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.

Growth through Mergers and Acquisitions

Companies seek growth through mergers and acquisitions to satisfy one or more of the following – adding a related product or service; expanding geographic reach; purchasing assets, i.e. real estate, patent, brand; and/or, acquiring clients.  There is also the promise of cost reductions through consolidation of back-office and front-office services.  The justification for two companies coming together to either expand or further strengthen a competitive position is logical and easy to support from a financial perspective.  More than likely if an increase in shareholder value can be demonstrated, based on a proforma, the entities will proceed.

Very soon after a decision to merge or acquire is made, a press release is issued which identifies the combination benefits.  “We look forward to working with Cerberus to maintain and grow GMAC’s traditional strong performance and contribution to the GM family,” said GM Chairman and Chief Executive Officer Rick Wagoner.  “This agreement is another important milestone in the turnaround of General Motors. It creates a stronger GMAC while preserving the mutually beneficial relationship between GM and GMAC. At the same time, it provides significant liquidity to support our North American turnaround plan, finance future GM growth initiatives, strengthen our balance sheet and fund other corporate priorities.” (Ally Financial Inc.  Press Release: 2006)

But regardless of how good the merger or acquisition looks on paper, there is a large body of research that shows that mergers and acquisitions add no value, for a majority of the transactions.  In my career I have been exposed to seven entity combinations.  In two instances, the entity I was associated with was acquired; in three situations we were the acquirer; in one situation my entity assumed a majority interest in another entity; and finally one situation where a majority interest was taken in the entity where I was associated (quote above).

The successful execution of this type of growth initiative rests on the details of how the process is managed.  If you choose to acquire or agree to be acquired, consider the following three topics –

Business Integration

Systems – Integration of systems must be addressed upfront to ensure clients of each heritage entity can communicate with the new entity, in a seamless fashion, securely.  This initiative is extremely important during this period where cybercrime and hacking are ubiquitous.  Allowing systems from legacy companies to communicate via workarounds is not a secure approach.

Policy & Procedures – While these guidelines may have common features from company to company, they are custom to each organization.  More than likely your P&P does not match the P&P of the entity that you are acquiring.  You will find that one set is more restrictive than the other.  The question you will have to deal with – “Which policies should be the policies of the new organization?”

Costs – A primary reason to merge or acquire is the perception that cost efficiency can be obtained either from economies of scale, usage of excess capacity, co-location, supplier discounts…

The integration topic has a direct link to time, i.e. how fast you can integrate to secure systems, ensure consistent policies and procedures and cut costs.  Moving too quickly can cause needless disruption to the business; while moving too slowly just delays the benefit of the acquisition.

Employees

Attrition – The combination of two entities immediately creates redundancy.  Employee loss will be high. Some of this loss will be welcomed, but other will not.  You may find that you prefer Manager #1 over Manager #2, but Manager #1 resigns.  Regardless of the amount of analysis and preparation, management has the least control over the individual preferences and decisions of employees.  This point is apparent when you consider the following citation – “Yahoo has naturally lost some of its acquired talent. At least 16, or roughly one-fifth, of the more than 70 startup founders and startup CEOs who joined Yahoo through an acquisition during Ms. Mayer’s tenure have left the company.”  “Yahoo’s Other Challenge: Retaining Acquired Talent.”  Wall Street Journal Online.  Wall Street Journal, 1 May 2015.

Reporting – In my first merger experience, my company was acquired by a company of equal size but stronger economically. A colleague at the time explained to me that when two companies come together, the acquiring company assumes the management responsibility of all roles.  In essence, I would fall under that manager and be performing the role of the person that reported to me.  Every individual in the company that was acquired must be ready to do the job of their direct report.  This explanation was true for all combinations.  At times I had the higher role, as I was with the acquiring entity; while in other situations the reverse was true.

Clients

Attrition – Client loss will be high, more commonly from those clients that were associated with the brand that no longer exists.  This set of clients, do not feel they have any relationship with the new entity.  Consider short-term pricing discounts to persuade clients to consider keeping their business with the new entity.

Sales Management – If you sell a product or service in a geography and you acquire an entity in the same market, you will need to wrestle with the question of who owns the customer, i.e. territory management.  This situation occurs commonly when clients represent national accounts.

Sales Compensation – Similar to Policies and Procedures – While these compensation structures may have common features from company to company, they are custom to each organization.  More than likely your compensation plan does not match the compensation plan of the entity that you are acquiring.  You will find that one set is richer than the other.  The question you will have to deal with – “Which compensation structure should be the structure of the new organization?”

In summary, when an entity wishes to add a product or service or expand geographic reach or purchase assets or purchase clients, the acquisitions approach is considered preferable by many, as it is faster.   Just remember that the economics of the new entity will not be the economics of the addition of each heritage company.  A merger or acquisition takes careful planning to be effective.  There will be upfront costs required for integration and client incentives.  It will require flawless execution to come anywhere close to the proforma goals established at the outset.  There are too many unknowns, internally and externally, to be positive of the outcome.

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.

Pricing Strategy – Tips and Caveats for Discount Pricing

Discounts have their place, but more often than not, they are used incorrectly. Prior to offering a discount, controllers involved with establishing pricing strategy need to take the following steps:

Understand your business economics. If you have a 15 percent profit margin and for a period of time you are willing to give up a third of the margin to offer a discount, that may be a correct business decision. However, if you have a 15 percent margin, and for a period of time you give up an amount equal to 150 percent of the margin to offer a discount, that approach will hurt your business.

Establish the discount duration. Discounts should have a finite life. If they continue into perpetuity, you are just resetting price with the word “discount.” A discount is simply a marketing tool—a program that is planned, fielded, and completed. At a certain point, once the program ends, it is important to calculate the return on marketing investment received to understand whether the expense was worthwhile.

Understand the client’s needs. Some clients are driven by the word “discount.” In this situation, you should find the price that allows you to achieve your required returns, and increase the price of the product/service by the discount you will be giving. Billing and applying the discount will result in the attainment of your profit requirements. This approach is quite common in all businesses.

Different Types of Discounts

There are three types of discounts that work, as they benefit each party in the transaction. These are:

Discount to try your product or service. For a service, this includes discount pricing while the service provider gains the required knowledge to provide the client with the maximum service possible. During the early days of a relationship, a client should not be asked to pay full price, while you learn their business. For products, a discount provides an incentive for consumers to try your product vs. staying with their usual selection.

Discounts provided to clients based on their purchase volume, i.e., relationship pricing. The philosophy behind this type of discount is as follows: “If I can count on you to purchase 10 units of my product or service, I will charge you full price. But as you purchase more, I can take advantage of economies of scales, which I can pass down to you.”

Discounts provided for early payments. To incentivize early payment, it is common to offer a benefit (discount) to consumers.  Receipt of your money sooner rather than later is worth the customary 2 to 3% in discount.  But if your profit margins are already razor thin simply raise the price by the discount amount.  Billing and applying the discount will result in the attainment of your profit requirements.

Whichever type of discount is used, the greatest responsibility of the manufacturer/service provider is to communicate the discount terms and when they will expire. In fact, over-communicate these items. If you implement a discount to benefit the client but the discount goes away prior to when the customer was expecting it to go away, the relationship will be disrupted.  The discount expense will be a waste.

Avoid Three Common Discounting Errors

Controllers also need to be aware of the following three common errors when offering discount pricing:

Offering a discount to customers to entice them to pay their late bills. The message you relay here is, “Do not pay on time and I will reduce your price.”

Offering a discount to match the competitor’s price. This approach assumes your economics are the same as those of your competitor. That assumption is often very wrong. For example the competitor may be giving up a piece of their margin, while you may be giving up your entire margin.

Offering a discount on one product or set and losing money, expecting to make it up in other products/services. In some situations, one product is heavily discounted while other products are premium priced. The goal is to lose money on a few items in order to entice the client to also buy others, while making a higher margin on those other products/services. However, this approach will always backfire when you work with clients who understand the market price. They will understand where to focus their purchasing, i.e. only on the lower priced products.

The Bottom Line

A business will not thrive when it competes on price. Ensure that your value proposition is strong. Customers should seek out your company because the value you provide exceeds the cost of doing business with you.

When considering discounts as part of pricing strategy, controllers would be wise to take the following steps:

– Always calculate the projected cost of the discount to the company, prior to implementing.

– Consider a key performance indicator that measures discount usage and report on it.

– Ensure that discounted sales are booked separately from non-discounted sales, so discount usage is clearly quantifiable.

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

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.

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.

When should you modify a customer or client relationship?

I was in a suburb of Detroit, presenting to a sales force.  The subject was “Modeling the Profitability of Relationships.”  The presentation went well until I relayed to a Sales Manager that the type of customer she was targeting was unprofitable and I would never sign them.  It turns out she was not the only Sales Manager with the belief that “every customer is a good customer.”

This situation is not uncommon and usually happens when business managers focus on revenues, and not profitability; or when your sales force is compensated based on activity and not profitability.

Characteristics of an unprofitable relationship may include –

-Customer/ Client requires preferential pricing/concessions, i.e. discounts.  Organizations negotiate special pricing or fixed rate pricing with a vendor in exchange for exclusivity;

-Customer/Client requires high touch, i.e. a dedicated customer service in exchange for exclusivity;

-Customer/ Client requires the vendor to advance cash as part of the product or service to be purchased; and/or,

-Customer/Client is a slow payer of outstanding invoices.  It is possible to have a very profitable relationship that is financially disruptive to cash flow.

An approach that has worked for me in the past, to identify non-profitable relationships includes the following steps –

Understand Your Business

-Asses your cost structure – Are processes within your organization as efficient as possible?  Are inputs priced competitively?  Inefficiencies have a cost, i.e. a non-value added cost.  Customers/clients will not pay for inefficient processes that increase the cost of your product or service.  Alternatively, you will be forced to assume the cost through lower profit margins.

-Assess your target return – What is your profit requirement?  For every $1 of revenue, do you expect to earn $0.50, $0.25, or $0.05?  You should calculate an acceptable range – “My target is between $0.35/dollar and $0.15/dollar of revenue.   If I am earning any less, it is not worth my time.”

-Assess the price for similar products in the market, from competitors.  Is your price above or below the average of competitors in the market?  Do not look to be the lowest price or the highest price.  Neither place is sustainable.

After this stage, you should have a good understanding of your economics.  If you found that [costs + your target profit] would require a price point higher than your competitors, it may be an indication that either profit aspirations are too high or your cost structure is too high.

Once you fully understand the business economics, analyze your customer/client.  It is very important to start your analysis only after you have fully understood your business economics.

Understand Your Customers or Clients – Prepare a spread sheet with client information.  For every customer/client, compare the expectations you had when the relationship was established, i.e. revenue, profit and profit margin; as well as your original target pricing.  Now calculate revenue earned, profit earned and the profit margin for each of your customers/clients.  What is your current pricing?  Review this data over a set period, i.e. three years.  One year is too short a period.

Based on the data pulled, group the customers/clients into three categories – the relationships that exceeded expectations with superior returns; the relationships that met expectations; and the relationships that performed below expectations with dismal returns.  Understand the reasons why certain customers/clients exceeded expectations.  Can relationships that met or fell below expectations be modified, to closely resemble the relationship with the highest returns?  Basic adjustments include –

-Customer/ Client requires preferential pricing/concessions – remove all discounts;

-Customer/Client requires high touch – additional usage of a help desk or service center, above an established level, should be priced accordingly;

-Customer/ Client requires the vendor to advance cash – establish an arrangement where costs are paid upfront; and for,

-Customers/Clients that are slow payers – establish a Collections Process, which rewards timely payment and penalizes late payers.

These simple modifications can make an unprofitable relationship profitable.  However, you must be prepared that your customer/client may not wish to make these changes, and decide to seek an alternative service supplier.

Obtaining a customer that becomes unprofitable is a common situation.  It only becomes an error of management if you do not perform this analysis periodically, or ignore the results.

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.

Tips to Mitigate Technology Implementation Challenges

Companies continually look for ways to reduce costs, facilitate sales, and increase customer satisfaction.  While there are a multitude of specific approaches that could be utilized to address each issue, all three of these objectives could be achieved at the same time through automation.  Production systems serve to increase sales efficiency and introduce cross-sell opportunities; while the implementation of back office systems serve to drive support efficiencies and remove non-value added costs.  Efficiencies that improve the sales process and/or the customer service process will result in increased customer satisfaction.

But, prior to searching for the best enterprise system solution for your business needs, establish your preliminary budget.  Consider licensing fees, development costs (external and internal), as well as the conversion costs.  Compute your expected Return on Investments (ROI), which is the ratio of income generated less dollars invested, over dollars invested in a process or product financed, to stimulate the growth of the company.  This statistic should be used to ensure that your financial resources are being allocated to growth opportunities with the highest returns.  As you get closer to selecting the new technology, these numbers should be revised.

Just keep in mind, any change in your business model will cause a certain level of disruption, regardless of the size of the system to be implemented.  If not executed correctly, the new system may cost you more than you expected, both today and in the future.  Proper planning is critical.  In my experience, the top issues which raise the cost of the development are consistent across different platforms, and not specific to the size of the company.  These are common issues associated with all technology implementations.

Issue #1 – Customization – When an off the shelf enterprise system is purchased or leased, a certain amount of customization will be required.  This customization serves to ensure a clear identification of features for the users, within the application, in the terms common to the business.  Another area that requires customization is the development of reports specific to managing the business or responding to client needs.  But all customization requires development time, that quickly raises the price of the new technology.  Be sure that the requested customizations are required.  Differentiate “nice to have” from “need to have.”  Negotiate and budget for this start-up expense.

Issue #2 – Integration – It is not uncommon for a business to be composed of a few systems with no integration.  This situation occurs when a business is growing and different departments purchase technology for their own areas, not considering the greater business.  This situation also is common for larger companies that recently experienced a merger.  It becomes obvious quickly, that different departments of the new business cannot communicate clearly with each other, as they are not all on the same platform.  Ensure that any new system is integrated within the company, satisfying the needs of a few departments.  At the very least, there should be integration between your productions system and financial system.  Integration requires development time and quickly raises the price of the new technology.

Issue #3 – Data Quality – When introducing new systems or upgrades, information maintained in either a legacy system or a homegrown database may be incomplete and inconsistent.  Information clean-up is time consuming and has an internal cost.  But correcting deficiencies today is a worthwhile project, vs. perpetuating issues in your new technology application.

Following are “best practices” to avoid these issues or at least reduce the negative impacts associated with implementing and managing new technology within your business –

Understand your Technology Needs – Assess the current needs of your customers (internal or external); while also considering their future needs.  This step may include surveys and focus groups with the users.  Flowchart the process today and identify what happens when things occur without issue.  Analyze the flow.  Are processes as efficient as they could be?  Now consider the experience when breakage(s) occur.  At what point in the flow does it happen?  How can this situation be avoided?

During this process, continue to consider user acceptance. If your system is not intuitive, external users may not wish to use it; and internal users may not transition to the new platform quickly, making conversion a long and drawn out process.

The output of this analysis should be reviewed with key stakeholders to gather their thoughts and views.  The result of this task will be a clear understanding of the business needs.  Document this information.

Next, issue a Request for Proposal (RFP) to service providers.  There are very few processes where there is not more than one supplier.  Send the RFP to at least three providers.

Develop a relationship that compliments your business – When considering a technology solution; the vendor relationship is as important as the technology being purchased/leased.  Prior to entering into any relationship, keep in mind, that there are common risks inherent with all vendors –

  • Employee quality – vendor employees requiring special knowledge, licensing, certification;
  • Privacy policy – sharing information regarding your processes and procedures, as well as customer information;
  • Business continuity – impact of a disruption in your vendor’s business on you; and,
  • Service quality – impact on your internal and external customers.

Establishing your requirements and how you will work with the vendor, prior to entering into a relationship, would be time well spent.

If the technology fits your needs; if the vendor will be a good partner for your business; and if the final budget and ROI are acceptable – it is time to draft the contract and statement of work.

As stated previously, proper planning associated with the integration of a new enterprise solution will ensure your selection satisfies the process improvement and cost containment needs of your business within the established budget, while achieving the required ROI.

I wrote this article for CIO Review Magazine-Corporate Finance Technology Special 2014 (April 2014)  The story can be found on page 50.

 

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.

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.

What Will Be Your Healthcare Strategy for 2014?

Originally signed in 2010, the Patient Protection and Affordable Care Act (Act) is composed of two separate legislations (HR3590 and HR4827).  Together they make up “Obamacare.”  Provisions began to take effect in 2011 and will continue to be phased-in through 2018.  But in 2014, some primary provisions of the Act will become fully in-force.  Make no mistake.  The law is as complicated as the Tax Code.

To compound the issue, on March 22, 2013, The Wall Street Journal reported medical premium increases are expected in 2014 – UnitedHealth Group projects +25% to +50% for small businesses vs. Aetna Inc. projects +29% for small businesses (“Health Insurers Warn on Premiums”).

In 2014 there will be approximately twelve phase-ins, most of which will be handled by the insurance industry and states.  Businesses need to be aware of the following four provisions – Small Business Tax Credit; Automatic Enrollment; Premium Variation for Participation in Employer Sponsored Wellness Programs; and, Reporting on Minimal Essential Coverage, relating to the Employer Mandate.

The “Employer Mandate” – if an employer has 50 or more full-time “common law” employees, they may be required to offer health insurance coverage to all employees.

Full-time is defined as working 30 or more hours per week, on average.   While a common law employee is defined by the IRS as, “Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.”  Individuals that are not employees include leased employees; a sole proprietor, a partner in a partnership or a 2% S-Corp shareholder.

The penalty for non-compliance may be as much as $2,000 per full-time employee, for every full-time employee over a 30-employee threshold.

So understanding medical costs are increasing and you may be required to offer health insurance coverage or pay a penalty, what will be your healthcare strategy?

Following are some options for your consideration –

-Do nothing.  Assume based on the economy Congress will either delay or amend the legislation.

-Reduce the number of full-time employees and replace them with part-time and seasonal employees – the Act anticipated this reaction and has a formula that will calculate “full-time employee equivalents” to identify businesses subject to the Employer Mandate.

Full Time Equivalents = (Total # of monthly PT Employee Hours/120)

-Outsource employees/lease –This option should be considered very seriously.  PEO companies are great at addressing all tax, payroll and reporting processes.  For more information, please review the following blog post – “A PEO is not a “Set it and Forget it Process” located  http://cfotips.com/?p=97;

-Pay Penalty – Of course if after a cost benefit analysis you discover that it is cheaper to pay the penalty, that may be an option.  Do not forget to consider within your calculations the tax implications of this option, i.e. health insurance expenses are deductible vs. penalties which are not;

-Cap company contribution and allow employees to choose coverage through an on-line marketplace.  If the employee wishes a richer plan, the employee would be able to pay more each month. This approach was used by Aon Hewitt, Darden Restaurants Inc. and Sears Holding Corp, in 2013.  Details can be found in the Wall Street Journal, March 17, 2013, “To Save, Workers Take on Health-Cost Risk.”

Whatever option you choose, please consider the impact it may have on your recruiting efforts.  For example – choosing to not offer health insurance and pay the penalty may cause a retention issue for your company that is not easily corrected through your standard recruiting efforts.  You will automatically exclude applicants looking for benefits as possible employees.

Studies show, in the long-run costs will be controlled and more individuals will be covered. However at the individual company level and in the short-run confusion is imminent and in business, confusion leads to mistakes which can be costly.  Not addressing this issue and developing a plan is a very large mistake.

Update – On July 9th, a delay in the reporting requirements of the PPACA, required a delay in assessing the employer shared responsibility penalty until January 1, 2015.

Author: Regis Quirin
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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 Secret of Start-Up Success

Articles that provide the reason for start-up failures are plentiful; and there are many websites that provide failure statistics.  So I’m going to take the opposite approach.  What are the top five ways to ensure your start-up has a chance to thrive.

  1. Control the emotion.  Probably the most important suggestion is a contradiction.  It is emotion that was critical in your creative thinking.  It is this emotion that has set you on the path as an entrepreneur.  However, un-controlled this emotion will be a liability.  At this point, it served its purpose.  Now move to the next level and become objective.
  2. Study your competition.  What are their advantages vs. what are their weaknesses?  As a new business, you will be required to, at a minimum match your competitors’ advantages.  To win customers away from your competitors you will need to solve you competitors’ weaknesses, i.e. make your company a better alternative.
  3. Take the pulse of prospective customers.  It is very important to understand your customers’ buying habits and changing desires.  Without this information, you may develop products and services that do not align with the market’s needs.  There is a high probability that time, money and resources will be wasted if this step is skipped.
  4. Assemble an all star team of experts.  Success requires multiple disciplines, i.e. Legal, Marketing/Sales, Accounting/Finance, and Operations.  If you cannot build the team immediately, seek an outsource resource for each area, to call upon when needed.  The trick of course will be to understand when the resource is needed.   An Accounting colleague once advised that often times he is asked to look at an established small business.  “Most of the time when a business comes to me for help, it is already too late.”
  5. Develop realistic plans.  Establish an annual business plan with a proforma financial plan.  At the same time, develop key performance measures of success.  These measures should be watched monthly as they will be the first warning signs if things are not performing to plan.  This activity is very important.  Not necessarily because of the resulting document, but more because of the process.  Planning requires that you review all elements of your business.

As the business grows, so will the complexity of the business. More decisions require more analysis. The aforementioned activities will better prepare your entity to start operations.

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.