Get Professional Help Before You Must Get Professional Help - Dec 30, 2011
Posted by: Michael P. Landrigan in Success Stories
Over the course of this year, I have had the pleasure of working with a firm that already has competent financial management. In fact, the company has a very competent CFO. Their CFO, however, recognized that he was young and somewhat inexperienced. They asked me to help mentor their young CFO.
When I first started working with the company, some of the earliest questions revolved around international transactions. The company was only about three and half years old and just started importing from a Chinese supplier. The company needed letter of credit capability. The company had a small line of credit through a Credit Union, but that institution couldn’t handle their international needs. I introduced them to a full service bank.
The company had recently changed their professional services provider to a single organization that provided tax and legal services. However, after discussing their tax return, I was not certain that the company was receiving sound tax advice. I suggested that they have a Tax Professional that I trusted, review their return. As I suspected, there were a number of questionable items that should be corrected. It became clear that it was in the best interest of the company to change tax firms so my contact became their tax preparers. I also suggested the name of a local attorney who I felt would be a good fit for them.
In the end, in less than a year, I have advised them to change banks, CPA firms and attorneys. Fortunately, they are delighted with all of my suggestions. To their credit, they have not been afraid to get help. They are showing particular wisdom. They get excellent professional advice to avoid problems rather than waiting until there is a problem and being forced to pay to get the problems corrected.
Beyond these recommendations, we’ve also put together a very complex business model. The model that we’ve created helps the company create a number of different forecasts. Their CFO can change variables to generate a wide range of potential results. This flexibility has already been used to forecast various changes to revenue streams or significant changes in costs or expenditures. The model also allows the company to forecast cash balances, loan balances as well as all the various aspects of the balance sheet. This also allows the company to plan for cash needs; a theme that I’ve written about before.
Get good professional help. Use that help prudently and save yourself money. An ounce of prevention really is worth a pound of cure…and it is much less expensive.
Back to the Basics of Accounting (or) I Don’t Know a Thing about Accounting, Where Do I Start? - Sep 27, 2011
Posted by: Michael P. Landrigan in Articles
Part B (The Income Statement)
In my last blog, I started to answer the question “Are debits good or are they bad?” As I went through that some of the scenarios, I focused on entries that affected the Balance Sheet. However, the answers change when looking at the Income Statement. Recall that every entry requires both a debit and a credit. When a debit occurs on the balance sheet but the credit isn’t to an asset account or a liability or equity account, then the credit has to affect an Income Statement account. In general, credits on the income statement are made to revenue or sales accounts; debits are made to expense accounts.
As an example, assume you own your own appliance servicing company. A customer, Mrs. Prudence, has asked you to come and install a gas cooking appliance. The customer has paid for all of the supplies and the appliance already. You are connecting the appliance to the gas plumbing and making sure the connections are safe. The work is completed, it is done well, to code, and everyone is happy. Now you need to bill the customer, so you create an invoice for $250. Your account entry would be:
Debit Credit
Accounts Receivable 250.00
Service Revenue 250.00
Record service revenue for Mrs. Prudence 500 W. Main Street
In this example, a debit to Accounts Receivable is a “good thing” and the credit to Service Revenue is also a “good thing. Revenue accounts increase when a credit entry is posted to the account. However, a credit to the customer would look like this:
Debit Credit
Service Revenue 10.00
Accounts Receivable 10.00
Record good customer discount to Mrs. Prudence 500 W. Main Street
Now total Service Revenue would be $240 or 250 – 10. While the debit to service revenue is a bad thing it also may create additional customer loyalty from Mrs. Prudence and that loyalty could be important parts of helping your company remain competitive. There is a lot to weigh when doing financial analysis.
The computer and software in general has really streamlined the business world. Prior to the computer, a bookkeeper made all the accounting entries, posted to ledgers and created financial statements. Accounting technology today often allows organizations to streamline their accounting entries through the creation of data in a few fields. It is quick and may seem painless but if the wrong information is entered, the company may end up with results that create big problems. Whoa! I can hear you say, “What is he talking about?”
So here goes…I’ve been in a couple of firms where creation of new parts becomes the responsibility of the engineering department. The actual entry may be done by engineers, clerks or some other personnel but the process is similar. These folks are rarely trained in accounting; they don’t understand accounting and may not really understand all the fields that they need to enter for accurate recognition of transactional activity.
Think of it this way. Accounting is designed to be a double entry system. This means that for every single transaction two general ledger accounts should have entries. Unfortunately, some folks don’t understand that process or have set up their files incorrectly and they end up using the same general ledger account for both the debit and credit entry. Let’s look at that a little closer.
A manufacturing company has a part in stock that costs $100 and they sell the part for $150. Their system handles the sale properly but is set up so that the following entry is made:
Cost of Goods Sold General Ledger Account 1200 (Inventory) $100
Inventory Account 1200 (Inventory) $100
In this case, the same account is used for both sides of the same activity. There is no doubt that an item worth $100 is no longer in inventory, but when account 1200 is both the debit and credit the recorded value of inventory does not change. If this happens frequently, the possibility for a major overstatement of inventory is very high. In effect, no one can trust the integrity of the financial inventory records.
Another problem is using similar inventory accounts to record transactions. Most manufacturing companies have general ledger accounts for raw inventory, work in process inventory (WIP) and finished goods inventory. However, over time, inaccuracies begin to crop up, accounts start getting used for new purposes or any number of factors cause the basic information to be changed or altered. When parts go from raw inventory to WIP the general ledger entries should be a debit to some WIP account and a credit to some raw inventory account or WIP goes up and Raw Inventory value goes down. Using the same logic, when parts are finished, there should be a debit to a finished goods account and a credit to WIP account causing the value of finished goods to rise and WIP value drops.&nb....
Posted by: Michael P. Landrigan in Articles I’ve seen it more times than I care to…a company develops a great vision of growth, begins following through with that plan for growth and then suddenly it all comes to a grinding halt because the company doesn’t have the processes in place to support the growth. I think if I use a sports analogy the idea might be clearer. All football teams have a playbook. This book includes those plays that the team expects to run. Each play details the responsibilities of each offensive player; where they are to go and what opposing player to block. If each player is able to complete their task successfully, more often than not the team will be able to move the ball downfield. Offenses can be complex or relatively simple, but one characteristic is absolutely necessary for the team to be successful…the team must be able to block, throw, catch and run. Without these basics, the team will always struggle. Peyton Manning is tremendously successful because of the ability of his offensive line to protect him. When he has not had that protection, he, and the team, struggle. While the Colts may have a fairly sophisticated offense, that doesn’t mean the offense must have a large number of plays in the playbook to win. In fact, the great Vince Lombardi only had seventeen offensive plays for his offense. However, the key for the Packers was their ability to hone the execution of those plays. Lombardi emphasized blocking and tackling. The Packers might have only had a few plays, but could they ever run those plays well! Posted by: Michael P. Landrigan in Articles In life, it is important to know your individual strengths and to recognize your limitations or weaknesses. For a person employed professionally this becomes more important. You really need to know what you do well and where you need help. On my first day in a new job, I was introduced to my administrative assistant, “Terry”. This was a luxury I had never previously enjoyed. Later, when we met privately, we discussed how we worked best and told her what I thought were my strengths and areas that she could really help me. Over the course of the next few weeks, we worked on a process that allowed her to assist me in those areas that limited my effectiveness. I gave Terry the right to eliminate any superficial items from my inbox, things that were not of high priority to the company but did add to number of daily activities I needed to complete. I had worked for companies that had no filtering process at all. Every offer, ad, mailer or opportunity that was addressed to me or to the title I held, ended up in my in-basket. With her assistance that came to a halt. Now I was able to address the true issues of the company. I also was able to communicate effectively with her so that we could outline financial control processes and she would then write up the fuller process. This even went so far that when we needed to make significant changes to our facility, I was able to delegate most of this responsibility to her. She had a remarkable ability to communicate the information that I needed to know and sift out the more mundane. In the process, my strengths improved. I didn’t have to have my energy drained performing tasks that were simply not areas of strength for me. Terry was able to get these done efficiently and I was significantly more productive. Many business owners face similar problems. They lack the resources, experience or manpower to be as productive or as profitable as they can be. Sometimes you just don’t know what you don’t know. That is why it is important to surround yourself with a good team. This team should have a background that is sufficiently broad to provide familiarity with other business perspectives, methodologies or processes that may be able to influence your company toward greater success. I believe that, particularly for small firms, it is important to look for help outside of the company walls. What may be state of the art within the company might be really be antiquated thought in most parts of the business world. Someone outside the company might provide a different more novel approach that turns those weaknesses into strengths. Recently, I went through a SWOT Analysis with a new client. In this process, the company points out their Strengths, Weaknesses, Opportunities and Threats. After the session, one of the managers confided in me that they go through this process on a regular basis. He said, “it may have seemed like we have a number of weaknesses but you’d be amazed at the number of our strengths that we previously ....
Posted by: Michael P. Landrigan in Articles What is the difference between a good CFO and a great CFO? Maybe we should start with some basics…what does a CFO do anyway? Typically, these responsibilities fall into three general categories: Accounting – Oversight of the Controller function. Typically the controller is responsible for the accuracy of the reporting of financial information; in other words, accounting and accounting personnel. This function tends to focus on activities that are in the past as well as protecting the assets of the company. Treasury – investment of money, liquidity, minimizing the risk that the company faces, bank relationships and managing the capital structure of the company all fall under this function. Economic Strategy and Forecasting – A CFO should be able to identify areas that provide the greatest opportunities for the company as well as those products or activities which are least profitable for the company. With this data, the company can begin to make adjustments to help maximize profitability. In the long run, the most important thing that a CFO does is help their companies see into the future. When a company can see the direction that it is headed there is usually time to make alterations so that a different outcome can be achieved, if necessary. I believe the ability to see into the future is one of the most important aspects that any CFO can provide. As a W2 CFO, one of my bosses would tell me, “Mike, you’re the policeman. You know what is supposed to happen. Your job is to make sure it does.” To do that, the company needed to have a couple of key items. First, the company needed to develop a business model. Depending on the complexity of the business and number of business sku’s, this could be a big undertaking. Fewer sku’s or product families simplify this process. I’ve written earlier about budgeting for balance sheet items. The implications for the business are enormous. When you include balance sheet items, you begin to develop a process that allows you to forecast the effect of changes to assets and liabilities on the entire organization. Forecasting the balance for cash, accounts receivable or the line of credit won’t be perfectly precise. Instead, the focus should be on the general direction of those items. This model should be able to provide answers like will there be enough cash for what we intend to do. How much availability will we have on our line of credit? Will inventory and accounts receivable be able to support our line of credit? These are critical questions. Knowing that you will be short of a key resource provides the opportunity to make adjustments.“Mike, you know, we were talking about it the other day and we aren’t even the same company we were when we first met you last year. Dave (operations manager) told me that if we hadn’t made these changes over the past year, we wouldn’t even be able to meet our customer demand today.” I have to admit, when I look back on it, the changes over the past year were significant; the company had underperformed for the past three years and 2008 had been particularly poor. They made significant cuts in expenses and were really focused on finding new, significant customers that allowed the company to enjoy consistent profitability. In fact, early in the year, the president established a list of customers that the company would like to add. When one of these new customers began ordering products, the president would put a simple checkmark next to the customer name. By mid-November, there was a check mark next to each name. Throughout the year, the company did a great job of staying true to the goals and on working to improve sales and margins. Also during the year the company purchased new operating software. This allowed the company to begin understanding margins by part and by customer. In almost every respect, information became accessible on at least a daily basis and generally hourly and even up to the minute. That doesn’t mean that everything went as we had hoped…overall sales were down about 20%, but the drop in sales was primarily for goods with poor margins, so the impact on the bottom line was minimal and the company improved margins significantly with the addition of new customers. Early in the year we recognized that one division of the company was in for a struggle. Sales would be down drastically. However, there were opportunities in the remaining division and we concentrated efforts on finding customers and improving margins…the overall result was a profitable year despite lower sales. As the company heads into 2010, sales will continue to be bolstered by three new products, again with sound margins. The president of the company has done a great job of talking to the key customers and finding out what products they would like to offer. In turn, the company has responded by developing these products and providing them to customers. The key here is that not only did the company talk to their customers, but they listened and provided exactly what the customers were seeking. In turn, the customers recognized that the company provides outstanding support and that recognition helps create greater teamwork between the company and their customers. This cooperation provided additional opportunities and improved profitability. Despite the poor economy, this firm has a reasonable expectation of increasing sales by more than 25% this next year. At an industry meeting, last week, the president was asked what the company had done to prepare for 2010. He responded by saying that the company had installed new software. This software pro....
Posted by: Michael P. Landrigan in Articles Posted by: Michael P. Landrigan in Articles
Once a budget for revenue and expenses for the year is established (see last month blog, Flexibility-The Key to Sound Budgeting), I strongly recommend that you continue on and also budget for balance sheet items. To be honest, there was a time in my career that I viewed trying to budget assets and liabilities as a tremendous waste of time, and if the budget was stagnant and we missed our sales targets, it was! However, using flexible budgeting, you can build a budgeting model that ties the income statement and balance sheet. Even if you miss the sales target, you can still link assets and liability to revenue and expense accounts. My favorite software for developing a budget model is MS-Excel®. Put all active asset and liability accounts into your model. It is important that all your revenue and expense accounts be linked to some account on the balance sheet. As an example, if you typically sell on open account with 30 days turnover, you must link to net revenue to accounts receivable. If you manufacture a product, you will need to build the purchasing and production cycle into your model. Materials will need to flow from raw inventory to work-in-process and through finished goods. This process also provides the ability to create a detailed capital budget that includes the timing for your purchases. You can also tie depreciation expenses to accumulated depreciation. I’ve found that the process works best if you have separate lines for the beginning balance, debits to the accounts and credits to the account. When transactions are complex, you can add a line for each level of detail. Total the beginning balance, debits, and credits (credits should be negative numbers) together for the ending balance. Using the ”sumif” function makes calculating totals for balance sheet information easy. Why is this useful? Imagine that you sell a product through a commissioned sales force that is paid 5% commission. By tying the commission expense to the accrued commission liability account, you can watch the liability go up with additional sales or fall on lower sales. That is the beauty of this process. Not only does this account reflect what happens in a “what-if” manner, but done properly, all accounts move up or down in relation to activity within the organization. Taken as a whole, companies can anticipate the future movement of asset and liability accounts based on reasonable assumptions. In total then, cash needs can be forecast. Anticipating future cash movement goes a long way toward managing cash and making sure your organization has the cash necessary to grow and be successful. Using this information allows you to forecast the balance sheet by m....
Posted by: Michael P. Landrigan in Articles
Early in my career, I had a narrow view of budgeting. To me, budgeting was a very constricted exercise that an organization plodded through annually. At the end of the process, the company would generate a very defined budget that was "hard-coded". By hard-coded, I mean a set number or desired number for each account on the projected income statement, by month, for the budget year. Then, when this process was generated, these numbers would be entered into a "budget" file, typically within some module of the general ledger operating system. Posted by: Michael P. Landrigan in Articles For management to have a good idea of what is taking place with their company, they need to have access to all the information related to the company. Many firms are satisfied looking at information after the fact, when they review the financial statements. Unfortunately that is almost always too late. I’ve seen it happen in construction too many times as an example. A project is nearing completion, all the reports look like the project will finish under budget when all of the sudden several invoices arrive that the project manager forgot about and the accounting personnel didn’t know about. Suddenly the project that was a winner becomes a big loser and now the company has to find a way to pay for the additional unexpected costs. In manufacturing, a similar problem would occur when a physical inventory is taken. For example, if goods are received but the company has done a poor job of recognizing goods that have been received but the invoices have been processed into the general ledger. This means the cost for those goods won’t be considered in the inventory balance in the general ledger. Inventory is understated and the company understates the cost of goods sold. When the invoice does arrive the company will be forced to recognize additional expenses. Depending on the size of the invoice this could have a major effect on profitability. If your company falls into that trap, how do you break free from this negative cycle? You need to close the loop. “The loop” is the ability to monitor what is taking place within the company. For example, if you don’t have the ability to use the software system to identify what is on order for inventory or for a project you have an open system. Your system forces you to guess about the dollars you have committed to purchase, either as part of a project or as part of purchase to replenish inventory, or for other company needs. Why is this important? Because it affects two key aspects of your business: cash and profitability. Eventually you’ll need to pay for anything you order. With a closed system, management has the ability to forecast the specific cash requirements of the company while having the ability to recognize the costs that will occur. For example, in construction, it is typical for a company to bid or make an estimate related to specific projects. As construction begins, actual costs begin to be recorded against project and can be compared against the original bid. As the project develops and later nears completion, management attempts to estimate the profitability of the job. However, if all purchases are not being recorded and collected within the software system, management is effectively blind to any costs which have not been received into the payable system. This can lead to poor decision making. Closing the loop means that not only are purchases recorded so that management can tell the cost associated with those orders, but ....
Posted by: Michael P. Landrigan in Articles As a business person you need to have goal clarity. One of my B2B CFO® partners, Rick Daigle wrote a great blog on the importance of goal clarity that I strongly recommend (Osprey parenting). In his blog, Rick points out that the male Osprey knows that he has to catch six fish every day to support his mate and hatchlings. In business, too often, the CEO may not know what information is really important and key for their business to succeed. As a result, they may jump from one really exciting piece of information to another without consistently looking at the data that really matters. Fortunately, after going through this struggle they may find that as long as this activity is happening, everything is going well. Once this becomes important to the owner, president or CEO it is easy to get other members of the company to pay attention to the same data. One of the most telling experiences I ever encountered occurred when I was leading an MRP II implementation (today we would call it an ERP implementation). For MRP to be successfully implemented, you need 98% bill of material accuracy, at least 95% routing accuracy and at least 95% inventory on hand accuracy. When we started the project, our accuracy was abysmal, hovering around 35%. We had a long way to go. We made changes in our processes, felt that we had the accuracy necessary in routing and the bill of material, and should see a dramatic improvement. We took a full inventory and our accuracy had improved but was still only around 70%. We continued to count but had no improvement in our accuracy. We needed to do something different. First, we chose one afternoon and almost all members just under the “C” level of the company went into our stockroom and started counting. I imagine it was embarrassing for the folks who ran our stockroom to see us out there on their turf. We set a date to repeat the action in a week. When we returned seven days later, the stockroom had already counted the parts and made it pretty clear we would not need to repeat the effort in the future. The second thing we did was to begin graphing our results and posting the results in the cafeteria. Each week, we would update the information and management paid attention to the graphs. It did not take long before the pride of the individuals in the stockroom took over. They wanted to succeed. They offered a number of suggestions to help improve our processes and they became determined that they would achieve the goal of 95% inventory accuracy. Almost immediately, the numbers started to improve; within 30 days we saw 95% accuracy for the first time and the numbers stayed there. The real key was making the goal visible. Some years later, I was working for a company in the automotive industry that was attempting to implement QS-9000. Like IS....
Posted by: Michael P. Landrigan in Articles I remember it like it was yesterday, I was involved in a full scale argument with my wife of about 3 weeks. Now, understand, I grew up in a house where I never heard my parents argue. It just wasn’t done. Sure mom and dad had discussions together when they disagreed, but a raise-your-voice-heated exchange? Never happened, never has. The consequence of our argument was clear to me… my marriage was doomed. Arguing was a clear sign, in my mind; this marriage was a huge mistake. So I asked, in a very tentative voice, what seemed to be logical at the time…”So…do you want a divorce?” At that point, my wife gave me a tremendous gift. She was incredulous. Yes, absolutely incredulous and absolutely livid. “What are you talking about!?!?” she demanded. “I don’t want you to EVER, EVER use that “D” word with me again!!!” If I remember correctly, her voice became even more shrill and her volume increased significantly! “ I am married to you, Michael Landrigan and I will always be married to you. Nothing, absolutely nothing I say or you say will make me stop loving you! We are married and that is the way it will stay!” Succinctly and pointedly, she let me know that she was absolutely committed to being my wife and no matter how harsh the words or how pig-headed either of us might be (typically that would be me), she was determined to make our marriage work. What a blessing! That was over 30 years ago and I now remember it with a chuckle. Everyone that enters into marriage brings their own particular views of what a marriage is and their own expectations. I naively thought married folks never argued, primarily because my parents provided us with a remarkable example. My wife knew better and had a clearer view of what was necessary to make our marriage survive in the long term. Business partnerships are much the same. Each person joins the partnership with certain ideas or concepts about how the partnership will operate and unfortunately, when the partnership doesn’t live up to their idealist impression, the partnerships often fail. These partnerships lack the absolute commitment and determination to do whatever it takes to make the partnership succeed. I’ve been around about a half dozen partnerships. Unfortunately, most partnerships became exercises in futility. Often, one partner perceives that another partner had somehow wronged him. This leads to accusations, often exacerbated by external personnel, like attorneys, accountants or spouses, each adding their opinion and often creating new demands and more hard feelings. It is a terrible, awful, disgusting downward spiral which ends up in failed communications, silence and bitterness, loss of capital and probably failure. What a shame! SO Cool! I can tell you how many units we made last hour even. This is SO COOL!!" Don had good reason to be excited. In 60 days his company had built all the data necessary to run completely new operating software at his manufacturing company. They had to load all parts, vendor data, vendor pricing, customers, customer pricing, bill of materials (BOM), purchase orders, customer orders...everything, including his general ledger AND completing a physical inventory. Pretty amazing! I remember being shocked the first time I sat down at one of his terminals and realized I was staring at a blue DOS -like screen, reminiscent of the 1980's. There was no BOM, on hand quantities in an inventory module, no open purchase orders. The company calculated cost of goods by calculating beginning inventory plus purchases minus ending inventory. There was no way to determine which sales accounts were profitable and which were draining the resources of the company. Developing cost information for existing products was difficult at best. All BOM information resided on a massive Lotus worksheet. There was no way to automatically update costs to roll up accurate costing data. Everything was laborious. Even Accounts Payable and Accounts Receivable were difficult to maintain. Now, however the story is different. Later in the week, Don presented me with a current report of sales for July by customer along with the calculated gross margin for each account. Now this was information! We also were able to dissect the various components of the business so that we were comfortable that we understood how the company was responding to the new information. Don was particularly relaxed. Despite the tough economy, his company is on the upswing. In fact, he shared a little secret with me..."Mike, I slept all night last night. That's my first full night of sleep since last September. Now, I can know exactly what is going on in my company with this system. The fear of the unknown was keeping me up at night." By the way, Don slept through the night again the next day. Don is confident that he has the systems necessary to provide him with the information his people will need to be successful and they are up to the task of meeting those challenges. That's knowledge that can really help any owner relax. *Names and dollar amounts have been changed. Posted by: Michael P. Landrigan in Articles I'm not a tax expert. In fact, I admit that I prefer to avoid questions related to taxes. .. that doesn't mean I ignore taxes altogether though. Fortunately, I have a pretty good idea of what I know well enough to provide advise and that line where I need to get help. Unfortunately, many firms or business managers ignore or are ignorant of activities that can create significant potential liabilities for their firm. Nexus is a legal term that essentially means an event or activity has ocurred that allows a state or city to have the right to tax the company. In recent years, states have become more aggressive in their efforts to find new revenue streams. Or, put in other terms, to find a means to tax new entitities, especially if those companies have out of state addresses. To create "Nexus", each individual state makes the rules that determine when Nexus takes place. This event can vary by state. Unfortunately an item that creates Nexus in one state may not create Nexus in another. this means that you could be surprised or een schocked by what events might trigger Nexus. For example, in some states, Nexus can be created by having a sales person call on potential clients or even display merchandize at a trade show. In other states, hiring or more precisely paying an employee that resides in that state can be a triggering event for Nexus. The question that may be asked is, "What does this mean? Does it matter at all?" There isn't a clear answer to those questions. Once Nexus is established, the new state now has a right to tax and potentially audit the company. In theory, the state has a right to only the portion of their income that relates to sales within their state. The practical realities can vary however; my home state is Indiana. Some years ago, I recall a situation where Ohio was able to establish Nexus. At the time, I said to our tax acountants "Well, this really menas, doesn't it, that Indiana can no longer tax 100% of our income but not the portion in Ohio?" I remember her reply well, "In theory, Mike, you are correct. Unfortunately, it never seems to work out that way. One state may not recognize some portion of the claim of another state. Usually you end up paying taxes on more than 100% of your income." Paying taxes in another state also means the time and cost of preperation of another return. Regards of whether the return can be completed by internal personel, or use of external tax experts, there will be time consumed to gather the information and cost for preparation. These are costs in addition to any costs prior to this new return. In the case I experienced, the equivalent Ohio tax rate was also higher than the rate we previously paid in Indiana. What steps should you take? The primary thing to remember is--- don't forget the potential for new tax concerns. Talk to your tax advisors before you make a decision. It is always easier to fix a problem before it happens than after the problem occurs. Sometimes you can't put the genie back into the bottle. Posted by: Michael P. Landrigan in Articles $2,000,000 – (.3 X 2,000,000) = $1,400,000 We had failed to look at the costs that mattered. We didn’t understand how much this division affected our profitability by covering our fixed cost. In the end, the company was sold to its biggest competitor. The competitor consolidated all activities to the national headquarters and the company ceased to exist. As a business person, know your cost so you can calculate your contribution margin. Posted by: Michael P. Landrigan in Articles Back in 1989, I led what was then called an MPR II implementation project for Thunderbird Formula boats (http://www.formulaboats.com/). We had many objectives that we wanted to reach and one of them was to be able to look at the quantity listed as "On Hand" and trust the number was correct. For too long, our purchasing personnel simply didn't trust the numbers. Instead, to be certain that they knew the right quantity on hand, they would go find the inventory and make sure the quantities were right. While this was understandable, it was also exceptionally inefficient. Why not get correct balances and keep them correct instead? Now, you may be thinking, okay, they'll take a full physical inventory and everything will be correct. Unfortunately, it isn't that easy. There are a number of problems associated with a physical inventory: Posted by: Michael P. Landrigan in Articles I'm a strong believer that you learn more from mistakes or failures than from your successes. Often, those mistakes may have been very painful experiences, but very valuable. I also think my father provided very sound advice: "Learn from your mistakes, but it's cheaper and less painful to learn from other people's mistakes!" I was involved with a company that determined the wisest course of action was to increase market share. Their goal was to become the dominate entity in the industry. This particular market segment was made up of a few primary players, but dominated by three organizations. One of these dominate companies was my employer. As we discussed our plans, we reviewed the industry, talked about our ability to increase our market share through "organic" growth or through more sales of our products and determined that the quickest way for us to become dominate was to buy the competition. We set our sights on one of the competitors and approached them. They were aggreable and we proceeded with the purchase. We put together a plan that included consolidating the two organizations and identified who would remain in specific executive positions in the consolidated organization. The plan was sound and I felt made sense. However, as we proceeded, we were forced to search for a new president to lead the company. After a long search, a replacement was hired. Unfortunately, he wasn't involved in the creation of the original plan and he headed in another direction. We never had the opportunity to initiate our plan and the company struggled for a number of years. From this excercise, I learned that not only do you need a plan, you need to follow the plan unless you find the plan is not working. Give your organization time to allow your plan to succeed. Our mistake was not following the plan. Have a plan, then follow it! Posted by: Michael P. Landrigan in Articles Recently, I had the opportunity to be the guest on a local radio program that focuses on business. Follow the link below to hear what followed... Find the MP3 player and click on Guest - B2B CFO®
Sitemap |
About Us |
CFO Services |
Find A CFO |
TV |
PR |
FAQ |
CFO Directory |
Office Locations |
CFO Careers |
Why B2B CFO? |
Part Time CFO |
CFO Wise vs B2B CFO |
CFOwise |
Kenneth Kaufman
(877) 4-B2BCFO Zoom in using the +/- tools on the left. Click on each photo for more details.
Master the Basics of Business - May 17, 2010
Like football, business activities are complex and require numerous players to meet their various individual responsibilities for the company to achieve. In business, however, too many owners and managers believe that because they have the tools necessary, like great software, they have everything they need to be successful. Unfortunately, that generally isn’t the case. The ability to use that software well, just like in sports, requires constant repetition and improvement. Software is like any tool, if you don’t use it well, it isn’t worth much and, in some cases, it might make matters worse. You have to be skilled at the basics before you can really implement large scale visionary growth strategies. Otherwise, in my experience, you will find yourself facing some difficulty that becomes a major roadblock.
I was CFO for a company that had been recently purchased. At a meeting of our senior executives I asked each of them what they thought were our biggest challenges. They each responded with process problems that we faced like stock outs, poor bill of material data, bad inventory control or our inability to forecast sales demand. I forwarded these meeting minutes to the company that now owned us.
Within a few hours, I received a call from the individual who was my primary contact from the “parent” company. He was not happy. The Meeting Minutes indicated a lack of basic “blocking and tackling” and the overarching strategy of the buying corporation called for us to focus on growth, n....
Know Yourself! - Apr 8, 2010
CFO or Soothsayer? - Mar 4, 2010
Got Goals? - Jan 8, 2010
When you write down your goals they suddenly become real. For most folks, the process of sitting down and writing out your goals can be motivating. Written goals help mentally solidify concepts and they become real. In many ways, it gives individuals a reason to get up and get out of bed. Without goals that same person might drift from one thing to another, not really doing anything out of the ordinary. We need clear goals and responsibilities to help us achieve. Without goals we become just another average person.
Proof of this came in study by Gail Matthews, Written Goal Study Dominican University. His findings confirm that people with written goals, shared this information with a friend, and sent weekly updates to that friend were on average 33% more successful in accomplishing their stated goals than those who merely formulated goals.
Written goals can be scary. I've met many people who seem terrified by the prospect of having to put their goals in writing. Until the goal is written down, it is just their idea--something only they have an interest in. If they don't reach it, they'll be the only one to know. In effect, it is acceptable for them to fail if they are the only one to know they didn't reach their goals. Writing down a goal and missing it might cause some else to view them as a failure. Amazingly, this becomes motivational as well. The group with the best results wrote down their goals and then shared the goal and the result with someone else.
For business owners, written goals are critical as well. Have you written down your goals for 2010? How did you do in 2009? For most companies, 2009 was very difficult. However, one of my clients established a list of potential clients for 2009. This list was posted on a simple whiteboard in the office of the president. As each customer was added, a check mark was placed by their name. By the end of November, a check mark was next to every name on that list. I am convinced by placing that list in a position of prominence, it kept the president and the organization focused on meeting their goals. Their work, done in 2009, will set up a very prosperous 2010 for this company.
As business people, creation of a business plan with ....
Budgeting Full Cycle - Completing the Task! - Dec 18, 2009
Flexibility - The Key to Sound Budgeting - Nov 17, 2009
As the year would proceed, we would compare this information to the actual results and measure the difference between actual and budgeted expenses. Typically over time, the gulf between the budget and actual sales and expenditures would grow as the year progressed. Over time, this difference began to make the budget process feel more like the writing of an unnecessary piece of fiction, than a necessary management tool.
Fortunately, I was introduced to the folks at Oliver Wight and, in particular, to Tom Wallace. I was lucky because Tom was able to show us that there was another, better way to budget. He pointed out that the problem with most budgets were they were based on a sales forecast. Usually, these forecasts were generated by some member of senior management. Almost without fail, these estimates were the best guess or desired sales goal of the organization; almost equally without fail, we would miss those numbers on the low side.
Tom pointed out to us that essentially there are three kinds of expenses: fixed, variable and semi-variable. Fixed expenses do not vary. For example, depreciation expense remains fixed unless the company buys or sells fixed assets. Regardless of whether sales go up or down, fixed expenses remain constant. Variable expense, on the other hand, is entirely tied to the fortune of sales. If there are no sales, then there is no variable expense. As sales rise, so does a variable expense. An example of a variable expense would be ice cream at an ice cream stand. The vendor buys the ice cream and that purchase remains an asset on the books of the firm until someone comes and orders ice cream. Once the ice cream is sold, the cost is shown as expense under materials sold.
Occasionally, an item will act as a semi-variable expense. These costs run somewhere between a fixed cost and a variable cost. Semi-variable costs act like a fixed cost up until there is some triggering event. A triggering event is some decision or action that forces the company to add expenses, such as additional supervisors when a shift is added to a plant or additional indirect personnel to meet the demands of production. In my experience, these expenses are almost always treated as fixed and then the budget is adjusted if the triggering event occurs. Or, rather than having expenses increase, a company decides to downsize. Essentially, these costs are reductions of semi-variable expenses. In fact, almost every fixed cost is actually semi-variable. Given some event, those costs can and will go up or down. That is why controlling the discretionary decisions related to fixed costs are often key for companies to reach or regain profitability.
Eventually, we were able to develop a process that allowed for "flexible" budgets. A flexible budget means that rat....
Close the Loop! - Oct 25, 2009
You Get What You Measure! - Sep 28, 2009
Like a Good Marriage, It Takes Commitment! - Aug 25, 2009
Don't Ignore the Tax Consequence! - Jun 29, 2009
Not Knowing Your Costs Can Kill You! - May 5, 2009
Finally, the day came and production of these units was transferred to the supplier in Mexico. Management was very anxious to see the effect on the financial statements. Results the first month were poor. Profits dropped but a quick analysis seemed to indicate that this was probably a result of initial costs associated with transferring production to Mexico. However, when our profits dropped in each of the following three months, we became concerned. Management had signed a long term contract and we were stuck.
So what was wrong? Management paid attention to total costs. They had not understood how their costs were configured. Put another way, they didn’t understand the difference between fixed costs and variable costs. Their original variable costs were less than the new variable costs from the new supplier in Mexico. All the fixed costs still remained with the company, only now; we were not able to offset the fixed costs with the same contribution margin, previously enjoyed.
So what is contribution margin? Contribution margin is the difference between your selling price and your variable costs. In the simplest form, imagine a retailer hat buys merchandize for $5 and sells that item for $11. The contribution margin is $6 ($11-$5). The calculation for a manufacturing company can be more complicated but the general premise remains. The key is to know your variable costs.
Unfortunately, this isn’t my only example. In another instance, the firm sold most of their product through large retail outlets. However, about 10% of sales were sold through a professional installation network. When the gross margin for this product was examined by non-financial personnel, they saw a gross margin of only 10%. They demanded action! It was obvious we needed to “axe” the drain on our resources and profitability. There were also outside pressures on the firm seeking the elimination of this distribution network.
Eventually, the company made the decision to eliminate this professional installation division. The results were disastrous. Almost immediately, all our dealers moved to our biggest competitor, significantly strengthening our competition. Worse still our profits began to suffer considerably. Why?
The answer was obvious once we began to dig deeper into the numbers. We had focused on the gross margin of 10% and ignored our contribution margin. In this case, our contribution margin was about 70%. This meant that our variable costs were only 30% of sales. So this division with only about $2 MM in sales was covering $1.4 MM of fixed costs for the company.
Stop Taking Physical Inventories, Cycle Count - Apr 9, 2009
Plan Your Work and Work Your Plan - Mar 7, 2009
Your Business Matters - Radio Interview WGL - Mar 6, 2009
B2B CFO Partners, LLC dba B2B CFO®
2415 E. Camelback Rd, Suite 700
Phoenix, AZ 85016
