Drive: take control of your business' profitability.Is your business reaching its true potential? If you're like most experienced CFOs and controllers, you probably would answer "yes." You and your team have spent your careers analyzing your business' financial results and finding ways to reduce costs and leverage investments. Every investment is analyzed an·a·lyze tr.v. an·a·lyzed, an·a·lyz·ing, an·a·lyz·es 1. To examine methodically by separating into parts and studying their interrelations. 2. Chemistry To make a chemical analysis of. 3. to ensure that ROI (Return On Investment) The monetary benefits derived from having spent money on developing or revising a system. In the IT world, there are more ways to compute ROI than Carter has liver pills (and for those of you who never heard of that expression, it means a lot). hurdles are cleared. In addition, you probably do a pretty good job of budgeting, tracking and managing performance. Unfortunately, all of your hard work may be subverted because your organization lacks a culture that encourages and rewards profitable behaviors throughout the business. If driving profits is a team effort, why is it so often seen as the job of the finance department? TIME FOR A TUNE UP? If you are wondering whether your business might need a profit process tune up, ask yourself the following: * Does your business delay implementing a good idea until the next budget cycle because it wasn't part of the annual plan? * Do most profit improvement ideas come from the finance department or top management? * If someone leaves the company, does the position automatically get filled? * Do some areas of the company have a "use it or lose it" attitude about spending? * Are you behind in utilizing technology? * Is your tax department brought in to review major transactions after it is too late to change the structure? * Are your employees' skills outdated because of training budget cuts? * Does your business automatically try to perform all functions in-house? * Has your finance department spent so much time on Sarbanes-Oxley implementation that profit initiatives are behind schedule? If you answered "yes" to any of these questions, your business may need a profitability process tune up. Here are some ideas that can help jump-start your profit improvement process. INCENTIVES FOR ALL It's common for executives and high-level managers to receive incentives for reaching profitability goals, yet many companies fail to provide incentives for all employees--and the type of incentive is only limited by your creativity. Barney and Barney, a San Diego-based risk management consulting Noun 1. management consulting - a service industry that provides advice to those in charge of running a business service industry - an industry that provides services rather than tangible objects and insurance brokerage firm, has successfully implemented a companywide incentive program that involves profit sharing profit sharing, arrangement by which employees receive, in addition to their wages, a share of the net profits of a business. The purpose is to give them an incentive to increase their output through enhanced morale, less wasteful use of materials, better care of of approximately 4 percent of base salary as well as an individual bonus plan for everyone in the firm. This has led to year-after-year revenue increases in excess of 20 percent due to the contributions and teamwork of all employees. Barney and Barney CFO See Chief Financial Officer. Hal Dunning Dunning The process of communicating with customers to ensure the collection of accounts receivable. Notes: Dunning can start with gentle reminders and then progress to nearly threatening letters as accounts become more past due. says that by getting the right incentives in place, everyone plays a significant role in helping to drive the revenue and profitability of the company. [ILLUSTRATION OMITTED] TOP MANAGEMENT BUY-IN A management buyin (MBI) occurs when a manager or a management team from outside the company raises the necessary finance, buys it, and becomes the company's new management. A management buy-in team often competes with other purchasers in the search for a suitable business. Does your firm have a formal process for soliciting profit improvement ideas from all areas of the company? If not, you may be missing out. Phil g, a principal at Regent Pacific Management, is an expert in company turnarounds. Regent Pacific is often called in when a company needs help analyzing how it can improve its bottom line. "A company's own employees often have the answers to how the company can turn around," says Gioia. "Unfortunately, in many cases, no one in the company is listening and it takes an outsider to draw out the ideas, raise support for implementation, then execute, to pull the company out of its downward trend." Many firms develop formal profit improvement teams with executive leaders on the team. Once these teams identify the best opportunities for cost savings or revenue enhancement revenue enhancement An increase in revenues, especially by way of increased taxes. Revenue enhancement includes reducing taxpayer deductions and eliminating tax credits. , the executive leaders can champion the ideas to ensure that any barriers to success are eliminated. Most profit improvement initiatives require both cross functional support and top management support to reach their objectives. You can increase the success of these initiatives by including leadership support from the outset of the projects. [ILLUSTRATION OMITTED] OUTSOURCING (1) Contracting with outside consultants, software houses or service bureaus to perform systems analysis, programming and datacenter operations. Contrast with insourcing. See netsourcing, ASP, SSP and facilities management. FUNCTIONS OUTSIDE OF CORE BUSINESS Outsourcing's potential financial benefits cannot be ignored. In a recent CFO magazine survey of CFOs who outsource, nearly 65 percent plan to expand their outsourcing in the next two years. Typical functions that are outsourced can range from payroll to accounts payable to customer service. Savings from outsourcing generally range from 25 percent to 50 percent annually, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. David Schnitt, president of IQ BackOffice, which specializes in handling accounts payable and other critical labor-intensive accounting processes. JUMP-START THE CREATIVE PROCESS The most successful profit improvement programs are those that create new ideas "New Ideas" is the debut single by Scottish New Wave/Indie Rock act The Dykeenies. It was first released as a Double A-side with "Will It Happen Tonight?" on July 17, 2006. The band also recorded a video for the track. for increasing revenue and decreasing costs. Here are four ways to get the profit improvement ideas flowing: 1. When hiring new employees, search for individuals who have the technical skills for the job and a track record of implementing ideas that improved profits. These employees will have the initiative to identify and implement profit improvement ideas and can spark enthusiasm and desire in other employees. 2. Use your advisers and consultants to prime the pump. Professionals who work across many companies often have visibility to the latest techniques and technologies. Save time by using their expertise to identify successful programs. 3. Support continuing education continuing education: see adult education. continuing education or adult education Any form of learning provided for adults. In the U.S. the University of Wisconsin was the first academic institution to offer such programs (1904). for your team. Seminars and conferences are a great way to interact with peers and stimulate ideas for profit improvement. 4. Encourage your team to research and brainstorm potential profit improvement ideas. Can you imagine how many ideas would be generated if you and your team dedicated at least one day per month to profit improvement research? Robert Tormey, a CFO with Tatum Partners, helps clients maximize their financial performance. One of the tools he uses is the PPC See Pocket PC, PowerPC and pay-per-click. PPC - PowerPC Management Letter Comments Expense Reduction Checklist. The checklist has a wealth of ideas on how to reduce expenses in areas such as business insurance, workers' compensation workers' compensation, payment by employers for some part of the cost of injuries, or in some cases of occupational diseases, received by employees in the course of their work. , travel, utilities and freight. By using the checklist, Tormey finds that he can quickly identify a list of opportunities for his clients. INCLUDE YOUR TAX ADVISER Most CFOs and controllers understand the value of good tax planning Tax planning Devising strategies throughout the year in order to minimize tax liability, for example, by choosing a tax filing status that is most beneficial to the taxpayer. , however, this often does not translate into a process where the tax department is brought into the decision-making process on deals or other initiatives at a time when they can still affect the structure and tax implications. One tax planning opportunity that few firms have implemented is in the area of cost segregation studies Under United States tax laws and accounting rules, cost segregation is the process of identifying personal property assets that are grouped with real property assets, and separating out personal assets for tax reporting purposes. . Cost segregation analysis segregation analysis n. The determination of the number of progeny that have inherited distinct and mutually exclusive phenotypes. "can provide your clients with huge benefits by accelerating depreciation on previously under-depreciated property. "However, because of the complicated nature of the service--there are strict IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. requirements and the service may require the services of engineers and appraisers--few CPAs offer their clients a cost-segregation study," according to a recent Journal of Accountancy article. A cost segregation study usually allocates costs to individual components of property, such as land, land improvements, building, equipment, furniture and fixtures. These studies can support faster depreciation deductions and lower current tax liability by reallocating building costs to tangible personal property. Since the rules are complex, it is important to have good tax counsel along with an engineering cost study analysis. NEGOTIATE PERFORMANCE-BASED CONTRACTS Performance-based contracts can minimize risk and maximize returns by paying only for results. These contracts are especially effective in finding expense reduction opportunities. Telecommunications, freight, payables, research and development tax credits, and sales tax sales tax, levy on the sale of goods or services, generally calculated as a percentage of the selling price, and sometimes called a purchase tax. It is usually collected in the form of an extra charge by the retailer, who remits the tax to the government. reviews are just a few of the areas where you can pay only based on the savings you realize. According to Missy Sue Mastel, president of Mass-Tel Communications, the fast changes in the telecommunications industry make telecom reviews--that often realize savings of up to 20 percent--especially attractive. Often telecom review firms work entirely on a contingency basis, so if the review reaps no savings, you pay nothing. CELEBRATE SUCCESS AND APPROPRIATE RISK TAKING Many companies unwittingly create a culture where employees are better off doing nothing than trying something new and failing. This is a formula for missed opportunities. Jeff Flecker, controller at Qualcomm, supports appropriate risk taking. His financial team has developed core values where successes are celebrated and it is acceptable to make "learning mistakes"--first-time mistakes that identify a training or process improvement opportunity. Qualcomm's accounts payable team recently had its accounts payable reviewed for potential duplicate payments and sales tax overpayments. The team used each identified overpayment o·ver·pay v. o·ver·paid , o·ver·pay·ing, o·ver·pays v.tr. 1. To pay (a party) too much. 2. To pay an amount in excess of (a sum due). v.intr. To pay too much. as an opportunity to improve the process and related internal controls. At the end of the review, the team celebrated their progress with a department party. With this level of dedication to continuous process optimization Process optimization is the practice of making changes or adjustments to a process, to get results. Optimization is the use of specific techniques to determine the most cost effective and efficient solution to a problem or design for a process. , it is no wonder that Qualcomm was among PricewaterhouseCoopers' first clients to become SOX (1) (Schema for Object-oriented XML) An XML schema developed by Veo Systems and Muzino Communications, which was submitted to the W3C. SOX is based on DTD, but adds data typing and reuse mechanisms. compliant. THINK CYCLE TIME OPTIMIZATION Cycle time reduction has always been key to developing world-class manufacturing and new product development programs. Unfortunately, cycle time is often not a factor in implementing profit improvement ideas. Projects are delayed until there is time to implement them. The reality is that unless the project is made a priority there is never enough time. Think of profit improvement projects as you do other important initiatives. Successful projects require an implementation plan, resources and management support. Encourage the team to think of the time value of money and the importance of reducing the cycle time for project implementation. In most cases, a faster completion will result in higher savings. USE PERFORMANCE METRICS Performance metrics are measures of an organizations activities and performance. Performance metrics should support a range of stakeholder needs from customers, shareholders to employees [1]. THAT MEASURE PRODUCTIVITY Performance metrics that track productivity will have an immediate effect on your business' productivity. Virtually all functions in the business can develop productivity measurements. Analyze each department to identify productivity measures that will support your productivity goals and will quickly identify changes, positive or negative, in your organizations performance. Performance metrics can also be very useful for identifying opportunities to streamline your operations. By measuring errors or gaps in the process, you can identify the underlying root causes of process issues. For example, in the accounts receivable accounts receivable n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business' problems in paying area, companies often use Days Sales Outstanding In accountancy, Days Sales Outstanding is a company's average collection period. A low figure indicates that the company collects its outstanding receivables quickly. Typically it is looked at either quarterly or yearly (90 or 365 days). as a measure of how effective their receivables department is in collecting accounts. Unfortunately, DSO See CSO. does not provide information on the underlying reasons that DSO is changing. There are often a number of reasons why a firm's DSO is increasing: longer terms; customer financial issues; pricing or billing errors; an overworked receivables department; or inefficient processes. [ILLUSTRATION OMITTED] It is only by measuring the underlying reasons for a change that you are able to address the true cause of the problem. USE TECHNOLOGY One of the greatest areas of opportunities for improving profitability is using technology to improve efficiency and reduce costs. To assess whether or not you are using available technology to its full advantage, ask the following: * Does your system offer remote access so employees can access information, send e-mails, approve invoices and research the status of a client's account whether they are in or out of the office? * Are transactions with your vendors, such as purchase orders, invoices and payments, electronically transmitted? * Are you using imaging and workflow products to process your payables? * Can your customers and vendors ask questions, get pricing information and resolve issues via your website? * Are you using tools such as Zoomerang.com or SurveyMonkey.com to efficiently collect data and gain feedback from employees, customers or vendors? * Are you using any of the many available internet resources to reduce your travel costs? * Are you using webcasts to reach your clients or investors? * Are you using internet or videoconferencing A real time video session between two or more users or between two or more locations. Although the first videoconferencing was done with traditional analog TV and satellites, inhouse room systems became popular in the early 1980s after Compression Labs pioneered digitized video systems to hold virtual meetings and reduce travel costs? * Are you using online training to reduce your training expenses? The list of opportunities to use technology is almost unlimited. It pays to have a culture that embraces new technology and encourages employees to find new ways to support the business. YOU'RE IN THE DRIVER'S SEAT driv·er's seat n. A position of control or authority. You can take control of your business' profitability. All it takes is vision, focus and commitment. You always will be faced with naysayers who give you a list of reasons why changes can't be made, but by providing the leadership for change, you can help get your business back on the road toward its true profitability potential. BY JOAN ALLECKSON, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. Joan Alleckson, CPA is president of Profit Solutions Network, a financial consulting firm Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee consulting company business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a . She has a business relationship with many of the firms mentioned in this article. Alleckson also serves on the CalCPA Board of Directors. You can reach her at jalleckson@profit-solutions.net or visit www.profit-solutions.net. |
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