The Changing Economics of Employment

This year will be remembered as the year the economics of employment changed greatly; and the following year will be the year the impact of these changes will be absorbed by businesses.  New regulations cover areas such as minimum wage, employment practices, overtime, background checks, and employee classification, i.e. independent contractor vs. employee.

With any regulation change there are three separate cost levels – cost of review – every entity assumes the cost of reviewing the requirements to understand if they apply to their situation; cost of planning – If the regulation applies, costs include developing an approach to implement, communicating the approach, and if required, training; and finally, cost of implementation – the actual financial impact of the change, which varies based on your organization.  New regulations are expensive.

To add to the complexity, labor laws are predominantly established at the state level.  If your entity transacts business in three states, three sets of rules will need to be considered.

For most organizations, employment costs are the greatest component of total expenses.  Unlike other inputs in the production process – salaries increase annually, but never decrease; when prices rise you cannot quickly reduce use of the resource or purchase the resource from an alternate provider; you pay for the resource, even if you do not fully utilize it; and unlike other inputs, emotion can play a part, i.e.  morale can be a great motivator or great hindrance to the entity.

Focusing specifically on the minimum wage.  A great number of states have increased the minimum wage, but not just for this year.  Several states have a schedule of increases, over time.  To put numbers around it, a $1 increase per hour equates to approximately $2,000 per year in increased employment costs per employee, i.e. $1 * (35 hours * 52 weeks) = $1,820.  The balance will come from employer paid taxes.  For a business that is people intensive, the added costs can be great.

“…the company’s program to raise hourly wages accounted for 75% of the lowered earnings target. He said the company expected to spend an additional $1.2 billion on wages this fiscal year and another $1.5 billion in fiscal 2017.”  (Wall Street Journal, 10.14.2015, Wal-Mart Lowers Sales, Earnings Outlook)

In the long-run, these additional employee expenses should benefit the entity through increased productivity.  A well-paid and well-trained employee works more efficiently, stays on the job longer, and provides better customer service, i.e. is more productive.  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.

However, in the short-run costs will be incurred prior to experiencing the benefits.

So when you raise wage, where does the money come from?  Options to pay the increased wage to your employees are as follows –

  1. Increase the price of your product/service and maintain your profit margin – if your industry is highly competitive, clients may not wish to pay the increased price and leave you to go to a cheaper alternative;
  2. Reduce the reward to investors, partners, owners through reduced dividends; or,
  3. Decrease the average annual raise to higher paid employees – this approach may work in the short-run, but until you can correct the issue, every employee that did not receive a fair increase that is representative of their contribution is a flight risk.

More than likely the increased expense will be absorbed through a combination of the strategies.

Now may be the time to examine your staffing to ensure that it is at the proper level –

Do you have more staff than you need to achieve your business goals?  More importantly, are you receiving the value from these employees that match or exceed the compensation you pay?   Do you still need the contract, temporary or part-time employees (if applicable)?

When costs increase, we are forced to address issues that may have been overlooked previously.

Finally, if your entity does not have any employees that are paid minimum wage, you may not be directly impacted by this change.  However, you will be impacted indirectly.  If your vendor’s costs increase due to these changes, they will attempt to pass the additional expense to your entity.

As such, once you complete your employee review, you may wish to also review your vendor spend.

Editor’s Note: Regis Quirin is a financial executive and author with 23 years of corporate experience.  In addition to writing articles for a few publications, in 2014, Regis published the book “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.

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.

Pay versus Performance – A Comment Letter to the SEC

Following is a letter that was forwarded to the Securities and Exchange Commission, in response to a request for comment, regarding the Pay vs. Performance proposal.

June 24, 2015

 

Mr. Brent J. Fields

Secretary

U.S. Securities and Exchange Commission

100 F. Street, N.E.

Washington, D.C. 20549-1090

RE: File No. S7-07-15

Release No. 34-74835- Pay for Performance (the “Proposing Release”)

Dear Mr. Fields:

Thank you for allowing me to comment on this proposal.  Overall I agree with the desire for greater transparency into the compensation vs. performance relationship.  The values identified to be used to demonstrate the relationship, would serve this purpose.  However, I am not in favor of the reporting flexibility for registrants, being considered.  I do not believe the flexibility will improve the data.  Instead the flexibility may create confusion and make it very difficult to compare registrant-to-registrant information by interested parties.  The flexibility also leaves room for the potential to unintentionally mislead.

When reviewing data (financial and statistical) there are several key elements that are required to provide confidence in the conclusions.  This situation is even more pronounced when you are comparing and contrasting the results across registrants – Is the definition of the data being reviewed consistent, for every registrant?  If I chose not to act today, when I review the information in a year or two, will the original definitions I used, be valid?  Is the data disclosed by the registrants trended over a consistent time period?

My overall recommendation is that every registrant should be asked to provide the same base information, in the same format, for the same time period.  Flexibility will be limited to a page or two of explanatory notes, subsequent to the tables.  I do not believe that these requirements create a burden in any way, as I would guess/hope that organizations perform a similar analysis currently when determining compensation levels.

Disclosure (Request for Comment #1 and #3) – Executive compensation and Financial Performance information should be included in all materials/filings that discuss compensation, including information to be distributed prior to an annual meeting or special meeting or written consent in lieu of a meeting.  There are multiple filings that a company may make to the Securities and Exchange Commission.  While an analyst may read several filing types, a shareholder or potential shareholder will most likely only read materials assembled for the purpose of the annual meeting.

Compensation Disclosure (#5, #22 and #24) – Executive compensation [as defined in (Item 402(c) of Regulation S-K [17 CFR 229.402(c)] assumes the completion of a Summary Compensation Table.  The table considers the multiple forms of compensation and should be required, with the values for each compensation component provided.  Interested parties can then see for example, what part of compensation is salary vs. bonus vs. equity….  Compensation information should be provided on an accrual basis, i.e. bonus paid in January for the prior year should be attributed to the proper year, to ensure executive compensation more closely tracks Total Shareholder Return.

Tabular Presentation (#6 and #12) – Reporting components should be defined and required, for both the Summary Compensation Table; and the Pay versus Performance table (page 19 of proposal).  The actual value of the components should be provided, not just summary or ratio information.

Graphic Presentation (#7) – A Line Graph should be included which shows for the five years under review the level of Total Shareholder Return (TSR).  Underneath the TSR line (broken vertical axis), would be a line to show the executive compensation, as a group.  You should expect to see the executive compensation line track closely with the Financial Performance.  The vertical axis can be broken again to show the median of annual total compensation (as defined by Section 953(b) of the Dodd-Frank Act), trended over five years, in relation to the annual total compensation of the CEO. In a perfect world, inclines, declines, and slopes will be similar.

Additional Information (#9) – Executives by nature will debate a financial calculation/statistic they feel does not positively represent their efforts, i.e. “But you can’t look at it that way.”  The difficult part is distinguishing the validity of that statement, i.e. perceived difference vs. actual difference.  As such, registrants must be allowed to append qualitative information to the quantitative data.  In a subsequent page, management can give an explanation of the information presented, i.e. why it is an accurate portrayal or not.  However, the goal is to have every registrant start from the same perspective, i.e. a level playing field.

Financial Performance (#34, #35 and #38) – Many ratios/statistics can be used to validate performance, which may include Total Shareholder Return, Free Cash Flow, Return on Investment, Shareholder Value Added…  Each statistic has its strengths and its weaknesses.  A claim that the statistic increases short-term approaches can be made for any measure that is used to gauge success.  Based on human nature, when a statistic is reported, managers will attempt to maximize the value.

Peer Group (#40 and #41) – The same peer group used for purposes of Item 201(e) or the Compensation Discussion and Analysis should be used.  A note should be included by the registrant that advises the interested party as to the components of the peer group.  If the registrant desires to make a change, the change must be made for both uses to ensure consistency.  However, if a decision is made to change the peer group, the data must be changed for all five years displayed.  This provision will avoid multiple peer groups in one filing.

Reporting Period (#42, #44 and #46) – All information should be provided for the most recent completed five fiscal years, without aggregation, consistently required by all registrants.  The time period is sufficient.  Additional years should not be allowed in the data page or in the subsequent notes.

In summary, there is a very real danger that the flexibility provided to registrants, which is being considered, will make the implementation of the Pay vs. Performance provisions confusing to investors.   In essence, if the rule was developed to assist investors, consistency, transparency and the ability to evaluate registrants is critical.

My recommendation is that every registrant should be asked to provide the same base information, in the same format, for the same period.  Flexibility will be limited to a page or two of explanatory footnotes.  I do not believe that these requirements create a burden in any way.

Please feel free to contact me if there are any questions with my recommendations.

 

Sincerely,

Regis Quirin

 

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 Problem with the McDonald’s Turnaround

On May 4th2015, McDonald’s Corporation  announced initial steps in a turnaround plan which included the following activities – restructure the business into four segments, beginning July 1, 2015 – U.S., International Lead Markets, High Growth Markets, and Foundational Markets; refranchise 3,500 restaurants by the end of 2018; capture approximately $300 million in annual general & administrative expense savings; and, embark on a three-year return of cash program to shareholders totaling $18 to $20 billion.

Other than the announcement of a turnaround, there was no complete turnaround plan communicated, i.e. what happened to place you in this situation and what is your plan to get out of it.  At this point, all we have to go on is a collection of press articles and press releases.

The clearest sign that turnaround assistance is required is after a steady erosion of your business economics.  The turnaround at McDonald’s Corporation is required based on the substantial economic drop in its business model, since 2013 –

As of Revenues ($000) Gross Profits ($000) Profit Margin
12/31/2014 $27,441,300 $10,455,700 17.00%
12/31/2013 $28,105,700 $10,902,700 20.00%
12/31/2012 $27,567,000 $10,816,300 20.00%
12/31/2011 $27,006,000 $10,686,600 20.00%

http://www.nasdaq.com/symbol/mcd/financials?query=income-statement

A business may find itself in need of turnaround assistance based on unforeseen external factors.  There are many reasons why an organization may require turnaround assistance.  Rarely is it due to a single factor.  The primary impetus for the McDonald’s Corporation turnaround requirement seems to be associated with competition from new entrants to the market and shifting consumer preferences.

In any turnaround, transparency and communications are integral for investors, analysts, potential franchise owners, rating agencies and employees.  When the turnaround is transparent, interested parties understand your direction and the value of the changes being implemented.  But absent this information, confusion is a high probability.  Based on a review of openly available information – some of the action items slated for implementation seem to be contradictions.

Steam-line menu

Variations and food options impact the speed and efficiency of the restaurant kitchens.  Testing is underway in Delaware, Little Rock, Waco, Bakersfield, Macon and Knoxville to simplify the menu and reduce options.  However, in another article you may read about menu additions planned or being tested, including all day breakfast, burger customization, a premium sirloin burger, and a premium chicken sandwich.  As of 2014, McDonald’s Corporation maintained 121 menu items.  Will the additions come before the reductions, further slowing down the restaurant kitchens?  What has the research shown with respect to the expected impact on customer satisfaction, from the menu reductions?

I believe that McDonald’s is a victim of it branding. The company is positioned as great tasting and inexpensive food. Where ever I go in the United States, I can purchase the same meal, with the safe quality. Most of us can repeat the ingredients in a Big Mac, i.e. two all-beef patties, special sauce… That is part of its branding. The slogan did not end with “or feel free to change it up.” The positioning – consistent quality, fast and at a low cost.

I do not think of McDonald’s when I want healthy or organic or custom fare. Very few brands have ever had success at a quality transformation. The only transformation that comes to mind is “Made in Japan.” That was not a positive in the 70’s. But in the 80’s, that all changed with the explosion of Japanese vehicles, i.e. Honda and Toyota. While it is not impossible, it is very expensive to re-brand.

Return cash to shareholders

On the heels of the recent year-to-year decline in profits from 2013 to 2014, McDonald’s Corporation intends to return $8 to $9 billion to shareholders in 2015.  At the same time, McDonald’s will be embarking on a turnaround which requires the use of surplus cash up front, to design new processes and launch new products.  For example, a new 31 page procedure to improve order taking and fulfillment accuracy was implemented in a Wyoming franchise, beginning December 2013.  The change was implemented to reduce the time to service customers, and increase customer satisfaction.  Based on its success, training and roll-out is slated for the summer 2015.  The role out of this new process to all 36,000 locations will require an investment by the organization.

Recently, the rating on McDonald’s Corporation debt was lowered by the three big rating agencies – Fitch lowered its issuer default and senior unsecured rating to triple-B-plus from A; S&P lowered its corporate credit rating to A- from A; and Moody’s lowered its senior unsecured rating to A3 from A2.  As McDonald’s debt ratings decline, the cost of borrowing will increase for the corporation.

Data Distribution

A redesign to turnaround a business cannot be completed behind the scenes.  Progress sharing with your investors, analysts and employees is very important.  But beginning July 1, McDonald’s Corporation will discontinue reporting sales figures monthly, and will begin to only report quarterly.  A turnaround usually results in a period of high analysis and the development of metrics to measure and manage the business.  Success at achieving your strategic goals, based on the metrics, is important to stakeholders.  Reducing the flow of information during a turnaround, may be counter productive to your efforts.

Once a Turnaround is announced, the focus should be on strategy, planning, cash flow, reporting, optimizing policies and procedures, marketing and business development.  However, currently McDonald’s Corporation is experiencing an attack on its brand from several fronts.  These attacks can be distracting and damaging in the press, when interested parties do not have a full understanding of your intended direction.  Examples of two such issues include – a Legal proceeding to determine if McDonald’s Corporation shares some responsibility for the actions of franchise employees, with respect to low wages; and The Children’s Advertising Review Unit claimed that McDonald’s Corporation advertising placed an emphasis on the toy that was part of the Happy Meal vs. the food in the Happy Meal.

I believe that McDonald’s Corporation would benefit if the turnaround plans were more fully communicated to investors, analysts, potential franchise owners, rating agencies and employees.

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.

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.

The Supplier Marketing Program

There are multiple ways companies market themselves.  Each form is associated with a certain level of investment and return, within a certain timeframe.  One of the most effective approaches is “quid pro quo” marketing, i.e. marketing your products or services to your suppliers/vendors.  This approach can work as a business-to-business strategy, or a business-to-consumer strategy, or both.

As a business, you pay for multiple services from your chosen vendors, i.e. software, hardware, banking, accounting, stationary, mail delivery, office cleaning…  Does your business offer any products or services that may be purchased by these vendors or the employees of these vendors?  I worked with a company that implemented this type of Supplier Marketing Program.  The program was highly successful and easily adaptable to any business.

So how do you get started?  The implementation of any Marketing program has two main pieces, both of which are required to be successful, i.e. analytical review and marketing execution.  In situations where your Marketing department does not have the knowledge and experience to perform the financial analysis that justifies the marketing investment, that responsibility should fall on the office of the CFO.

Prior to undertaking this strategy, a Return on Marketing Investment (ROMI) should be calculated.  The formula is as follows – (Gross Profit-Marketing Investment)/Marketing Investment.

Analytical Review – Estimating Gross Profit

Identify the Opportunity – Develop a table of all company relationships. Include the supplier name; contract type; purpose; pricing; term; termination requirement.  Customers should be rank ordered, i.e. highest likelihood to use the product or service you offer.  Your focus should be on the best opportunity based on your relationship type; the location of the supplier and the employee count.

Quantify the Potential – Following is the standard opportunity waterfall, which changes based on factors specific to your business –

Category Factor Opportunity 1 Opportunity 2 Opportunity 3
Total Employees (Leads) 100% 100,000 250,000 500,000
Employees that are Consumers of Product/Service 50% 50,000 125,000 250,000
Current Shoppers 25% 12,500 31,250 62,500
Capture Rate 5% 625 1,563 3,125
  • Total Employees (Leads) – total number of the employees, of your suppliers, as a group.
  • Employee Consumers – employees that would use the product or service you offer.
  • Current Shoppers – consumers that are in the market today for your product or service.
  • Capture Rate – consumers that are willing to purchase from you today.

An additional category that can be added is frequency of purchase based on your business model, i.e. tax services are needed annually, mobile phone every two years, home purchase every seven years.

Marketing Execution – Estimating Marketing Investment

The marketing process has three distinct steps –

Relationship Development – Contact the gatekeeper of the Supplier account.  Present product or service benefits.  Focus on value to the company and employee retention.

Endorsement – Develop marketing plan in conjunction with the gatekeeper.  Determine how you will reach out to the employee base and the way you will reach them.  Leave behind the appropriate marketing materials.

Account Management – Execute the marketing plan.  Activities may include desk drops, attending sales meetings/events, lunch-in-learns, etc.  Maintain ongoing contact with the employee base.  Add value by offering personal touch services.  Market directly to consumers whenever possible.

At this stage you have all of the factors needed to create a ROMI.  Use this information going forward and review the actual results to plan results, to understand if this program is a success and should be continued.

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

Tips to Mitigate Technology Implementation Challenges

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

“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.

Redesign to Turnaround Underperforming Small and Medium-Sized Business

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

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

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

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

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

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

  • Employment and administrative expenses increase; and,

  • Competition is fierce.

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

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

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

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

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

  • We can solve the issues through expense reductions only.

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

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

Management

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

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

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

Diagnose the Depth of the Issues

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

Develop an Appropriate Strategy

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

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

Plan and Actively Manage Cash Flow

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

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

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

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

Optimize Support Functions

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

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

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

Optimize Business Development

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

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

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

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

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

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

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

Redesign to Turnaround Underperforming Small and Medium-Sized Businesses

 

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

2014 Concerns to the CFO

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

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

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

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

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

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

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

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

What issues are of concern to you?

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

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

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

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

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

So why is the frequency of telecommuting not growing?

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

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

Once you identify the roles that can work remotely —

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

But caution is warranted —

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

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

Where is your company in this process?

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

2013 Year End Tax Strategy

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

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

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

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

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

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

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

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

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

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

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

The Three Financial Metrics Every Business Should Track

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

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

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

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

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

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

What ratio do you use to track your success?

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

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

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

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

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

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

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

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

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

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

Results are similar within the public sector –

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

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

What are your thoughts?

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

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

What do you do with a whistleblower that is not satisfied?

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

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

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

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

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

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

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

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

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

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

Periodic Self-Assessment to Free-up Capital to Grow

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

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

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

2) Modify the order fulfillment process;

3) Alter products and services offered; or,

4) Combination of 2 and 3.

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

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

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

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

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

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

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

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

Accounting Discretion or Earnings Management?

Surveys completed by 169 CFO’s showed , “…CFOs believe that in any given period about 20% of firms manage earnings…only about 60% of earnings management is income increasing, while 40% relates to income-decreasing activities…CFOs believe that it is difficult for outside observers to unravel earnings management…” (Earnings Quality: Evidence from the Field, September 2012).

There are policies and practices within GAAP, that allow for a certain amount of flexibility, i.e. where reasonable individuals may disagree , such as revenue recognition timing; depreciation and amortization policies; allowance for doubtful accounts projections; pension expense estimates; and inventory valuation.

These discretionary practices are also causing issues within the Auditing community.  Based on a recent report issued by the Public Company Accounting Oversight Board – REPORT ON 2007-2010 INSPECTIONS OF DOMESTIC FIRMS THAT AUDIT 100 OR FEWER PUBLIC COMPANIES (PCAOB Release No. 2013-001 February 25, 2013), audit deficiencies identified include – auditing revenue recognition; auditing fair value measurements; auditing accounting estimates; and, auditing procedures to respond to the risk of material misstatement due to fraud.

Issues arise when these policies allow for abuse.  Private companies may wish to increase expenses and lower earnings, to minimize taxes; while public companies may wish to decrease expenses and increase earnings, to achieve a higher stock valuation.  These strategies primarily move earnings from period to period.  To sustain the desired approach, successive quarters will need to be manipulated.  Regardless of your initial reason to manage the earnings, the end result will be a strategy where you mislead investors and lenders, i.e. commit fraud.

Additionally, there are also policies within GAAP that make targeted manipulation possible.  Common manipulation techniques include – over-accruing “cookie-jar reserves”; and establishing a reserve for restructuring charges “big-bath reserves.”

To avoid this situation – institute a strong control environment; and, retain a CFO with sound ethical convictions.  While it may be difficult to identify earnings management for an outsider looking in, an insider with the proper training in Accounting, Finance, that understands the business model, should easily identify the issue and implement corrective measures going forward.

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

CFOs … Beyond Bean Counters

Re-Post of a blog written by Cindy Kraft, first posted on www.CFO-Coach.com.

The American Banker addressed the evolving role of Chief Financial Officers in banking.

The CFO’s responsibilities have broadened since the financial crisis, becoming more challenging and requiring executives to have an understanding of areas beyond accounting.

The Finance Chief’s role has been evolving and expanding for years, and not just within banking, but across every industry.

So what does make a Chief Financial Officer marketable today, regardless of industry?

Thought Leadership

Marketable CFOs have the proven ability to envision a direction and/or initiative, execute that vision, and deliver a positive impact for the organization. Sitting at the executive table is different than being a leader who sits at the table and strategically contributes to the executive team.

Operational Knowledge & Impacts

Head knowledge without proof of ability to use it … is just head knowledge. A marketable CFO will have CAR+SI (Challenge – Action – Bottom-line Result + Strategic Impact) stories that illustrate his depth of understanding of dollars and operations – and – operations and profitability.

Operational CFOs with proven track records of positive impact are in high demand, and will remain so. They also make great CEO candidates.

Soft Skills

As the CFO, your finance skills are a given … and your marketing documents should reflect that fact with stories of solving real problems and delivering a tangible impact. However, today that is not enough.

The evolution of CFO from bean counter to strategic leader means soft skills matter. If no one is following you, you’re not leading; and without great communication and negotiation skills, you probably can’t be an effective leader.

Marketable CFOs are strategic, operational leaders, not numbers nerds.

Targeted Audience

Not everyone needs you, nor will your message resonate with everyone. But a Subject Matter Expert can help a well-defined market, will understand who that market is, and target his message to that audience.

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

The Best Way to Avoid Fraud is to Remove the Opportunity

According to the Association of Certified Fraud Examiners (“2012 Report to the Nations”) – Most fraud was committed by a first-timer with a clean employment history.  The longer the employee tenure, the greater the financial loss was to the company.   The majority of all fraud situations occur in the following areas – accounting, operations, sales, executive/upper management, customer service, or purchasing.  Common fraud schemes involved billing, check tampering, and skimming and expense reimbursement.  Frauds lasted a median of 18 months before being detected. (http://www.acfe.com/rttn.aspx)

It is not uncommon to hear about an owner of a business not knowing a long term employee was stealing until the person was out of the office for a prolonged period.  Revenues and profits seemed to increase without a discernible increase in Sales.

Following are seven strategies that you can employ to reduce the probability of Fraud:

1)      Establish and maintain policies and procedures of roles and responsibilities.  Every role should have a back-up that can step in and carry out the assigned tasks; as well as validate that tasks are being carried out in accordance with policies.  No one employee should be responsible for every step of a single financial process.  Consider carrying out a Segregation of Duties Analysis, i.e. a review of all financial tasks and the title of the responsible individual handling each task. (http://wp.me/p2aImN-7Z).

2)      Foster an ethical culture within your firm which includes training and ongoing reinforcement throughout the year.  The ethical culture must start from the top and go down. If your employees question your ethical behavior, they will only consider their actions in the context of the standard you set. (http://wp.me/p2aImN-2y)

3)      Educate staff on the proper policies and procedures and their responsibility to report abuses, without fear of retaliation, i.e. a “Whistleblower Program.  It is unlikely that an external source will advise you of any potential fraud.  Not knowing your company’s acceptable policies, they will not know if fraud is being committed.  Alternatively, employees are the best source to understand if something does not appear quite correct. (http://wp.me/p2aImN-4n)

4)      Conduct regular audits for validation.  During the review of your financial tasks, you will quickly identify those areas where a risk of fraud is greatest.  Develop ways to test the area, to proactively identify abuse.  Basic tests simply compare what you expect with actual results, allowing for a small tolerance range. (http://wp.me/p2aImN-5f)

5)      Listen to the results.  This point is very important.  If during your testing you discover results that you did not expect.  Thoroughly investigate the reasons for the variance.  Either the tolerance ranges are too small or you have discovered an issue.  These tests and the results do not need to be trended.  If a tolerance range is breached, further investigation is necessary.

6)      Report audit results.  Senior Managers should become accustomed to reviewing results and gain comfort in knowing fraud has not been identified.

7)      Annually reassess your policies and procedures and the corresponding tests, to ensure the proper business risks are identified and tested.

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.

Judging a Book By Its Cover

Re-Post of a blog written by Cindy Kraft, first posted on www.CFO-Coach.com.

And not only books, we judge all sorts of things. And people. And other people make judgments about each of us every single day. So,

– If you were a book … what would people say about you?

– When they read the title, is it worthy of reading the inside cover?

– Does the inside cover entice the reader to know more, to want to buy and read the entire book?

– If the book is read, is it everything they hoped for … and more?

You know where I’m going with this, right? Branding. Authentic branding. An authentic personal brand always precedes you. All day, every day who you are perceived to be is being judged by the people with whom you interact. Is that perception accurate? Is it compelling? Is it non-existent, because that, too, is judge-worthy.

Why is a strong, personal brand important?

Let’s go back to the book analogy. Once the worthiness of the book title is judged, there’s one of two actions. Reject it or read more.

So it is with your brand. It is what your brand inspires someone to do that matters. And that perception is typically established within the first few seconds of your encounter.

What if that first perception is wrong?

The title of the book may be appealing. The inside cover may be intriguing. The book itself, though, is a colossal disappointment.

Have you ever met an incredibly polished and professional executive at a networking meeting who turns out to not be who you thought he was in the initial conversation? In fact, far beneath what you initially thought?

Authenticity matters. Why? Because once that mask is removed, the word is out and spreads quickly. Just like a bad public book review, it’s difficult to rebound once an initial bad/poor/wrong judgment has been made.

You are being judged … and it’s by your cover (brand). The question is, what’s the belief of those who are doing the judging?

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.

Six Tips to Improve Your Internal Controls Audit

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

Many organizations feel ambivalent about their yearly audit. They know it’s important, but there’s a sense of dread at the impending disruption and costs to the organization that, frankly, bring little to no obvious positive effect to the bottom line.

Fortunately there are ways to enhance the value of your audit – and even cut your audit-related costs over time. We recommend starting with your internal controls over financial reporting, which auditors are now required to review in order to meet legislative guidelines.

1. Be Proactive

Understanding what your auditors will be doing, how they do it, and what they expect – before the audit starts – is key to an efficient, successful audit. The traditional practices of hall-roaming, constant disruptions, and off-topic discussions should be mitigated in advance by having a plan to host, manage, and focus your auditors. Being proactive can include all of the activities identified in steps 2 through 6, and will lead to fewer headaches for everyone involved. Establishing a proactive effort around your audit will also set your auditor’s expectations, and help them understand how to be more effective as well. They want you to be organized, have the appropriate information available, and be willing to discuss or address any issues they find. Having a formal plan for your audit is the first step in showing them that you are ready.

2. Actively Manage the Audit Staff

Assign one member of your internal team – the controller or internal audit manager – to actively manage the audit staff. Make it clear to the auditors that all requests for information and documentation must be fielded through that single employee. This will reduce disruptive behavior – such as an auditor storming into an office and demanding the immediate delivery of something – to employees inside and outside your finance team.

3. Complete the Risk Assessment and Segregation of Duties Analysis Yourself

Regulations require auditors to scope their audit based on risk. In this environment, the risk assessment and segregation of duties analysis take on a new level of importance. Traditionally, auditors will spend time preparing these assessments themselves. We recommend taking this on internally, or outsourcing to a third-party expert that charges less per hour than your auditor. The key is to get your auditor’s approval of the methodologies behind the work and the results prior to starting the audit. Also, be sure you can support independence and objectivity when internal personnel are used. By working with the auditor on what you have prepared, you are already limiting and controlling the potential scope of the audit – and this can make a big difference in both the duration and the outcome.

4. Balance Your Control Counts

Strive to balance your internal control counts, since too few controls put you at risk, and too many result in high audit and maintenance costs. Look at how many internal controls you have per employee in the finance department and, if the numbers seem skewed, consider undertaking a control rationalization effort before the end of your fiscal year. The best way to determine how many controls you need is to use a risk assessment to identify the highest areas of risk in your business, and focus mainly on those areas. Having redundant controls to mitigate the same risk is a good starting point, but over time you should be able to reduce this ideally down to one control per risk – saving you significant cost and effort as time goes on.

5. Document for Audit-ready Review

Documentation is another area where some simple, proactive work internally pays big rewards down the road. Find out how your auditor wants to see your documentation, and then follow an organized system that maps to their standards. Vibato recommends storing your monthly and quarter-end documents in binders that are tabbed out by topic (such as journal entries or bank statements). This kind of organization not only gives you a better sense of how far along you are at any given moment, it also makes it easy to find what you need during the audit – and ensures that your organization isn’t paying an auditor for something your own team could have done more cost-effectively.

6. Bring in a 3rd Party

Consider bringing in a reputable and experienced third party consultant for audit-related help that requires more independence or expertise than your internal team can offer. The right consultant acts as a client sounding board and advocate– which auditors no longer do—who can deliver focused, high quality service for a lower hourly rate than what an audit firm would charge for its senior partners. Rely on consultants when you need assistance with your risk assessment and segregation of duties analysis; for testing and documentation efforts; and for control implementations or rationalization efforts. The best consultants will offer established methods that have been proven to work, ensuring you get the most not only out of their expertise but out of your entire audit as well.

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 Shareholder Concerns to the CFO

“CFOs have become key contacts for the investment community, auditors, and ratings agencies, and are the day-to-day access to shareholders that directors do not have.”  (Bloomberg BusinessWeek, 9/22/2009) Boards and the Expanding Role of the CFO, by Karen D. Quint and T. Christopher Butler.

Regardless of the size of your company, there is a value in understanding the general issues and perceptions of the shareholder community.  You may find that your investors have beliefs and concerns that align closely with the general beliefs and concerns of all shareholders.  This assumption will be especially true if you have or are looking to secure a sophisticated investor for your business.

The Annual Meeting season is off and running and the trends that were observed in 2011 and 2012 are expected to continue in the 2013 season. 

So how is 2013 shaping up?

According to Proxy Monitor (www.proxymonitor.org/), a review of shareholder proposals for 170 companies, whose annual meetings are scheduled from 01.09.2013 through 05.23.2013, show three primary concerns:

  • Corporate Governance (74 proposals) – This category includes such items related to the legal structure of the organization, i.e. voting rules, separation of Chairman and CEO, special meetings, written consent, proxy access…   Current Events – (Wall Street Journal,  2/20/2013) Investors Seek to Split J.P. Morgan Top Posts, by Dan Fitzpatrick
  • Executive Compensation (202) – This category includes items such as say-on-pay, equity compensation rules, golden parachutes…
  • Social Policy (78) – Includes items which include animal rights, employment rights, sustainability…

Who is sponsoring these shareholder proposals?

According to Ernst & Young LLP “Proxy season 2013 Preview “, individual investors account for 27% of the proposals; socially responsible investors 21%; public funds 20%; labor funds 16%; faith based funds 10%; and Other 6%.

What is not included in this review are the proposals that do not make it to the annual meeting, either because there is no substantial support or the issue is resolved/negotiated, prior to reaching the annual meeting.

How does your organization compare?

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

The New Cash Management Approach – Pay Slower

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

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

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

So what can you do?

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

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

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

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

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

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

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

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

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

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

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

What are you seeing?

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

Expense Control through Vendor Management

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

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

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

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

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

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

What is your experience?

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

What Will Be Your Healthcare Strategy for 2014?

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

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

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

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

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

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

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

Following are some options for your consideration –

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

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

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

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

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

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

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

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

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

Author: Regis Quirin
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.

The Secret of Start-Up Success

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

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

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

What is your experience?

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

Mid-Year Look-Back and a Look-Forward

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

Look Back

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

Review company success at generating revenue through marketing and sales

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

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

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

Review your company’s financial health

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

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

Review if your company is operating efficiently and as expected

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

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

Review customer accounts

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

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

Review your position in the market

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

Look Forward

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

-Re-forecast your projections.

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

-Ensure optimal tax planning – state and federal.

Finish the year strong!

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

Is Tax planning even possible in this environment?

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

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

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

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

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

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

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

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

How You Compare, i.e. Competitive Analysis Tactics

Successful companies conduct competitive analysis on an ongoing basis.  It is important to review how you compare to like companies with respect to the product or service you offer – Market Share, SWOT, Customer Experience, and Pricing.  In theory, consumers make informed and rational decisions based on their perception of what you offer.  Following are some ways to understand their buying decisions –

MARKET SHARE ANALYSIS (Management Focus) –It is very important to understand your success at attracting customers, compared to the entire population of opportunity, i.e. your share of the market.  Depending on your business, you may find that data providers already exist that generate statistics on the size of your industry.  If this information is not available by a third party resource, attempt to capture information from your local industry group.  Study frequency – quarterly.

SWOT ANALYSIS (Operational Focus) – The result of this analysis is a four quadrant matrix which shows your company’s Strengths, Weakness, Opportunities, Threats compared to your competitors.  A common mistake I have seen is when a new company enters a market with a product, that they believe is superior.  Their product goes beyond what is offered in the market today, but does not offer all the features provided by current competitors.  This approach is dangerous.  You run the risk of being considered a product in a different category, by potential customers.  Successful companies offer customers everything that is offered by its competitors today and more!  The SWOT analysis should show what you may be missing.  Study frequency – annually.

MYSTERY SHOPPING (Marketing Focus) –This type of activity could be used for multiple reasons, i.e. understanding sales approach, product features, pricing, Marketing positioning.  But the most valuable information learned with this technique – “What is the customer experience?”  In addition to calling competitors, be sure to also call your own service center/office.  What deficiencies can be addressed by increased training?  Study frequency – monthly.

PRICING SURVEY (Finance Focus) –If this information is not easily obtained through purchasing data from a third party vendor or industry group, include this area in your Mystery Shopping.  Your goal should never be, to be the low cost provider.  The middle price point is a great place.  Study frequency – monthly.

Be confident in the information collected.  It is important to make sure that the approaches used are the same every time, i.e. script for performing Mystery Shopping.  Trend the data.  One data point should not cause you to rethink your business model.

Once you have collected information for a reasonable period — Set Strategy!

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.

Relationship Development after the Sale

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

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

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

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

Prior to any call review the customer’s situation.

-Review dates of last service – What occurred?

-Review billing history – payment status.

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

-Ask staff of any recent conversations with this client.

Call the Customer

Hi. My Name is ____________________ from _________________________.

General Customer Satisfaction

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

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

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

Billing

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

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

Files

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

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

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

After Call

-Document the conversation.

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

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

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

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.

Patient Protection and Affordable Care Act “ObamaCare” Constitutionality

The Patient Protection and Affordable Care Act was signed into law March 23, 2010, by President Obama.  It is an extensive piece of legislation that will greatly alter the economics of healthcare.  The law impacts the four major industry constituents – providers of healthcare, providers of healthcare insurance, employers offering healthcare benefits and users of healthcare.

In March 2012, the Congressional Budget Office and the Joint Commission on Taxation estimated that the insurance coverage provision will have a net cost of about $1.1 trillion for the 2012 – 2021 period.  Excluding unauthorized immigrants, the insured share of the nonelderly population is projected to increase from 82% in 2012 to 93% in 2021.

Specifically for businesses, by 2014 – “Employers with more than 200 employees must automatically enroll new full-time employees in coverage.  Any employer with more than 50 full-time employees that does not offer coverage and has at least one full-time employee receiving the premium assistance tax credit will make a payment of $750 per full-time employee.”  (Summary Link – http://dpc.senate.gov/healthreformbill/healthbill04.pdf )

But, the future of this legislation is in question, in its current form.  Lawsuits have been brought by 27 states, questioning the constitutionality of some of the provisions of the law.  The Supreme Court of the United States heard three days of oral arguments at the end of May and is now deliberating.  A late June decision is expected.

At the heart of the issue are two elements, i.e. the “individual mandate” provision which requires all citizens to maintain health insurance by 2014 or be assessed a penalty on their tax returns; and the expansion of Medicaid which impacts states, that help fund the program.

So what is the likelihood that the Supreme Court declares aspects of the law unconstitutional?  It is hard to predict.  But if you are wondering how many times the Supreme Court has overturned Congress in the past, according to the General Printing Office database, the Supreme Court has declared acts of Congress unconstitutional 158 times in the past 213 years, from 1789 to 2002.

Please look for an update to this post within the next 30 days.

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

Accounts Payable Best Practices

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

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

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

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

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

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

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

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

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

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

What is your experience?

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

Internal Audits – “Inspect what you Expect”

According to The Institute of Internal Auditors (https://na.theiia.org) —

“Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.”

During the normal course of business, department heads – identify operational risks; develop and document policies and procedures to mitigate these risks; and train their staff on the procedures.  These policies and procedures are amended, probably annually by the responsible department.  Internal auditors validate that the policies and procedures are followed and effective at minimizing financial risk.

But, recent market turmoil revealed additional risks that if not addressed expose the company to brand and reputational risks, as well as financial risk.  The role of the internal auditor is expanding and the approach employed is evolving.  Internal Auditors are accountable for reviewing current processes and improving them when possible, by implementing best practices.

A proper internal audit approach includes understanding business goals usually identified through senior manager interviews, preparing risk assessments, scoping key audit areas, evaluating controls, creating remediation plans, and testing controls.  An internal auditor must be able to evaluate, assess and implement controls across business areas.

According to the 2012 Internal Audit Capabilities and Needs Survey (Protiviti March 2012), identified themes for 2012 are associated with technology and the risks presented, such as IT Asset Management; Vendor Negotiations; Fraud; Social Media Applications; Cloud Computing; Continuous Auditing/Monitoring.

What has been your experience?

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

The SEC Whistleblower Program

As part of the Dodd-Frank Act, signed by President Obama on July 21, 2010, the Securities and Exchange Commission (SEC) was required to amend the Securities Exchange Act of 1934, to establish a separate office within the SEC to administer a whistleblower program.  On May 25, 2011, the amendment was finalized.  On August 12, 2011, the Office of the Whistleblower in the Division of Enforcement went live.

Even though we are approaching the first anniversary of the amendment this month, office activity only occurred for nine months.  As required by the Act, the SEC reports the results of the program to Congress annually.  The first full-year of data is expected to be released November 2012 and will include information for Fiscal Year 2012.

In developing the Whistleblower program, the SEC’s intention was that whistleblowers would report their concerns/issues of abuse internally to their company first, prior to SEC external escalation.  As an incentive, the SEC offers a monetary award of 10% to 30% of collected penalties, to whistleblowers if the information provided is original; leads to a successful SEC action; and results in monetary penalties exceeding $1 million.

One can only assume that when internal reporting procedures fail a whistleblower has no recourse but to go external.  Public companies thus have a large incentive to ensure their internal procedures are optimal.  Following are Best Practices in the implementation of an internal company program —

  • Educate staff on proper policies & procedures and their responsibility to report abuses;
  • Establish an environment where whistleblowers can report confidentially and are protected against retaliation;
  • Develop a process for employees to escalate concerns internally to an impartial area responsible to investigate allegations;
  • Track tips reported and the investigations undertaken to prove or disprove the abuse; and,
  • Report program status periodically to the Board of Directors.

What’s 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.

Audit Transparency – Rating the Raters

On May 1, 2012, the Public Company Accounting Oversight Board (PCAOB) announced changes to its website (www.pcaobus.org) where site visitors can now review certain public information provided by audit firms, which includes registration, annual and special reporting, disciplinary proceedings and inspection reports.

The PCAOB was created in 2002 as a result of the Sarbanes-Oxley Act.  As required by the act, auditors of US public companies are subject to external and independent oversight, by the PCAOB.  The SEC maintains authority over the PCAOB, with respect to rules, standards and budgets.

As of April 25, 2012, there were 2,378 registered firms (foreign and domestic), as well as 42 pending applications.  As of May 7, 2012, information for 1,627 inspection reports was provided, including 118 “QC criticisms now public.”  A quick review of the Big 4 Audit firms showed –

Firm Entity Reports QC Criticisms
Deloitte & Touche 18 1
Ernst & Young 30 0
PriceWaterhouse 32 0
KPMG 35 0

This type of information can only benefit companies/issuers that are looking for a new auditor for their private or public concern.

Please let me know how useful this information was to you, by Commenting.

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.

Complying with State Tax Requirements for Non-Residents, i.e. Nexus

Nexus is the way in which a connection can be established between the state and the taxpayer.  If a nexus exists, the taxpayer may be liable to the state for taxes, regardless if the taxpayer is a non-resident or only works within the state for part of the year.  You would think that the clearest nexus standard is “physical presence”, i.e. work performed within the state.  But treatment varies –

According to the Mobile Workforce Briefing Book by the Council on State Taxation (09.09.2009) –

  • In 25 states, nonresident employees are subject to Withholding Tax on first day they enter the state; vs.
  • In 16 states, nonresident employees are subject to Withholding Tax after reaching a threshold which varies among the 16 states involved.

In the age of the World Wide Web, Consultants can market their services and generate revenue from customers in a state without maintaining a physical presence.  In response, some states are developing the concept of “economic nexus.”

Based on a random review of state tax laws, I found the following citation interesting –

Source income “…Attributable to compensation for services performed in Connecticut or income from a business, trade, profession, or occupation carried on in Connecticut, including income derived directly or indirectly by athletes, entertainers, or  performing artists from closed-circuit and cable television transmissions of irregularly scheduled events if the transmissions are received or exhibited within Connecticut;”

For a Consultant that transacts business in multiple states, a compliance nightmare exists which is burdensome and expensive to manage, i.e. a non-value added expense associated with an administration burden.  Disparate laws established by states are causing nexus confusion –

  • Standards are inconsistent for employees, i.e. personal income tax filings;
  • Standards are inconsistent for employers, i.e. withholding tax administration; and,
  • Penalties for non-compliance may result.

Help may be coming with the passage of H.R. 1864 – “Mobile Workforce State Income Tax Simplification Act of 2011 – Prohibits the wages or other remuneration earned by an employee who performs employment duties in more than one state from being subject to income tax in any state other than: (1) the state of the employee’s residence, and (2) the state within which the employee is present and performing employment duties for more than 30 days during the calendar year.”  (http://thomas.loc.gov/cgi-bin/bdquery/z?d112:HR01864:@@@D&summ2=1&)

However, until this bill becomes law, best practices are few – maintain records of when you performed work for customers, in which state, for how long; and retain all receipts.  When you prepare your personal state taxes, check if tax code thresholds exist, i.e. wage/income, days within state, reciprocal 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.

Marketing Economics

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

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

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

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

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

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

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

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

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

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

What is your experience?

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

Corporate Sustainability – Risk or Opportunity?

Simply stated, Sustainability relates to our impact on the environment, i.e. social responsibility.  Sustainability issues are on the minds of consumers; and continue to be a focus of the government and community groups.  How your company handles these issues could be a source of positive press or reputational risk.

At the end of 2011, Newsweek published its 2011 Green Rankings.  This piece identified, “America’s 15 Greenest Companies” and “America’s 20 Least Green Companies.”  Results can be viewed here – http://goo.gl/We91A.  Additionally, for a third consecutive year sustainability issues are expected to be a topic discussed at 2012 annual meetings (“Leading corporate sustainability issues in the 2012 proxy season” Ernst & Young).

Executive Order 13514, signed by President Obama in October 2009, could be considered a primary catalyst for the evolving Sustainability movement.  Based on this order, federal agencies are required to establish a strategy towards sustainability and make the reduction of greenhouse gas emissions a priority for federal agencies.  This requirement also extends to new contracts established, for goods and services purchased by these agencies.  If you service government agencies today, in your normal course of business, you have probably already felt the impact of this Order.

Are you prepared?  If not, following is an approach to get you started —

Immediate Approach

  • Identify an executive to be responsible for the Sustainability movement within your company;
  • Research your local trade group to understand their position.  If none exists, research the activities of your closest competitors in the area of Sustainability.
  • Plan to match the standard set.  Activities advocated by a trade group can become the minimum acceptable level, within the industry.  If a trade group does not exist, consider matching the actions of your most similar competitor, if it makes sense.  But doing nothing creates risk.

Long-Term Approach

  • Perform a Sustainability assessment to understand the applicability of Sustainability on your business;
  • Define the problem and develop a plan which may include re-engineering current products and processes;
  • Educate managers and employees on the company’s approach to sustainability;
  • Track issues within the community, i.e. listening to the concerns of employees, shareholders and community groups;
  • Establish a formal reporting process that provides a status of implementing plans and issues presented; and,
  • Discuss results at senior levels.

The growth in adoption by more and more companies makes the issue of Sustainability an important consideration for your company’s overall strategy and management.

What is your experience?

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

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

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

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

Benefits afforded to emerging growth companies by this law include –

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

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

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

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

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

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

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

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

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

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

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

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

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

Pre-Approval, i.e. now

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

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

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

Post Approval, i.e. 2012

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

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

How are you preparing?

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

The Evolution of the Audit Process

By this time, your annual audit is either complete or winding down.  You have documented the auditor’s requests and considered how you could make the process easier next year.  You may have had your exit discussion and are in the process of considering how and when to implement any suggested process improvements.  In year’s past, that was it, until you received your engagement letter next November/December.

But this year may be different.  One change being discussed may alter the process, in the next twelve months –

In August 2011, the Public Company Accounting Oversight Board (http://pcaobus.org) released for comment PCAOB Release No. 2011-006, which proposed an audit FIRM rotation.  PCAOB questions how objective an auditing firm could be if the audit firm and the client have had a long-standing relationship.

As of March 24, 636 letters were received, i.e. some for the proposal and some against.  The comment period will stay open until April 22, 2012.

This proposal represents a more stringent requirement than the one imposed by the Sarbanes-Oxley Act (2002).  As a way to ensure independence and objectivity of audit firms, Sarbox requires senior managing audit PARTNER rotation every five years.

The primary objection, for those that oppose the PCAOB proposal, are that as you shorten the time of engagement, you lose the expected efficiencies and cost savings associated with a long-standing relationship.

According to a study entitled “Audit Partner Rotation: An Analysis of Benefits and Costs” audit partners reported that it required two-to-three years before client familiarity was established.  Based on this research, audit clients only receive the benefits of an established audit relationship for two years, prior to a partner rotation.  At this early stage, Firm Rotation research is spotty.

Even though these actions technically are imposed only on public companies, it would be prudent for a CFO to take note.  Quickly when business methods are adopted and accepted by key stakeholders, they have a way of becoming a “Best Practice,” i.e. a business requirement that is expected, but not legally based.

What is your experience?

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

Should a business invest the time and resources in developing a Business Continuity Plan?

The reality is that a majority of small businesses do not have a plan.  As part of the Wells Fargo Small Business Index, Topline, 3rd Qtr 2011 survey, a sample of small businesses were asked if they “have an emergency plan in place in the event your local area experiences a major disaster, such as a fire, tornado, hurricane, earthquake, major flooding, or other disaster?”  While 41% have a plan, 58% do not.

In the not too distant past, natural disasters have exacted an economic toll in the billions of dollars.  Recent disruptions where the costs are still being tallied include Hurricane Katrina (2005), BP Gulf oil spill (2010), Hurricane Irene (2011).  In all of these examples, there was some type of warning prior to the height of the disruption.  Admittedly these events could be considered once, in a life-time situations.

However, there are disruptions that occur with some frequency, that do not have any warning.  In 2010, there were 3,419 power outages across the United States (Eaton Corporation’s Blackout Tracker Annual Report for 2010).  According to Price Waterhouse, after a power outage disrupts IT systems – “33%+ of companies take more than a day to recover; 10% of companies take more than a week; and 90% of companies that experience a computer disaster and don’t have a survival plan go out of business within 18 months.”

Every business should have a plan that considers the possibility of disruptions directly to its business; or disruptions to the business of its suppliers.  The only question – How extensive should the plan be?  The program you implement can be as extensive as creating redundant operations;  maintaining business interruption insurance to cover the physical loss of the place you conduct operations;  and maintaining contingent business interruption insurance to cover the physical loss at key suppliers, which may impact your business.  But it does not have to be.

There are simple measures a business can put in place that have little or no cost:

  • Maintain records in an electronic form and back-up the data on a set schedule.  This last part is critical.  Large companies back-up data daily.  A small to medium size company should back-up data, at least weekly.

 

  • Review your company’s insurance policy – do you have a specific policy for hazard and flood insurance?  Find out what you are covered for, prior to needing the insurance.

 

  • Create a Plan in the event of a disruption –
  1. How will you communicate with your customers?  What type of messaging will you send to them?
  2. How will you communicate with your employees?
  3. Where will you work in the interim?
  • Share the plan with your employees and maintain the document in a location where they may access it.  Update the plan as factors change.

 

  • Maintain a list of key contacts and update it consistently –employees, customer, vendors.

The risk a company assumes by not having any type of plan, far outweighs the cost in time and money of implementing these simple tasks.

What is your experience?

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

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

In my experience – Ethics policies are tucked away within a company’s code of conduct.  Prior to year-end, every employee is required to go and review the policy and click on a little button on the bottom that states, “Accept.” Employees open the training material and go right to the last page and press accept on-line.

According to the 2011 National Business Ethics Survey® (http://www.ethics.org/nbes/files/FinalNBES-web.pdf), the increase in training observed from companies surveyed, has not resulted in a noticeable reduction in abuses.

Select Survey Results
The proliferation of ethics standards and ethics training increased 2000 2003 2005 2007 2009 2011
Written standards for ethical conduct 79% 68% 83% 83% n/a 82%
Training on company standards of ethical workplace conduct 54% 50% 65% 75% n/a 76%
But the impact is questionable
Pressure to compromise their company’s ethical standard is flat 14% 11% 11% 10% 8% 13%
Abusive Behavior declined slightly 24% 22% 20% 21% 22% 21%
Discrimination is flat 16% 14% 12% 13% 14% 15%
Stealing is flat 13% 13% 12% 11% 9% 12%
Falsifying time reports or hours worked declined 20% 22% 16% 17% n/a 12%
Sexual Harassment declined slightly 13% 14% 10% 10% 7% 11%

Clearly there are many factors that can have an impact on the statistics presented.  However, six data points for each criteria, over eleven years is significant.

So if the process of annually checking a box, prevalent in many organizations, does not work, what will be successful?

Raytheon Company (http://www.raytheon.com/responsibility/stewardship/ethics/ethics_over/index.html) claims they have a process that is yielding success.  The program includes the following elements –Offer Ongoing Ethics education – Annual, peer group training sessions where real workplace issues are discussed; periodic e-mails to staff, which review ethics situations; and on-line learning modules for completion are distributed; Advocate ethics activities within the community; Establish an Ethics office, to allow for the reporting of abuses, by employees, i.e. whistle blowers; and, Create metrics and track progress.

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.

The Voice of the Customer

By definition, entrepreneurs go into business to provide a product or service desired by the market, based on their view.   It is very important to understand your customers’ buying habits and changing desires.  Without this information there is a possibility that the products and services you develop do not perfectly align with the market’s needs.

There are multiple types of survey formats, depending on the survey goals.  At a minimum, every business should be involved in conducting:

  • Transaction Survey – survey the customer’s experience regarding a recent service provided or purchased.  Common questions include overall satisfaction, willingness to recommend, satisfaction with eight to ten aspects of the sale process, ideas to improve the product or service.
  • Contact Survey – survey the customer’s experience when they called your Customer Service department recently.  Common questions include wait time, were your question(s) resolved, satisfaction with eight to ten aspects of the customer service process, ideas to improve the service.

At the end of both surveys, respondents should be given the opportunity to provide their personal information and request a call back.  This requires results to be reviewed when received, and personal calls made to the respondents in a timely manner, if that is what was requested.

The data collected should be analyzed and monitored, to identify product or service change recommendations.  The information should also be used to set satisfaction levels today, allowing you to gauge improvements or to quickly identify problems, over time.   Survey results and comments can be added to your marketing message or posted on your web site.

Businesses that are unsuccessful at this strategy run the risk of planning for more revenue than occur; and wasting valuable cash resources on developing and maintaining products or services not wanted by customers.

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.

For a Business – Cash Flow is King

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

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

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

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

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

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

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

What is your experience?

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

Vendor/Contract Management, a Controlled Risk

Companies primarily outsource when they need a service or expert, in a field that is not their specialty.  Financially it makes sense to bring in the expertise on a contract or assignment basis, rather than building the functionality within the company.

Prior to entering into any relationship, keep in mind, that there are concerns depending on the type of vendor you hire.  There are an endless number of service providers today, which include legal services, financial services, human resource services, technology services…  Every service includes its own specific risks which must be identified.  But risks common to all vendors include –

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

Vendor/contract management represents a Risk that should be managed and controlled actively.  Establishing your requirements and how you will work with the vendor, prior to entering into a relationship, would be time well spent.  General activities include –

Due diligence – Vet potential suppliers both individually and against their competitors.  Request references and perform a site visit.  Does the vendor have the ability to provide the services within the committed timeframe required, i.e. expertise and financial viability?  What systems does the vendor use and are they secure?   Are background checks performed on the vendor’s employees?

If you are satisfied after this review –

Draft Contracts – In addition to roles responsibilities, timeframes, payment terms, termination provisions, consider including a reciprocal nondisclosure agreement to cover the confidential information of both parties; requirements to maintain current knowledge and best practices, as well as maintain licenses and accreditations; Service Level Agreements with escalation process; and Liquidated damages in case of a breach.

Once contracts are signed, vendor activities must be monitored to ensure that elements of the contract are followed by both parties.

Measure Performance (Short-Run) – Closely monitor and assess the success at transitioning the vendor into your standard operating procedures.  Issues that arise should be dealt with immediately.

Measuring Performance (Long-Run) – Establish metrics to measure the vendor’s performance ongoing, this may include time lines, rate of conversion, and problem resolution.  Establish a survey process to understand the success of the initiative, ensuring your expectations are being met.

These general tips provide a framework to begin the process of hiring an external vendor.  As stated previously additional areas to examine will be related to the type of outsource provider you wish to employ.

Lastly, there may be a point when it makes sense to build the infrastructure within your organization. It always helps if you are able to understand that point prior to entering into any relationship.

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

Bridging the gap between Sales and Finance

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

Establish Process with Controls

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

Production Planning

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

Model Development

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

Escalation Process

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

Activity Tracking

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

Scheduled Meetings to Discuss Results

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

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

What is your experience?

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

Time for a resurgence of Market Research

Since the start of the December 2007 recession, as declared by the National Bureau of Economic Research, companies have had to reduce expenses, due to falling revenues.  Strategies included – reduce staff, consolidate locations, scrap projects…

A strategy that worked for me in the past was a review of contracts outstanding to understand if the items promised in the agreements were being fulfilled.  As a result of this review, 42 non-active strategic relationships were terminated for a monthly savings of $63,000; and a contract was terminated with a data vendor that was not providing what was promised, for a one time savings of $37,000.

Cost cutting is getting more difficult.  The risk of cutting costs at the expense of quality becomes greater.  As such, I recommend that prior to any cost cutting action, the opinions/views of your customers are considered.  Studies should be conducted to understand –

  • Satisfaction – overall, product, customer service
  • Brand perception
  • Pricing strategies
  • Timeliness of delivery
  • Policies for returns and exchanges
  • New products and services

Research methods that could be utilized include –

  • Post Purchase surveys are great ways to quickly gain immediate customer feedback, i.e. within 30 days of sale/service.
  • Contact surveys are great ways to quickly gain immediate customer feedback, i.e. within 30 days of the last contact to your customer service or help desk.  The reason for the contact is also great information.
  • Focus groups are an excellent way to collect customer information on current products/services provided, as well as future concepts for consideration.

There are many different study types.  But based on the aforementioned studies you should understand what your customers value vs., what they do not consider important; understand if the customer is willing to recommend; and request Testimonials that you can use to capture new customers.

So what is the process –

  • Write the questions
  • Pilot the questionnaire to ensure that the results you are getting, answer your needs
  • Distribute to the full population
  • Tabulate the results and analyze
  • Use the data for process improvement and product development

What is your experience?

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

Financial Modeling is an Art, not a Science

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

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

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

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

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

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

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

What is your experience?

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

Rules are Changing

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

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

2012 Regulation Table

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

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

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

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

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

What has worked for your company?

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

Emotions and Economics

You have a great idea and you want to start a business.  Regardless if you are creating a new product/service category or you are entering a segment with established competitors, there are some basic “Best Practices” that you should adopt.  Following are the top three –

Set a plan – The cash flow of any business is critical to its survival.  Project for the next twelve months when you will recognize revenues vs. incur expenses.   This matching of revenues and expenses may be slightly complicated if consumers are not paying for your product or service immediately, i.e. you extend credit.  Now re-set your plan if your revenue expectations are 50% lower than what you expect.  Can you adjust the rate at which you incur expenses or will your cash be tied up in supplies?

Staff your business top down – You have strengths and more than likely, your business is linked to those strengths.  But it is unlikely that you are a specialist in all disciplines required to run a business efficiently.  For example, if you need a Finance resource, hire an experienced executive for your management team that can add value in multiple areas.  Just as important, a specialist can provide you with objective feedback required to make you successful and avoid mistakes.  Along the same lines, as soon as possible distribute responsibilities.  One person should not be responsible for Sales and Compliance.  Strategies in one area may contradict strategies in the other.

Draft your Policies and Procedures as you develop – If you make a decision, document it.  Now look at it from all sides, i.e. what risk am I assuming, how will this decision impact the customer experience, is this policy the most efficient.  Regardless of the size of your company, a document that defines how the organization will act in a specific situation is critical to avoid confusion and reduce risk.

As an entrepreneur, you are emotionally invested.    This emotion is the critical ingredient needed to make you successful.  Your creativity will separate you from your competition and will hopefully bring customers.  The purpose of the aforementioned Tips is to control that emotion.

Nothing destroys economics more than emotions.  I learned this concept in school, but have seen it played out with the 30+ small and mid-size companies I have managed, as their financial support.  If actual results do not follow your expectations, your Plan, People and Policies and Procedures will help you get them back on track quickly.

These tips are not just for companies starting out, but should be adopted by companies of all sizes.

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.

A PEO is not a “Set it and Forget it Process”

A Professional Employer Organization (PEO) is a co-employment arrangement where a Business hires the PEO as the employer of record. The employees are referred to as leased employees.  For a fee, usually a percent of payroll, the PEO will perform a portion of your Personnel & Payroll activities; while the Business performs others —

Task Business PEO
On-boarding Recruit and process new employees. Provides benefits package.
Compensation Designs plan. No involvement.
Payroll Process payroll instructions bi-weekly, i.e. salary, draws, commissions. Business distributes the Commission statements. Pay wages per Business directions.
Taxes No involvement. Pay and report all employment taxes to state and federal authorities, as required.
Unemploy and W/C claims No involvement. Administers and manages all claims.
Benefits No involvement. Makes benefits available per contract.
Employee Support Respond to day-to-day questions based on Policies and Procedures. Involvement reactionary.
Employee Training Coordinates job training. Coordinates harassment/ discrimination training.
Performance Reviews Administers. No involvement.
Warning Process Administers. Involvement reactionary.
Record Maintenance Maintains employee file. Maintains employee file “of record.”

If you are a small business and do not have the resources to hire a full payroll and human resources staff, the PEO approach should be considered.  This recommendation is further supported when you consider the HR changes that are “on deck” for implementation, i.e. W2 reporting, 401k disclosure, HSA management, health care regulations.  Keeping track of the changes and when they will be implemented may be better handled by a specialist, i.e. the PEO.

If managed correctly, these relationships are fantastic.    Following are a few suggestions for your consideration –

  • Spend extra time ensuring the payroll you submit for payment, to the PEO is correct.  Out of cycle payments are usually expensive.
  • Maintain a complete copy of the employee records.  Do not be in a situation where the vendor has all of the information for your employees and you have none, i.e. giving up total control.
  • Annually, review what you pay for PEO services vs. what it would cost if you maintained in-house support.  Depending on your business, there will be a point where bringing the process in house makes sense.
  • Conduct meetings with the PEO, on a set schedule, to ensure the quick resolution of issues, as they materialize.

My personal experience with PEO’s occurred between 2000 and 2006, where I was responsible for managing payroll activities for 30 joint venture companies, i.e. 250+ employees.

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.

An Approach to Compare Actual to Plan

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

Measure

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

Variance Analysis

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

Forecast

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

Corrective Actions

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

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

Please share your thoughts.

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

Bad Debt Strategies

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

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

30 days Past Due

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

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

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

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

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

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

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

Prior to a bad debt situation –

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

Please let me know your experiences.

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

Employment Status Determines Tax Liability

According to the IRS –

“Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.”

Originally the IRS determined if an individual was an employee or an independent contractor, based on a “Twenty Factor” test.  But in January 2006 the process was simplified.  Factors considered now fall into one of three categories, i.e. behavioral control, financial control, type of relationship.

IRS Test Category Employee (W-2) Independent Contractor (1099)
Behavior Control Location On premises Off premises
Behavior Control Work Time Co determined – standard Contractor determined – non-standard
Behavior Control Staffing Resources Co determined Contractor determined
Behavior Control Direction Provided Direct work process and output Direct work output only
Behavior Control Training Co provided Contractor responsibility
Behavior Control Supplies and Equipment Company provided Contractor provided
Financial Control Business Expenses Generally  Reimbursed Generally Unreimbursed
Financial Control Investment in Process Insignificant Significant
Financial Control Degree of Availability Co is sole customer Multiple Co customers
Financial Control Pay Consistent Not consistent
Financial Control Profit or Loss No p&l outcome p&l outcome
Type of Relationship Contract Describing Relationship What parties call it What parties call it
Type of Relationship Benefits Eligible Yes No
Type of Relationship Degree of Permanence Permanent work Temporary work
Type of Relationship Importance of Services Performed Business critical Non-business critical

If after reviewing the IRS established testing you cannot determine the employment  status, you have the option of completing and filing a form SS-8, requesting an IRS ruling on the status.

As you can see, in some circumstances employees fall clearly in one or the other camp.  However, there can be a very large grey area.

In 2000, the Department of Labor investigated the degree at which mis-classifications occurred.  At that time it was determined that 30% of firms mis-classified employees and independent contractors.

In response, federal and state authorities are beefing up auditing to investigate these situations and levying fines against law breakers.  Please note the federal government’s newly re-introduced H.R. 3178; and California’s newly enacted SB459.

If it is determined that an employee was misclassified, the employing company will be assessed back taxes, penalties, interest, unpaid personal incomes taxes of the misclassified worker, overtime, benefits, leave entitlement, and other rights and protections due to employees.

If your company has any independent contractors, it may make sense to review the arrangements based on the criteria above.

Please let me know your experiences.

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

Activity Based Costing and Sales Management

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

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

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

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

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

What has been your experience?

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

Is Your Company maximizing Social Media?

Social media is a communications outlet that cannot be overlooked.  While current clients can be reached today via print, TV and through more traditional methods; future clients, individuals that were born after 2000, can be best reached via a social media platform.

If you are not engaged in the Social Media, following are some tips on how to get started —

Identify your strategy.  A strategy I have used before is as follows – “Build a relationship between your company and your consumers.   Reinforce your brand and your positioning.  Engage consumers or potential consumers to gain feedback on your products or services, i.e., positive testimonials, and willingness to recommend statements.”

Set-up a company page on a couple of social networks that reach your target customer.  Invite current/past users and potential customers to join your community.  Interact with the community on-line through product development suggestions, beta testing, targeted marketing campaigns.  Be true to your brand.  If your clients expect traditional content, now is not the time to become satirical.

Actively Market.  Respond to clients/customers.  It is terrible when a client makes an effort and comments, and their efforts do not receive any feedback.  If there is no response, they will never comment again, and may develop a negative impression of you.

Continue to post fresh material.  Successful usage of social media requires an effort.  It is not an afterthought.

Differentiate messaging across social media sites.  For example, you may wish to discuss seasonal promotions, special events or discounts on Twitter; but product information on Facebook.

However, in my experience, there are two primary reasons why some companies may wish to shy away from this communication medium –

Negative Comments – If you provide individuals an opportunity to interact with your company via social media, be prepared to read bad comments; as well as good comments.  Keep in mind that messaging on the internet is “forever” at the current time.  These negative comments will never go away.  But, in my opinion, any information that helps you understand what your clients are thinking adds value.  Just be prepared.

Legal Significance – Often times, social media is discussed as just a different type of advertising, similar to print and TV spots.  There does seem to be one very big difference.  Any company communication, prior to the use of print or TV, is vetted through legal departments to ensure there are no statements that could be considered by reasonable people as misleading.  It may not make much sense economically to constantly run 170+ words by your legal department.

But regardless of the two caveats discussed, I believe the benefits of engaging in social media outweigh the risks.  Just be thoughtful and true to your brand and strategy.

.

 

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

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

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

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

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

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

How does your company compare?

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

The CFO Analyst

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

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

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

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

The Value Embedded in Tele-Commuting

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

The trend is growing —

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

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

Benefits to these arrangements include –

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

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

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

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

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

Where is your company in this process?

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

Do you manage risk or react to it?

In its quest to achieve its strategic goals, a company naturally assumes risk, and must wrestle with the risk-reward trade-off.  Individual risks assumed, as a result of a product or a service may be minimal.  However, when you look at the entire organization as a whole, are you taking on more risk than you thought?

Risks include, but are not limited to – financial, operational, and regulatory.

Enterprise Risk Management (ERM) is an established framework, developed to assist the Board of Directors and Senior Managers of a company to identify, assess, respond, control, communicate and monitor Risk.

Most companies have incorporated some of the framework items, but not all.  Which items are you  missing?

  1. Review company product lines and service lines and identify areas of risk.
  2. Establish metric(s) for each risk with corresponding tolerance range(s).
  3. Adjust policies and procedures, as necessary, to ensure risks are controlled:
    1. Approvals and Authorizations
    2. Top level performance reviews (actual vs. budget/ forecast/ prior period)
    3. Track major initiatives
    4. Physical Controls (inventories/ equipment/ cash/ other assets)
    5. Information Processing
    6. Segregation of Duties
    7. Develop a company-wide Board established “Risk policy” which identifies acceptable levels of risk.
    8. Communicate that policy to all employees, i.e. creating a culture of awareness.
    9. Monitor periodically adherence to the level of Risk established, i.e. metrics and tolerances
      1. Scorecards
      2. Internal and external audits
      3. Planning sessions
      4. Process improvement

Going forward all actions undertaken to assist the organization in reaching its strategic goals will take into account the Board established “Risk Policy.”

For more information, please review www.coso.org Committee of Sponsoring Organizations of the Treadway Commission.

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

Communicating and Monitoring Success at Reaching Strategic Goals

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

Qualities of the basic scorecard include –

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

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

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

What is your experience?

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

Should your CFO be a CPA?

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

The correct answer to the question…not necessarily.

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

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

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

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

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