Manage Risk—Don’t React to It

Some senior managers take a passive or reactive approach to protecting their company’s systems from cyberattacks and other risks. While they may acknowledge the risks, they believe that the risks are too minimal—or the costs too high—to actively address the causal issues. Their solution may be to purchase cyber insurance to prevent a monetary loss if a breach were to occur.

This approach is not advisable. The insurance strategy may limit immediate financial loss, but the long-term damage to the company’s brand—and bottom line—can be great. The company may even be liable for legal penalties.

According to the Federal Trade Commission in its Prepared Statement of the Federal Trade Commission on Protecting Personal Consumer Information from Cyber Attacks and Data Breaches, presented on March 26, 2014 before the Committee on Commerce, Science and Transportation in Washington, D.C.:

“A company [is considered to be engaging] in unfair acts or practices if its data security practices cause or are likely to cause, substantial injury to consumers that is neither reasonably avoidable by consumers nor outweighed by countervailing benefits to consumers or to competition. The Commission has settled more than 20 cases alleging that a company’s failure to reasonably safeguard consumer data was an unfair practice.”

An organization that addresses risk in a passive manner may also be negatively impacting its own growth. It is no longer uncommon for large clients to engage in the discussion of risk when considering purchasing your product or service. Risk is often reviewed during initial discussions prior to the development of a relationship, and risk is assessed during periodic vendor reviews during the relationship in client surveys and audits of the company’s business practices. Common areas of concern are the following:

-What means are used to protect information?

-What are the policies for the security, access, and retention of documents (in both electronic and paper formats)?

-Is there a plan for disaster recovery?

-Is the company in compliance with industry-specific regulations?

-Does the company have insurance coverage?

-Does the company have a plan for physical security?

If the company is unable to fulfill the client’s requirements, it may lose lucrative business, negatively affecting cash flow and leading to even more lost business when word spreads that doing business with you would be a risky move.

The Proactive Approach

The implementation of a proactive approach to manage risk begins with taking the following steps:

Know and implement the COSO Internal Control—Integrated Framework. COSO, the Committee of Sponsoring Organizations of the Treadway Commission, is a joint initiative of five private-sector organizations, including the American Institute of CPAs (AICPA), dedicated to providing thought leadership through the development of frameworks and guidance on enterprise risk management, internal control, and fraud deterrence. COSO’s framework continues to be the gold standard for risk management and is a logical place to begin the process.

When you look at what the framework represents, it is obvious that both public and private organizations of all sizes will benefit from its adoption. The purpose of the framework is to prevent and detect fraud. It is a standard framework for designing, implementing, and conducting internal controls as well as assessing the effectiveness of your current internal controls. The framework was recently updated from the original 1992 version to the 2013 revision to account for the ongoing changes in the business environment. Some of those changes include evolving technology, increased outsourcing, and the changing regulatory environment. (Companies that report to the Securities and Exchange Commission were expected to have fully transitioned to the 2013 framework by Dec. 31, 2014.)

Start by reviewing the COSO Internal Control—Integrated Framework’s core areas, principles, and focus areas. Document how your organization abdresses the concerns embodied in the core areas, principles, and focus areas. This framework will be the basis of your plan. In general terms, the framework is as follows:

Control Environment. This relates to the responsibility of preserving an internal control environment, concentrating on people (ethics and integrity); employee development and training; and management and accountability. The importance of proper employee training cannot be understated. Employees represent an organization’s greatest assets and its greatest risks. All employees within an organization must become part of the risk management process.

Risk Assessment. This area is geared to the identification of entity objectives and the associated operations risks. Consider compliance with applicable regulations specific to your industry, as well as external financial reporting requirements. Identify areas where policies and procedures may allow for fraud to be conducted. Consider outside threats.

A best practice is to assign a seasoned veteran with a complete understanding of the organization’s business model to develop the risk-assessment plan.

Control Activities. The primary focus of this area is on the establishment and ongoing maintenance of policies and procedures; accountabilities; and security management, such as the segregation of duties and segregation of information access.

Information & Communication. This area concerns the gathering and dissemination of information related to support internal control activities.

Monitoring Activity. The COSO risk management model recommends that on an ongoing basis, management evaluate internal controls to understand their presence and effectiveness, communicate deficiencies, and report on the status of corrective measures.

Tips for success: The first three sections do not need to be completed by the same person, as they look at different but related activities. In fact it may be better to divide the tasks among senior managers to foster mutual ownership and responsibility of the plan.

Augment this information with other framework standards that may apply, including risks identified by industry-specific trade groups and associations. A good example of additional framework standards include ISO 27001, and Framework for Improving Critical Infrastructure Cybersecurity.

Get approval and implement the plan throughout the organization. Once your plan is complete, seek board/management approval on the concept implementation. After approval has been obtained, execute the plan throughout the organization. Be sure to include communication throughout the entity so all employees understand their roles and know exactly what the plan entails.

Continually update the plan. To be effective, a risk-management plan must be fluid and continually evolve. For example, if during the course of the year, your company receives an audit request of your product delivery or service, and during the course of completing your audit you discover an area not covered by your plan, immediately update your risk plan, as you must assume the same client will ask the same question at the time of the next audit.

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

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

Growing through Productivity Increases

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

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

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

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

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

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

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

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

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

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

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

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

How Problematic is a Financial Restatement?

“On August 12, 2014, the Board of Directors and the Audit Committee of the Board of Directors of Ocwen Financial Corporation, after consultation with Deloitte & Touche LLP, the Company’s independent registered public accounting firm, determined that the Company’s financial statements for the fiscal year ended December 31, 2013 and the quarter ended March 31, 2014 can no longer be relied upon as being in compliance with generally accepted accounting principles.”  (8/12/2014, Securities and Exchange Commission, Ocwen Financial Form 8-k)

As the auditor for Ocwen, it is the responsibility of Deloitte to identify material misstatements.  As required by Auditing Standard No.12, “The objective of the auditor is to identify and appropriately assess the risks of material misstatement, thereby providing a basis for designing and implementing responses to the risks of material misstatement.”

At this point it is unclear whether the Ocwen material misstatement is due to an error in the application of accounting guidelines; or due to fraud.  The top accounting reasons for financial restatements include  – debt and securities issues; expense recording; reserves and accrual estimates; executive compensation; revenue recognition; and, inventory.  While the most probable fraud committed is the management of earnings to mislead investors.  But neither option is very positive for a company to admit.

Regardless of the accounting reason, a financial restatement shakes the confidence of investors, credit institutions and potentially customers/clients.  Regulatory scrutiny may increase and your ability to grow constrained.  As the actual impact to earnings is directly related to the issue, an average cost to restate cannot easily be projected.

In this situation, in response to the announcement – The Ocwen share price fell 4.5% the day of the announcement, to $25.16; Block & Leviton LLP announced that it was investigating the company and certain officers and directors to determine if anyone profited from the alleged accounting errors; The Rosen Law Firm announced the filing of a “Securities Class Action” against Ocwen Financial Corporation; The SEC subpoenaed records from Ocwen regarding its dealings with sister companies; and, S&P lowered its outlook on Ocwen Financial to negative.

Unfortunately, this situation with Ocwen is not uncommon.    According to research performed by the Center for Audit Quality, from 2003 through 2012, 10,479 entities required restatements, i.e. SEC 8-K filings.  For this 10 year period, restatement counts ranged from a high of 1,784 in 2006 to a low of 711 in 2009; averaging 1,048 per year.

So what can a company due to avoid this situation – Seek guidance from an Accounting professional on the proper application of GAAP, for your situation; Remove the opportunity for fraud to be committedMaintain a strong Internal Control environment including a Segregation of Duty Analysis; Implement conservative policies and procedures and reduce the manual intervention which causes errors; and, Ensure an ethical environment, but maintain a Whistleblower program.

As the SEC continues with the implementation of the JOBS Act, one can only wonder about the frequency of material misstatements, requiring financial restatements with small and medium-sized non-public entities.

SEC Press Release – January 20, 2016 – “The Securities and Exchange Commission today announced that Ocwen Financial Corp. has agreed to settle charges that it misstated financial results by using a flawed, undisclosed methodology to value complex mortgage assets.  Ocwen agreed to pay a $2 million penalty after an SEC investigation found that the company inaccurately disclosed to investors that it independently valued these assets at fair value under U.S. Generally Accepted Accounting Principles (GAAP).”

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.

Why are so many companies announcing a Turnaround?

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

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

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

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

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

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

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

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

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

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

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

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

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

The redesign steps are as follows –

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

Communicate with the Board of Directors, throughout the process.

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

 

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

Redesign to Turnaround Underperforming Small and Medium-Sized Businesses

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

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

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

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

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

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

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

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

Redesign to Turnaround Underperforming Small and Medium-Sized Business

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

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

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

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

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

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

  • Employment and administrative expenses increase; and,

  • Competition is fierce.

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

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

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

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

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

  • We can solve the issues through expense reductions only.

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

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

Management

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

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

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

Diagnose the Depth of the Issues

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

Develop an Appropriate Strategy

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

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

Plan and Actively Manage Cash Flow

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

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

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

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

Optimize Support Functions

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

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

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

Optimize Business Development

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

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

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

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

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

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

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

Redesign to Turnaround Underperforming Small and Medium-Sized Businesses

 

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

Should TeleCommuting be a part of your company’s plan?

“Census data indicate that the rate of telecommuting has plateaued at about 17 percent of the U.S. workforce, with the average telecommuter working from home about one day per week.” (US News, Telecommuting Can Boost Productivity and Job Performance, 03.15.2013).

The benefits of telecommuting have been extensively documented. For the employer, the benefits include increased productivity, reduced absenteeism, decreased attrition, reduced brick and mortar expense, and a labor pool that is not geographically constrained. For the employee, they can avoid a morning commute and help with work-life balancing.

But according to research performed by the Bureau of Labor Statistics and published in the Monthly Labor Review – 2012, data showed that providing the option to log-in remotely for employees, served primarily to help expand the workday, more so than replace the company office with the home office.

So why is the frequency of telecommuting not growing?

The truth is that there are some positions/tasks that can be completed 100% offsite; while there are other positions that can’t be.  Aetna boasts that 47% of its 35,000 US workforce works from home.  Historically sales positions have worked off-site.  While positions that require interaction with colleagues within the organization do not lend themselves to tele-commuting.

This past February, Marissa Mayer (CEO), reversed a Yahoo policy.  Working from home was no longer an option for Yahoo employees. Instead, employees would be required to work from a Yahoo location. The reason for the policy change was to facilitate “communication and collaboration.”

Once you identify the roles that can work remotely —

In addition to the technology which is business specific, ensure you establish policies at the company level that all employees are required to follow.  Ensure these policies are fully documented and include provisions regarding equipment responsibility, data security and client privacy.  The way employees that telecommute are managed should be established early on to avoid the employee feeling excluded and disconnected from the company.

But caution is warranted —

Recent claims have been made in court by plaintiffs that asserted that tele-commuting was justified for an organization to offer reasonable accommodations as required by the Americans with Disabilities Act, i.e. Bixby v. JPMorgan Chase; Core v. Champaign County Board of County Commissioners; and EEOC v. Ford Motor Co.

As such, do not leave the decision to allow a tele-commuting arrangement to be established at the local manager level.  This approach will result in different managers having different policies and may create a liability for the company.  Establish one policy and ensure that all follow it.  Seek the input of an employment attorney.

Where is your company in this process?

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

“Unless you trust the sender, don’t click the link”

On February 12th 2013, President Obama signed an Executive Order, “Improving Critical Infrastructure Cyber security.”  Under the order, government agencies are expected to draft standards and share information regarding unclassified cyber threats.  In theory, the government and private industry will collaborate on this critical priority and develop voluntary standards, i.e. “Best Practices.”

So what is the incentive for private industry to share?  Historically companies have no desire to share information regarding breaches unless they are required.  If a company is successful at avoiding a threat, they have a competitive advantage over their competitors who may not be as prepared.  However, if the company is unsuccessful at avoiding a breach, disclosure risks damage to their brand when customers lose trust in them.

But cyber threats are very real and growing.  According to the Symantec Internet Security Threat Report (ISTR) 2013, “Last year’s data made it clear that any business, no matter its size, was a potential target for attackers. This was not a fluke. In 2012, 50 percent of all targeted attacks were aimed at businesses with fewer than 2,500 employees. In fact, the largest growth area for targeted attacks in 2012 was businesses with fewer than 250 employees; 31 percent of all attacks targeted them.”

It makes sense that cyber threats will migrate to smaller companies that most likely do not have security protocols as extensive as the Fortune 100 companies that spend millions on security.

So what can a small business do to protect itself and mitigate cyber risk?

Understand the current security expectations of management and key stakeholders of your firm.  This step is required not only to uncover concerns you may not be aware of, but to also develop buy-in.  The end result of this process will be more control and internal policies, which may cause frustration, i.e. restricted access to data, segregation of duties, system change management.  Early buy-in is highly recommended.

Analyze the firm’s current situation to identify security gaps.  The first part of this activity looks at system access internally and how remote employees access your system externally.  The second part of this task is to understand what employees need to access vs. what they should not need to access.  Private client information should not be readily accessible to all employees of the firm.

Develop strategies to close the gaps and prioritize the work required.  After the first two activities, you will quickly develop a list of process and policy changes that should be implemented.  The ability to implement all changes quickly will be constrained by time and money.  As such, your first priority should be items that if are not done will expose you to financial loss, regulatory action, brand damage, and/or client loss.

Test the effectiveness of your strategies.  There will be unforeseen consequences to your cyber risk mitigation strategies.  It is recommended to test the effects, prior to widespread implementation, to avoid business disruptions.

Educate staff on their cyber security responsibilities.  This activity introduces the policies and procedures to your staff; while underscoring the importance of any changes they will need to adopt.

Continually test the effectiveness of your strategies; and modify them as risks change.

It is better to prepare for a threat that may never touch your firm, than be in a reactive mode when a situation occurs.

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 do you do with a whistleblower that is not satisfied?

As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Whistleblower program within the Securities and Exchange Commission was launched August 2011. Since that time, 3,335 complaints were received, from which four rewards have been granted, i.e. one Aug 21, 2012 and three June 12, 2013.

But the SEC is not the only program – In March 1867 the Treasury began a form of a Whistleblower Tax program.  The IRS program was modified in December 2006 as a result of the Tax Relief and Health Care Act. From 2006 through 2012, 40,110 cases were received, with 1,077 awards paid.

What is of concern is that even though people are reporting issues to the respective regulatory bodies, the conversion from claim to outcome is very low, i.e. 0.1% for SEC and 3% for IRS.  The low SEC rate is most likely attributed to the newness of the program.  So when the SEC program reaches the seven year mark of the IRS program under review, will the claim rate reach 3%?

Now as more and more companies launch whistleblower programs internally they should tread lightly and consider how they will address issues raised.  If a process is established to address a legal or ethical issue raised by an employee, and the process fails, dis-satisfaction will be created. As such, creating an internal program where companies can identify issues and resolve them, prior to them becoming public brand blemishes, may backfire.  When a company does not act on information provided, the whistleblower may become unhappy and seek resolution outside the organization in a public forum.

“Markopolos began contacting the SEC at the beginning of the decade to warn that Madoff was a fraud. He sent detailed memos, listing dozens of red flags, laying out a road map of instructions for SEC investigators to follow, even listing contacts and phone numbers of Wall Street experts whom he said would confirm his findings. But, Markopolos’ whistle-blowing effort got nowhere.” (Madoff whistleblower blasts SEC by By Allan Chernoff, Sr. Correspondent, CNN 02.04.2009 CNN Money)

“Interviews with university officials, former players and members of the board, as well as reviews of internal documents and legal records, show that when the most senior Rutgers officials were confronted with explicit details about Mr. Rice’s behavior toward his players and his staff, they ignored them or issued relatively light penalties.” (Rutgers Officials Long Knew of Coach’s Actions by Steve Eder 04.16.2013 New York Times)

The SEC and Rutgers will be attempting to repair their respective images for some time.

While not every report of unethical or illegal activity will be valid, every claim should be treated the same way, until the results of a qualified investigation are finalized.  When training employees on the existence of a program, where they may freely lodge complaints without fear of retaliation, let them know that there is an established process that will be followed to investigate each and every claim.

Prior to embarking on establishing an internal Whistleblower Program, engage a Labor Attorney.  Understand the Federal Laws, as well as the laws within the states you operate.  Note – the Department of Labor has their own Whistleblower program.

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.

Accounts Payable Best Practices

There are various ways a company can implement an Accounts Payable (A/P) program utilizing internal or external resources.  Just keep in mind that the process will evolve.  The approach you establish to process 100 invoices/month will not be the same approach you establish to manage 1,000 invoices/month.

Following are three Best Practices that should be part of any program you implement, regardless of the size, to manage this activity.  Note, if the A/P process is not managed properly, the expense to correct deficiencies can be very high.  Best Practices include —

Establish Policies and Procedures –Document the entire A/P process.   This step ensures consistency in processing, i.e. everyone needs to work within the same established guidelines.  Clearly outline an exception process and a problem resolution process.  Caution – Do not let the exception become the rule.

Provide Vendors with your payment policy (abridged version) with payment dates, so as to set expectations of when payment will be made.  For example – “All invoices should be forwarded to the area ordering services for validation and approval.  Invoices will be processed twice a month, based on the date of receipt…”

Invoice Processing – Maintain a database of all preferred vendors, with complete information.  This information should include a valid W-9, current executed Purchase Order, and invoice identification information (invoice#, amount, and date).  Track the cumulative expense.  If it is large enough, you should be able to negotiate preferential pricing with the service provider.

Approved invoices should be processed in one central location, if possible.  Payment requests should fall into one of two separate groups, i.e. leases with a set amount paid monthly or quarterly as identified in a contract, or invoices with variable amounts.

Audit – Audit the process annually to understand if the documented policies and procedures are being followed.  It is also at this time that the process should be reviewed to potentially improve it.

There are pain points internal to the A/P department and pain points external to the A/P department, which include:

Internal Pain Points – Recurring Payments associated with contracts – Proper management of this area, will avoid over payments to terminated contracts and missed payments to new vendors. Any situation that can disrupt the A/P department’s flow should be eliminated.

External Pain Points – Multiple Offices – if your organization is composed of multiple offices around the country, another area of concern is ensuring those branches forward bills to the A/P department on time, to avoid the creation of out of cycle payments.

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.