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.

The Value of Stress Testing your Business

The act of “stress testing” banks, allows regulators to understand the effect on a bank’s economics during a severely adverse scenario, i.e. what is the likelihood that the institution will continue to transact business and survive a prolonged economic downturn.  Based on the results of the testing, regulators and bankers understand if the bank has the proper capitalization or alternatively what capital cushion is required to sustain itself.  Projecting an outcome based on a potential set of circumstances is a sound risk management approach.  Slightly modified, this approach can be and should be used to assess the impact of a stress on your business.  Does your business have the proper capital reserve cushion to adjust to a shock for a prolonged period?

For example, in the next three to twelve months, it is highly likely that the Federal Reserve will increase the federal funds rate.  This tool of monetary policy has an indirect impact on the prime rate, as the rates tend to move in lock-step.  As such, borrowers with variable rate loans will find their borrowing costs increase, i.e. a shock.  Since January 2009, the prime rate has been constant at 3.25%.  Yet 24 months prior, the prime rate was 5.0 percentage points higher, i.e. 8.25% (Source: Federal Reserve Board, Proprietary Bank Surveys).  At this point it is unclear if the Federal Reserve will begin a campaign to raise rates in 2015.  But once the campaign begins, how far will rates move up is not known.

To understand the potential impact of this shock, a business may perform the following testing –

Develop a proforma model based on the cash flow of your business.  Now increase your interest expense by 50% and then by 100%.  What is the impact on profitability as interest expenses increase?  Businesses that will be most impacted directly are entities that currently utilize a high amount of leverage and/or businesses that lay money out in advance of sales, for supplies and inventory.  While a business may have control over its leverage and purchases, it cannot control the economics of its customers and clients.   As rates increase, the economics of your customers may be disrupted which will have a trickle-down effect to its suppliers, i.e. you.  The natural outcome may be payment delays and an increase in your bad debt expense.

Based on your model, understand when issues will arise.  Quantify how much additional cash is required to ensure the proper cash reserve cushion is maintained.  Next proceed with one of three options –

Option #1 Least Impactful – Do nothing.  Understand the theoretical shortfall, but only make a change when you feel it is absolutely necessary.  I have seen many businesses use this wait and see approach.  It is not recommended.  Admittedly however, sometimes doing nothing works; but, other times it is disastrous.

Option #2 Most Impactful – Understand the cash reserve shortfall and discontinue any partner/owner distributions until the desired capitalization level is achieved.  This approach is very much in line with how the bank stress tests are performed.  If the bank passes the stress test, the Federal Reserve may allow it to make dividend distributions, share repurchases and major acquisitions/divestitures.

Option #3 Recommendation – Understand the cash reserve shortfall.  Investigate ways to increase the efficiency of your business.  Logical places to begin include –

  • Remove all 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.
  • Ensure an appropriate pricing model – Pricing is a critical task that all businesses manage.  However, there are many different ways to approach the pricing requirement.
  • Review the demand for your product offerings – 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.
  • Remove discounts offered – Discounts have their place, but more often than not, they are used incorrectly.
  • Manage the vendor expense closely – Unchecked, vendor expenses can quickly become out of control. Are you spending more than you should be with your current vendors?
  • Review the profitability of customers – Obtaining a customer that becomes unprofitable is a common situation.  It only becomes an error of management if you do not periodically review these relationships, or ignore the results.

At this early stage, take advantage of the time you have to make adjustments to your business model to help absorb the shock and continue to thrive.  If you review the six areas listed, but are unable to find cost savings and efficiencies, you may need to fall back on either Option #1 or Option #2.

 

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.

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.

Growing through Productivity Increases

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

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

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

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

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

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

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

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

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

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

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

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

Business Disruption Survival Techniques

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Who Owns the Customer, i.e. the Company or the Sales Agent?

This question was less important when the job market was in decline.  But as the economy recovers, business owners and senior managers will be faced with this question, more and more.

Depending on who you ask, there are two popular, but contradicting opinions.  If you ask the owner/CEO of the entity – “The customer belongs to the company.  They come to us because of our quality products/services.  The Sales Agent has been properly compensated for procuring the customer on our behalf.”

However, If you ask the Sales Agent – “The customer belongs to me.  They were sourced by my efforts and we have a relationship.  They transact business with the entity because of me.”

In fact, it is not uncommon for a Sales Agent to maintain a separate and personal file of their interaction with the client/customer.  When they leave your entity and seek employment from your competitor, they may say, “I produced $XXX in revenues for my last company, and I can do the same for you.  I maintain a book of business that will more than likely follow me, if I move to your company.”

There is a legal answer to this question, which I was reminded of, when I left an entity after fourteen years, even though not in a Sales capacity.  Not more than 30 days after my departure from one entity to a competitor, I received a letter from the President of my former employer.  Excerpts of the note are as follows -“In view of your departure from XYZ, this letter is to remind you of your obligations to XYZ, and under the law, both during and after your employment with XYZ…it is your obligation to handle XYZ trade secrets, confidential or proprietary information to which you had access during your employment at XYZ, whether in your memory or in writing, or in any other form, with the strictest confidence and in a manner consistent with XYZ’s policy, both during and subsequent to your employment…you may not misappropriate or use for the benefit of anyone other than XYZ any confidential or proprietary information relating to XYZ’s business.”

So what can you do?

As a first step, make sure your compensation agreements and employee agreements include language that clearly states the client belongs to the company and the legal obligation of the employee.  This agreement should be reviewed and approved by a qualified Labor Attorney.

But even after this measure, you may find that the client leaves you and follows the Sales Agent.  This situation may occur not because of what the Sales Agent did, but more because of what you did not do.  The companies that lock in the client and foster brand loyalty have developed a communication link with the client.  If you do not reach out and establish this link to your brand, the only connection the client has to the company is the Sales Agent.  More than likely, if the Sales Agent leaves, so will the client.

Popular approaches companies use to reach out to the client and maintain contact include offering post purchase support or discounts on future purchases or advertising related products/services.

At every possible opportunity your entity should advertise the brand and state the value proposition.   Regardless of the product/service, every business runs the risk that what they offer becomes a commodity in clients’ minds, i.e. belief that every competitor offers identical product/service.  If all products/services are the same, why not just work with the individual Sales Agent, wherever they go?

But your value proposition is your differentiator.  Customers/clients will seek you out and be less sensitive to price if they understand the benefit of working with you vs. other vendors.  How do you differentiate yourself from the pack?

It is a valuable exercise to identify and document what makes you different.  The results of this activity should become the basis of all marketing materials, i.e. your value proposition.

An example of a value proposition that I have used includes the following commitments.  XYZ Entity –

  • Offers superior product or service;
  • Makes an effort to understand your specific needs and has many ways of doing things so you can find the one that meets your needs;
  • Takes responsibility to get things done;
  • Is knowledgeable about the product/service you seek;
  • Tells you what you need to know in the way you understand;
  • Offers a complete array of the product/service you seek, to make your life easier.

The only way to maintain a client is to develop a relationship between the client and the company, through consistent messaging that differentiates yourself from the pack of competitors.

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.

COSO Internal Control—Integrated Framework 1992 vs. 2013

By December 31st 2014, companies that utilize the 1992 COSO Internal Control—Integrated Framework are expected to have fully transitioned to the 2013 framework.  If you are an organization that is required to report to the Securities and Exchange Commission, this change directly impacts you.  But when you look at what the framework represents, it is obvious that both public and private organizations of all sizes could benefit from adopting elements.  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 standard was updated to account for the ongoing changes in the business environment, i.e. evolving technology, increased outsourcing, changing regulatory environment…  The most significant change in the 2013 framework from the 1992 framework was the addition of 17 principles and 77 focus areas.  These new items further define the five core areas – Control Environment, Risk Assessment, Control Activities, Information & Communication, and Monitoring Activities.

 COSO 17 Principles

Elements that would be most applicable to small and medium sized entities include –

  • Control Environment – The entity demonstrates a commitment to integrity and ethical values. Senior Management is responsible to designate the individual(s) responsible to manage the satisfaction of reaching the entity’s internal control objectives; as well as continually developing the individual(s).

 

  • Risk Assessment –The entity sets its internal control objectives; as well as operations and financial goals. Externally the entity abides by frameworks, laws and regulations.  Internally, risks are identified and their significance established.  Approaches to respond to the risks are established.  Fraud and all the potential ways it can be committed are considered.

 

  • Control Activities – The entity develops control activities, which include segregation of duties, technology control activities, and policies and procedures.

 

  • Information & Communication – Obtain and generate information. Communicate this information internally and externally.

 

  • Monitoring Activity – On an ongoing basis, evaluate internal controls to understand their presence and effectiveness.

 

So how do you start?

Review the COSO Internal Control—Integrated Framework (Core areas, principles, and focus areas) to understand what elements apply to your situation; conduct an assessment of your organization, seek board/management approval on concept implementation, engage staff through training and communications, develop a transition plan, execute the plan, monitor success and adjust if required.

If you are looking to establish internal controls for the first time, it may make sense to bring in a third party that understands your industry and the common risks, which should be considered.  Team this individual up with an internal resource that understands your entity and your processes.

Additional posts on this subject include –

What is the proper way to roll-out an ethics program?

 Internal Audits – “Inspect what you Expect”

 The Best Way to Avoid Fraud is to Remove the Opportunity

 How Problematic is a Financial Restatement?

Update – WSJ (04/29/2015), “Almost three-fourths of the U.S. stock-listed companies that have filed 10Ks with the U.S. Securities and Exchange Commission since Dec. 15, 2014 have transitioned to using the updated COSO 2013 framework for reporting internal controls of their financial reporting requirements, said Bob Hirth, chairman of the Committee of Sponsoring Organizations of the Treadway Commission (COSO Commission).”

Where are you in the 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.

CFO Concerns 2015

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

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

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

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

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

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

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

Patient Protection and Affordable Care Act

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

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

Taxation

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

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

Debt Collection

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

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

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

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

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

No doubt 2015 will be a challenging year.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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.

Emotions in Business – Yes or No?

Probably one of the most important concepts in any business is to control emotions.  It is emotion that is critical in creative thinking and self-motivation.  However, un-controlled emotions are a liability.  Nothing destroys economics more than emotions.  I learned this concept in college, but have seen it played out with many companies I have managed as their financial support, time-and-time again.

It is understood that emotions cloud decision making.  For example, a practice within real estate sales is to make the buyer “fall in love with the property.”  Help the buyer visualize themselves in the home.  I have heard of real estate agents baking cookies so home visitors feel welcomed, during open houses.

In the end, if you bid on the property, it is advisable to know the maximum price you are willing to pay for it, and know when to walk away from the deal.  If you get wrapped up in the moment, you risk bidding beyond your means.

Clearly with respect to personal situations, we try to control emotions.  But when the question turns to emotions in business, there are two very different points of view –

In business you should be emotionless.  Inherent in business are successes and disappointments.  If things do not go your way, an objective solution is preferable to a subjective reaction.

If you find your company in a situation where profits are eroding, emotions should play a lesser role.  The best approach is to assess the situation, think of the options to solve the problem and chose the solution with the highest return and least probability of failure.  This approach is essentially mathematical.

The absence of emotions also can help when implementing fixes to your current business model.  You will be required to look at a business, and identify waste and inefficient processes.  At times the solution will have a negative impact on current employees either through their termination or a change to their job.  Having an emotional attachment will make it difficult to deliver bad news to the employee.

Counter point – Controlled emotions are not just acceptable but required to be successful.  If you are responsible to develop relationships and build trust, being devoid of emotions is not conducive to this goal.

Internally you will be required to build partnerships and motivate individuals within the organization, for the good of the company.  Employee involvement is important to the success of this endeavor.  Externally you must reach out to current customers and prospective clientele, to build relationships, for future business opportunities.

A turnaround requires more than just a great plan.  A turnaround requires flawless execution.  Emotions are useful to create trust, drive passion and helpful to motivate staff.

So what is the correct mix?  There are many tests that measure an individual’s approach in life.   IQ (intelligence quotient) measures an individual’s capacity to learn reason and apply that knowledge.  EQ (emotional quotient) measures an individual’s ability to read a situation, and apply intuition.  A high IQ, combined with a high EQ would seem to be the recipe for a highly successful individual in business.

There is a theory that building a team is made easier if you know the IQ vs. EQ mix represented by each team member.  In this way teams could be assembled with individuals that complement each other’s natural abilities.

But regardless of how you decide to proceed on the issue of emotions, keep in mind that the top reasons for employee law suits against businesses fall into the following categories – discrimination (sex, race, disability and national origin), harassment, retaliation against a whistleblower and wrongful termination.  In every situation, emotions play a role in these claims, as the employee feels they were wronged.  Valid claims or not, litigation is painful, expensive, and should be avoided.  Emotions throughout the organization should be controlled.

What are your thoughts?

This passage is an excerpt from my book, written in 2014 — “Redesign to Turnaround Underperforming Small and Medium-Sized Businesses” available via Amazon.

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.

“Framework for Improving Critical Infrastructure Cybersecurity”

Cybersecurity evolved from training staff not to accept spam mail that may include a virus that will disrupt systems; to not accepting spam that may include malware that will be used to steal client information.

Target Stores announced on its website 12.19.2013 that it experienced “…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.”

Neiman Marcus announced on its website 02.21.2014 that it experienced “…malicious software (malware) was clandestinely installed on our system and that it attempted to collect or “scrape” payment card data from July 16, 2013 to October 30, 2013.”

Michaels Stores, Inc. announced on its website 01.25.2014 that it “recently learned of possible fraudulent activity on some U.S. payment cards that had been used at Michaels, suggesting that the Company may have experienced a data security attack.”

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.

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

On February 12, 2014, The National Institutes of Standards and Technology released a “Framework for Improving Critical Infrastructure Cybersecurity”.  This document is considered a start (version 1.0); and is expected to evolve over time as new risks present themselves.  A main point in the document is that cybersecurity should now be considered a standard part of any Risk Management framework, i.e. no longer kept separate.

While the document is extensive, as it was designed to safeguard critical industries in the United States, i.e. banking, financial, healthcare; the approach is generic enough where it can be adopted for use by any organization.

The framework is a non-regulatory, voluntary set of industry standards and best practices.  A brief synopsis of the framework is as follows –

Framework Core: An approach to analyze cyber risk which tracks activities based on an incident management approach –

Functions Categories Subcategories Informative References
Identify – organizational understanding of risks
Protect – safeguards against incidences
Detect – ways to identify a cybersecurity event
Respond – actions to be taken once detected
Recover – restoration activities

 

Framework Implementation Tiers: Four levels which describe how the organization views the cyber risk and the processes in place to address them.

Tier Risk Management Process Integrated Risk Management Process External Participation
Tier 1 Partial Ad hoc  processes No organization risk awareness; and no organization wide approach none
Tier 2 Risk Informed Approved by management; but not established organization wide Organization awareness; but no organization wide approach none
Tier 3 Repeatable Approved by management; and policy established organization wide Organization awareness; and organization wide approach Collaborates with external organizations
Tier 4 Adaptive Established processes based on lessons learned and predictive indicators Organization wide approach that uses risk-informed policies Openly shares information with external partners to improve cybersecurity for all

 

Framework Profile: Current state of cybersecurity vs. the desired state of cybersecurity.

The Framework can be used to either establish a cybersecurity program or improve a current cybersecurity program.  Steps are as follows –

1) Prioritize and scope – Cybersecurity direction based on your organization’s business, mission and strategy.  This action can be accomplished through interviewing senior managers.  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.

2) Orient – Review of cybersecurity in relation to related systems and regulatory requirements.

3) Create a Current Profile – Based on the Framework Core.

4) Conduct a Risk Assessment – Assessment of the operational environment in relation to the likelihood of an event and potential impact.  Included in this step would be to look 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.

5) Create a Target Profile – Desired cybersecurity outcomes.

6) Determine, Analyze and Prioritize Gaps – Comparison current state of cybersecurity vs. the desired state of cybersecurity; and what it will require to move to the desired state.  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.

7) Implement Action Plan – Determination of activities to implement based on previous steps.  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.

So what is the liability for doing nothing?  According to the Federal Trade Commission the liability is great – “Further, a company engages 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.”  (Prepared Statement of the Federal Trade Commission on Protecting Personal Consumer Information from Cyber Attacks and Data Breaches before the Committee on Commerce, Science and Transportation, Washington DC March 26, 2014)

But how much do you spend?  Based on a recent survey by BAE Systems Applied Intelligence of senior IT officials showed that 15% of the IT budget today was allocated t0 security.  It is better to prepare for a threat that may never touch your firm, than be in a reactive mode when a situation occurs.

To read the full report click –Framework for Improving Critical Infrastructure Cybersecurity

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.

“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.

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.

5 Steps to Effective Segregation of Duties Analysis

Re-Post of a blog written by Teresa Bockwoldt, first posted on www.vibato.com

If you are like most finance executives, you probably would like to minimize the risk of fraud and financial mistakes within your organization. You probably also would like to reduce the chance of an audit-related surprise like a material weakness or waste time and resource effort with out-of-scope situations.

One way to achieve these objectives is to complete a Segregation of Duties (SoD) analysis at the beginning of each fiscal year. This relatively simple process, which takes only a few hours with the right information and tools, can yield big rewards, especially for small or rapid growth companies, or nonprofit organizations where there is an imbalance between number of staff (low) and workload (high).

The SoD analysis describes all the tasks related to your financial transactions and lists the employee or title responsible for handling each of those tasks. And when we say all the tasks, we mean all the tasks, from the most mundane (who opens the mail) to the most strategic (who signs payroll checks). This analysis emphasizes who not how: the SoD focuses on people and tasks, not policies and procedures.

The SoD identifies points in your financial processes where fraud or mistakes might occur and go undetected because one person is completing several finance-related tasks that conflict with each other (segregation conflict). For example, consider the opportunity for fraud if the accounting personnel have access to both your check stock and your signature stamp or if the same shipping and receiving manager receives inventory and investigates inventory discrepancies.

In a good SoD analysis, you would identify these segregation conflicts and develop a way to mitigate them – such as dividing the responsibilities or incorporating a monthly review of transactions by a higher level manager. The goal is to make it harder for anyone who works at your organization (including employees, consultants, volunteers, and Board members) to be tempted to commit fraud. Essentially, you are minimizing organizational risk by removing the opportunity, and hence the temptation, to commit fraud.

Since audits focus on risk and how it is mitigated, the SoD analysis will help both your fraud prevention and audit preparation efforts. Your auditor will be looking for holes within your organization where there might be opportunities for mistakes or concealment. If you can show the auditor you’re identifying and plugging those holes, by providing a copy of your SoD plus a list of follow-up actions, you can reduce the work your auditor needs to do and demonstrate the integrity of your organization’s financial reporting efforts.

A segregation of duties analysis is always completed as part of an audit; so if you do not complete one and show the results to your auditors, your auditor will complete one for you — and charge you for it. We recommend that organizations complete their SoD analyses, either on their own or with help from an objective third party, for several reasons. The biggest advantage in this approach is that an organization will be able to identify and remediate conflicts before the annual audit, thus minimizing the risk of a negative opinion. Another benefit is that if you can show your auditor that you are identifying and mitigating segregation conflicts, it increases their belief that you are running your organization properly and will lower their perception of your organizational risk – this can benefit you in other ways as well.

We recommend a five (5) step approach to completing an SOD analysis:

Step 1: Choose Your SoD Approach

Your executive team has decided to conduct an SoD analysis; now you must determine whether to complete the analysis using only internal resources or with help from a qualified third party.

We strongly recommend bringing in third-party assistance unless your internal audit or accounting team has both the experience and the tools to complete this process efficiently and cost-effectively. As is always the case when hiring a consultant, you’ll need to weigh the consultant’s fees and experience against the time and costs your in-house team would spend creating an in-house tool, researching your auditor’s requirements, collecting the information, and compiling the results.

Another tip: If you plan to do the analysis internally, do some research on the best tools/methods available that you can leverage. There is no reason to create this process from scratch, since a little knowledge will get you a long way towards understanding where you need to focus, and how to collect/analyze/remediate any issues. The more automated you can make your approach, the more reliance your auditors will tend to place on it because you are minimizing the risk of human error.

Finally, you will need to understand what risk levels are acceptable or unacceptable, not just to your organization but to your auditor. So before you start your SoD, review the notes from prior audits and/or ask your external auditors about their top concerns. This proactive approach will help you prioritize the conflicts you find and take action only on the ones that matter to your auditor.

Step 2: Tap Your Knowledge Network

Now that you have a methodology, some tools, and a team, you need to acquire information about who does what within your organization.

Remember, many finance-related activities happen outside the finance organization itself. For example, your receptionists “touch” the finance department if they’re responsible for receiving, opening, and sorting the mail. Similarly, your warehouse staff also “touch” the finance department when they ship products or receive inventory and invoices. For a comprehensive SoD analysis, then, it is extremely important to bring in representatives from the human resources, operations, IT, and finance departments, as well as directors or managers from satellite offices or manufacturing facilities.

Gather all representatives for an in-person meeting or conference call, during which your internal audit leader or consultant will go step-by-step through each finance task, and ask for information about who completes these tasks. It is important to assign titles, rather than individual names, to ensure the analysis stays consistent regardless of the day-to-day human resources changes in the organization (such as absences, resignations, or promotions).

Step 3: Identify and Prioritize Conflicts

Once you’ve assigned titles to tasks, you need to see where your segregation conflicts lie and prioritize them according to your organization’s risk limits. As a general rule, you should pay close attention to conflicts in tasks related to receiving or disbursing cash or checks; wire transfers; managing inventory; and posting journal entries.

Here’s where using an automated, visually-oriented approach pays off. Imagine the time you’d spend sifting through hundreds of pages of documents, manually checking titles and tasks, creating graphics to show the conflicts, and then ranking those conflicts according to risks. Some auditors and consultants still use this manual approach, which makes completing the SoD time-consuming and expensive. You’ll save time and money, and likely get a better result, by using an automated tool that synthesizes the information and provides a graphical output with conflicts highlighted and ranked according to the risks your organization and your auditor have identified.

Step 4: Develop Mitigation Plans

During this step, keep in mind that every organization has some SoD conflicts. Your goal is not to get to zero conflicts but rather to recognize which conflicts you have and to address those conflicts according to the risks they pose to your organization.

Your mitigation options include reassigning responsibilities, hiring more staff, increasing the frequency of cross-checks (like monthly closes), or introducing new approval or reviews either within or outside the finance department. A nonprofit or small company, for example, might ask a board member to review financial transactions, in lieu of hiring another staff member.

Occasionally, your auditor might disagree with how you’ve prioritized conflicts or want a more aggressive mitigation (such as hiring a new employee) that goes against your business realities. In these situations, it’s important to go back to your SoD analysis and prior years’ audits and provide evidence that backs up your assessment. If you have a third party consultant, they should be able to argue your case.

Step 5: Apply Your Analysis Beyond the Audit

You’ll want to share your SoD analysis with your auditors twice – when you’ve first completed it, to ensure that all areas of business risk are covered, and again when they are completing your year-end audit. Meantime, you can apply the lessons learned from your SoD analysis to other areas of your business. Since this analysis will highlight where existing duties are distributed unevenly throughout the applicable resource pool, the tool also helps you make more informed decisions during company-wide or departmental reorganizations. This analysis can be used to justify staffing recommendations to the management team or Board of Directors.

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.

A smart entrepreneur should maximize this opportunity

Money is being devoted to the stimulation of small business.  If you ever considered opening a new business or expanding your current business, the time is right.  Grants, loans and tax incentives are available from the public sector, to stimulate the private sector, i.e. specifically small businesses.

How important are small businesses to the US economy?

Small businesses employ about half of U.S. workers. Of 120.6 million nonfarm private sector workers in 2007, small firms employed 59.9 million and large firms employed 60.7 million.  (Source:U.S.Dept. of Commerce, Census Bureau: Statistics of U.S. Businesses, Current Population Survey and Business Dynamics Statistics; and the Edward Lowe Foundation)

Small firms accounted for 65 percent (or 9.8 million) of the 15 million net new jobs created between 1993 and 2009.  (Source: U.S. Dept. of Labor, Bureau of Labor Statistics, Business Employment Dynamics; Advocacy-funded research by Zoltan Acs, William Parsons and Spencer Tracy, 2008)

In many cases, the federal government is providing money to states for their distribution.  May 24, 2012 – “The U.S. Department of Labor today announced the availability of $35 million in funds to develop, enhance and promote Self-Employment Assistance programs in all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands.”

Programs exist in various shapes and sizes, depending on the state, but are consistent in the end goal of increasing employment and directing investment to certain geographies.

For example, the New Jersey Economic Development Authority (http://www.njeda.com) offers –

To cover operating expenses – Loans up to $750,000; and guarantees up to $1.5 mill for a total exposure of $2.25 mill.

To purchase or renovate a building, machinery or equipment to accommodate business growth and expansion – Loans up to $1.25 mill; loan guarantees up to $1.5 mill for a total exposure of $2.75 mill.

To grow a business located in an urban municipality – Loans of up to $2 mill for fixed assets to businesses in one of New Jersey’s urban areas.  Loans of up to $3 mill with favorable rates for fixed assets to businesses in one of New Jersey’s nine designated urban areas (Atlantic City, Camden, East Orange, Elizabeth, Jersey City, Newark, New Brunswick, Paterson, Trenton).

To grow business by adding employees – Incentive grants to businesses creating at least 25 new jobs in New Jersey (10 jobs if in the technology or biotechnology sectors).

While the Connecticut Department of Economic and Community Development (www.decd.org) offers –

Revolving Loan Fund – Loans range from a minimum of $10,000 to a maximum of $100,000 to assist with capital and operational needs.

Job Creation Incentive Program – Loans range from a minimum of $10,000 to a maximum of $250,000 to spur growth.  Amount may be forgiven if job growth achieved.

Creation Matching Grant Program – Grants are available at a minimum of $10,000 to a maximum of $100,000 to provide a dollar-for-dollar matching grant for specific job creation, capital investment and working capital goals.

What type of programs are offered in your state?

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.