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Helping clients survive hard times; what's best for a client in trouble? CPAs' insights can help get companies back on track.

Most people can run a business when times are good. Although the economy experienced a long run of prosperity, in recent years financial uncertainly has set in, leaving many managers unprepared to run a business during tough times. In addition, no matter what the eventual overall economic outlook, it's clear, even during economic expansions, that prosperity can favor some industries or regions of the country and leave others in the cold. That means CPAs should be prepared to help their clients facing or hoping to avoid lean times no matter what the general economic indicators forecast.

This article describes some of the thing CPAs are uniquely qualified to do to help clients manage during hard times.


When economic forecasts become confusing and contradictory, more and more companies begin turning to their business advisers for help and direction. The first thing managers facing a downturn must do is make an objective assessment of the business's current health and what can be done to pull it through difficult times while keeping it moving toward the company's long-term goals. This takes a great deal of skill and a good solid diagnostic approach.

Advisers to businesses in trouble must ask a few crucial questions at the outset:

* What critical indicators can be used to monitor the business?

* Which resources should the company rely on now--and which should it conserve?

* What direction should the company pursue now to ensure long-term objectives will be met?

In order to answer these questions, CPAs must begin by helping companies analyze their current position and plan future goals.


To help a company understand its position, the CPA should start by developing indicators that determine where the business stands and why. The indicators should analyze trends and be used as a basis for goal setting and future measurement. It will be important to plot them against established goals and to publish the results as widely as good business dictates in order to gain staff support.

The key is to choose indicators that will make a difference in the short term while maintaining their effectiveness in the long run as well. Fixed and semivariable cost structures normally are less than optimal areas to begin with, since they often take longer to affect. While the indicators selected depend on individual businesses, some that normally are useful to all businesses in the short term include.

* Personnel productivity ratio (PPR). Information on worker productivity is crucial to business decision making. The PPR is especially useful to labor-intensive operations, such as wholesale distributors, and has a direct correlation to net profit before taxes. It is defined as total compensation dollars divided by the total gross margin (in dollars). The result is multiplied by 100 for easier interpretation.

For wholesale distributors, a value of 45 indicates high performance, while median performers may settle around the 55 mark. This is a definition of the percentage of the total gross margin that goes to payroll (including fringes).

Businesses also can plot the number of employees by category versus net revenues over three to five years. Too many companies find they've allowed their head counts to rise as a matter of convenience instead of profitability.

* All other expenses. This figure is found by dividing all expenses other than payroll and fringes by the gross margin (in dollars). A high-performing distributor is likely to hit around the 25% mark. A score of 35% to 40% normally is too low to allow reasonable profitability.

* Net Point before taxes. This ratio is determined by dividing the net profit before taxes by the gross margin (in dollars). A high-performing distributor might target the 30% mark.

While it is extremely hard to generalize across industry segments, these ratios are very important to the diagnostic analysis and monitoring of a company. Ratios can help break down cost components by department or, even better, by related supporting activities for further control. Companies that don't keep score by using indicators of some type don't know if they're winning or losing.


CPAs can help management review strategic plans during downturns. Companies without plans should consider developing at least a loosely defined strategic direction from which a limited number of tactical goals may be derived. There's no better eye-opener during tough times than an objective assessment of a company's strategy, goals and values.

There are other benefits to creating a strategic plan if one is not already in place. The development process can help refocus a company's energies. Some of the areas in which CPAs can help companies perform self-assessments include

* Basic strategy and tactics. Companies must find the answers to these questions:

1. How are we perceived by our customers, employees and suppliers?

2. How did we get to where we are today (for example, through service, financial power, aggressiveness)?

3. What do we want to accomplish--higher growth or returns, entry into new markets?

4. How will we get there? Answers might include increasing the sales staff, cutting unnecessary overhead or acquiring a competitor.

5. Are we volume or margin driven?

* Company focus. Lean times can be used to refocus on personnel-related issues, such as participative management and employee involvement. CPAs should remind clients that the mild recession of the early 1980s proved that an internal focus on employee-driven quality programs hastened a return to profitability.

* Customer orientation. Companies frequently cut down on customer relations items such as travel and entertainment during troubled times. While cutting excesses is definitely necessary, CPAs should advice clients to be careful not to alienate customers by overly restrictive cutting.

Managers can try instead to use time and resource diligently to improve customer relations. Once good times return, customers will remember (although they may need subtle prodding) who stood by them and served them when times were rough.

An example of good management here would be to implement log-in limited demand. That is, references to products the company doesn't carry should be logged along with information on the customer's desired quantity and buying frequency. The log can be reviewed periodically in order to make contract deals to provide the products. This service is exceptionally well received by customers as a level of service above and beyond their expectations.


CPAS can be instrumental in helping companies examine and improve vital aspects of business management.

Budgeting. Budgets can be a valuable tool to monitor a company's success or failure in meeting quantifiable goals. Some advice CPAs can give clients creating budgets includes the following:

* Don't spread budgeted period amounts evenly just because it's easier. Doing so will distort cash flow requirements.

* Use multiple budgets to track different logical views of performance. Often both a fixed and a flexible budget are used for accurate forecasting and costing. In manufacturing systems, if often is desirable to keep a frozen budget for standard costing as well as a rolling or periodic budget to maximize profitability under more volatile circumstances. One budget drives costing and longer-range goals while the flexible budgets adapt to reality in volatile conditions and alert management to issues that need attention.

* Budget only items worth tracking. Consider implementing zero-based budgeting to resist the temptation to provide past line items with a current budget without good reason.

* Don't tie the budget solely to the general ledger account. It may make more sense to tie it to other groupings or even nondollar amounts. Examples vary with industry and imagination. Administrative hours per units sold and revenues per hospital bed days are two examples of mixed and nondollar data that offer better insights into a business and its operations.

As budgets are being created, companies tend to panic over unsatisfactory results. CPAs should advise that if results aren't satisfactory, it's time to study the underlying problems. Here's some good advice CPAs can offer worried clients:

* Don't slash expenses across the board. During a downturn, many companies immediately freeze hiring and cut expenses across the board. Such cuts can be damaging and are not in any way substitutes for sound fiscal review.

* Don't undervalue advertising and training. These often are among the first items cut during a recession because results in these areas are difficult to measure. However, companies fund training and marketing programs to establish presence and dominance in their markets by boosting the perceived quality of their products or services. During a slowdown, maintaining or enhancing product or company image becomes more important, not less. A company's success or failure often is linked directly to consumer perceptions.

* Monitor inventory. Inventory control and optimization are weak spots at many businesses. CPAs should advise greater diligence in purchase order control and materials, inventory security, production reporting and inventory cost control. Inventory usually is the most important element in manufacturing and distribution industries alike. It can be disastrous if inventory is too low or too high. For example, a distributor must know its current fill rate and how changes can affect sales in the long and short terms. Manufacturers are more concerned about limiting raw material levels (unless they are extremely price sensitive) and should work closely with sales staff to achieve acceptable work-in-process and finished-goods inventory levels.

During good times, many businesses play it safe and keep higher levels of inventory than may be necessary. During a slowdown, this choice can bankrupt a company. While optimal inventory levels vary greatly by industry and even by business objectives, it often is worthwhile to create a matrix of symptoms of inventory problems to identify causes and cures.

Finally, responsible cycle counting must be implemented and tracked. Many businesses have no idea of the reason for this step. To get it done right, CPAs can suggest clients count a control group and track it continuously for procedural problems with transaction flow. Once procedural flow is stable and correct, managers can perform activity-based costing (ABC) analysis and transaction volume analysis to set up a proper cycle count program. Of course, the control group should be counted periodically to detect changes or errors in procedural flow. Inventory accuracy and levels must be continually tracked if inventory control is to be meaningful.

ABC. This is a hot topic in cost management. It dictates that all supporting or overhead activities must be assigned to one or more products or services. Thus, overhead activities are matched to the products or services they support. Doing so defines an organization cost model that can be used in decision making.

Companies normally are surprised to learn the true cost of many of their products or services when the activity-based cost is added to direct costs. The model also helps reduce costs by identifying activities that are wasteful or don't add value to a product or service. (For more information on ABC, see JofA, Sept.90, page 53.)

Cash management. Businesses with healthy profits tend to overlook problems in credit and cash collection procedures. While it is important to control costs, CPAs should remind clients that it's equally important to analyze cash inflow and disbursements properly as well as follow prudent cash investment alternatives.

Productivity improvement. Methods for getting more from existing resources can take many forms. It's extremely important during a slowdown, when volumes tend to decline. Everything from industrial engineering approaches to productivity-based profit sharing may be used.

Productivity improvement techniques are made up of leveraging or incentive techniques. Leveraging techniques help increase the productivity of valuable resources. Bar-code scanning, industrial engineering methods and electronic mail are all examples. Incentive techniques seek to get more from existing resources by making it more advantageous to perform.

It's imperative to measure the results to maintain productivity improvements.

Personnel. While staff cutbacks are never pleasant, they may be necessary in a slowdown. Studies show that morale suffers the least when companies react quickly and start at the top. People function better when they are happy and motivated and feel secure.

Companies also should be careful about where cuts are made. Staff reduction decisions will vary from company to company. Some companies believe in starting at the top, but CPAs should advise clients to concentrate cuts in the middle manager level and then move up. The effects are seen more quickly, morale among skilled workers remains high and production continues.

Cuts should be made carefully to reduce marginal staff to remind the remaining workers of the seriousness of the company's problems and to create a balanced work force that is based on the business's long-term needs.

Management information systems. Technology is a great way to enhance productivity and manage costs. CPAs should advise clients that a properly selected and implemented MIS can be used to achieve better controls over operations without increasing labor costs.


Every company a CPA advises will be facing different circumstances, so practitioners must remain flexible in their outlook. Drastic reductions aren't always the best answer in bad times. Surprisingly enough, hard times can be the perfect times to expand a business if it's done carefully. Prices for materials, equipment and even staff will decline. CPAs can identify possible savings for managers and help them decide if investments made now are in the business's best long-term interests.

Whether a company is downsizing, making bargain purchases or simply trying to remain fit in a cautious economy, CPAs can offer the analysis and insight necessary for decision making. Practitioners should consider what they can do for clients in various situations and then make sure clients are aware of what they have to offer.

MICHAEL W. HARNISH, CPA, is partner in charge of management advisory services for Crowe, Chizek & Company, Oak Brook, Illinois. The chairman of the American Institute of CPAs information technology executive committee, he is a former member of the MAS executive committee and the MAS practice standards and administration subcommittee. FRED J. BAUTERS, CPA, is partner in charge of audit practice for Crowe, Chizek, Grand Rapids, Michigan.
COPYRIGHT 1991 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Bauters, Fred J.
Publication:Journal of Accountancy
Date:Aug 1, 1991
Previous Article:Reinventing the audit; a bold framework to enable CPAs to demonstrate a renewed commitment to the public interest.
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