensing fee.  Some of the hidden costs include contract negotiations, compliance reviews, project staffing, testing…
  •  Process Improvement –In the ongoing quest to offer quality services at the lowest cost and remove non-value added expenses, ABC is a valuable tool.  Activities include – process mapping and validation, apportioning costs by activity, identifying areas of improvement to maximize revenues and minimize expenses.  This process is extensive and complicated.

The ABC process makes tremendous sense for these aforementioned uses.  However, the greatest drawback of ABC is that it cannot easily be utilized month-to-month, due to the extensive analysis required to allocate expenses.

In every p&l some items are obviously associated to a product or service sold, but others are not.  Items that are not as clear include HR, IT, Legal, Payroll.  For smaller companies these administrative services show up on the p&l and are tracked by themselves, as they are considered the cost of doing business.  But for larger companies, with multiple channels, these costs are a source of frustration, as they show up as a management fee or corporate allocation.  Lumping together and allocating is much easier to administer than an accurate monthly allocation of expenses.

So what can you do monthly?  ABC should be used monthly when reviewing Sales activities.  For each Sales person, the company should track the individual expenses associated with obtaining the sales generated, i.e. revenues less discounts, marketing dollars utilized, commissions paid.  Through this process you will better understand which sales managers are bringing you the most value vs. the sales managers that are not as profitable.  Once identified, these less profitable sales managers can be coached with the intention of bringing their profitability to parity with the rest of the sales force.

What has been your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Process Improvement to Eliminate/Contain Non-Value Added Costs in the Services Industry

Process improvement is undertaken for a multitude of reasons which include – improve customer satisfaction, mitigate risk, improve employee satisfaction, eliminate/contain non-value added costs.

A non-value added cost is an expense that is incurred, but does not add to the value or perceived value of your product or service.  Simply stated, it is a cost your customers will not want to pay.  Instead you will assume the cost out of your profits.  During periods of low margin, company owners should attempt to protect their profit margins by eliminating or containing non-value added costs.

There are many examples of non-value added costs in the manufacturing industry.   My goal is to point out potential non-value added costs in the services industry which create delay, require rework, and re-focus resources off of providing the services your business offers.   All of the examples presented have parallels in manufacturing.

Non-Value Added Costs in the Services Industry
Area Issue
Distribution Transportation problems
Human Resources Employee – absenteeism, attrition, lack of training
Information Technology Data unavailable or hard to find
Management Constant reactionary state, i.e. focus on fighting fighers; and lack of employee empowerment requiring manager sign-off/approval
Planning & Analysis Re-work associated with bad planning
Operations Unreliable suppliers, defects in supplies

How does your company compare?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The CFO Analyst

The CFO office should function as a source of process improvement ideas; as well as business development recommendations.  It is in this location where production data meets financial data.  It is expected that your CFO will perform the necessary analysis to understand why actual results differ from Plan results.  But the analytical process does not stop there.

By comparing actual results between you and your competitors (benchmarking) or comparing activities within different regions of a company, you should be able to identify variations in revenues and expenses.  There may be perfectly good reasons for the disparities, but the questions must be asked.  More often than not, differences will be explainable.  But if not, you may have found a process that needs improvement to save the company real dollars.

This analytical discipline is also needed when considering new products and services, or expanding the distribution of current products and services.  The initial concept review is performed by the CFO – analysis, modeling, and planning.  Once approval is provided by the CEO, the CFO will pull in the affected departments, to implement the plan, i.e. HR, IT, Compliance, Legal, Sales…

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The Value Embedded in Tele-Commuting

As communication technology advances and tools become more pervasive, the traditional office blurs, i.e. geography and time zone.  Organizations are more-and-more giving up traditional brick and mortar, in exchange for the online office.  High speed internet is now available in many places.  Business can be conducted at home or at the local coffee establishment.  The term telecommuting includes all remote working and work from home arrangements.

The trend is growing —

“In a recent Accountemps survey, one-third (33 percent) of chief financial officers (CFOs) interviewed said remote work arrangements, such as telecommuting and working from satellite offices, have increased at their companies in the last three years.” (PR Newswire 09.14.2011)

“TechCast, a virtual think tank based at George Washington University, forecasts that 30% of the employees in industrialized nations will telework  2–3 days a week by the year 2019. What’s more, they estimate the market for related products and services at $400 billion a year.”  (TeleworkResearchNetwork.com / Kate Lister / May 2010)

Benefits to these arrangements include –

  • Benefits to Employer – “Half-time home-based work among those with compatible jobs could save employers over $10,000 per employee per year—the result of increased productivity, reduced facility costs, lowered absenteeism, and reduced turnover. The cumulative benefit to U.S. companies would exceed $400 billion a year.”  (TeleworkResearchNetwork.com / Kate Lister / May 2010)
  • Benefits to Employee – “Overall, researchers have found that virtual workers are slightly more satisfied than their in-office counterparts. In general, virtual work leads to higher satisfaction, lower absenteeism and higher retention. Additionally, because the majority of virtual assignments result from the employees’ expressed desire, organizations usually observe little to no decrease in production or performance. On the contrary, productivity often increases (Erskine, 2009; Mulki, Bardhi, Lassk & Nanavaty-Dahl, 2009).”  (Cornell University study Remote Work: An Examination of Current Trends and Emerging Issues Spring 2011)
  • Benefits to Society – Online Office arrangements provide the opportunity for those with disabilities to more efficiently participate in and/or transition into the workforce, i.e. an online arrangement may allow individuals on maternity leave to transition back to the work force more easily.

Benefits to date have been experienced by employers and employees, using a combination of various technology tools.  Top 10 technologies that companies provide to support remote workers include – Laptop 62%, Virtual Private Network (VPN) 40%, Instant Messaging 29%, Outlook Web App (OWA) 28%, On-line Meeting 27%, SmartPhone Mobile Computing 25%, Desktop 21%, Remote Desktop 18%, Collaboration/On-line Workspace 17%, Video Conference 17%. (Microsoft 2010 US Remote Working Research Summary National Survey Findings).

However, as you would expect with changes in business methods, come unforeseen issues, i.e. innovation creates disruption –

  • Issue 1 – Employee Exclusion – “Employees in virtual environments may develop perceptions of exclusion or isolation due to their need to rely on technology to communicate with others; common forms of communication technology (e.g., email) do not provide a high level of information richness and can inhibit social exchange (Marshall, Michaels, & Mulki, 2007).” (Cornell University study Remote Work: An Examination of Current Trends and Emerging Issues Spring 2011)
  • Issue 2 – Remote Responsiveness – “Some remote employees struggle when attempting to coordinate their work with their managers and other employees or when attempting to receive timely feedback.”  (Cornell University study Remote Work: An Examination of Current Trends and Emerging Issues Spring 2011)

More and more companies are figuring out the proper way to reap these benefits, while addressing the issues.

Where is your company in this process?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Communicating and Monitoring Success at Reaching Strategic Goals

Scorecards present Key Performance Indicators (KPI’s) that the company/department deems is appropriate to gauge success at achieving strategic goals.  These reports are metric centric.   As a general rule, KPI’s provide information which gives the reader a quick glance of success from a financial, operational, and risk perspective.  A successful scorecard will assist the company drive profitability, reduce costs and provide insight into risk.

Qualities of the basic scorecard include –

  • Simple, intuitive and easy to read
  • Department/business specific metrics – metrics impacted by team activities.
  • Tolerance ranges displayed and highlighted when breached
  • Nine to twelve key metrics to grade performance
  • Benchmarking to gauge how the company’s performance measures up to its competitors and peers (external data).

How to start – Identify nine important activities the team accomplishes, that contribute to the strategic objectives or compliance obligations of your business.  Build metrics that measure activity success.

Note – data presented rates how the company is faring based on established targets, i.e. based on your annual plan.  This type of report does not do a good job at presenting trend data.

What is your experience?

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Should your CFO be a CPA?

It only makes sense for my first blog post to be an issue that is controversial.

The correct answer to the question…not necessarily.

A CFO is a well-rounded management executive, whose primary role is “advisor” to the CEO, regarding strategy and direction of the company. He/she is a finance expert that must interact with internal groups (HR, IT, Accounting, Sales) and represent the company with external groups (banks, investors, reporting agencies, auditors).

I am in no way dismissing the knowledge and experience gained in public accounting, by a CPA. However, a CPA would be a Subject Matter Expert in only one area that requires attention from a CFO.

While the CFO need not be a CPA; he/she must certainly be able to understand the issues and ramifications of decisions. He/she needs a strong understanding of GAAP; and be skilled in financial statements, the general ledger, and the day-to-day technical skills.

Experience is the primary requirement for a company’s top Finance post. A CFO with hands-on experience and exposure to different situations and complex challenges enables them to quickly analyze and assess any situation.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.