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.

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.

Growth through Mergers and Acquisitions

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

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

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

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

Business Integration

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

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

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

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

Employees

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

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

Clients

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

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

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

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

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

Pricing Strategy – Tips and Caveats for Discount Pricing

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

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

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

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

Different Types of Discounts

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

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

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

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

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

Avoid Three Common Discounting Errors

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

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

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

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

The Bottom Line

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

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

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

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

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

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

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

Growing through Productivity Increases

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

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

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

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

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

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

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

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

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

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

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

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

Business Disruption Survival Techniques

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So what can you do?

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

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

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

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

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

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

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

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

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

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

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.

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.

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.

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.

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.

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.

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.

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.