IMA Conference Accounting/Business Practices to Improve Profitability

1
IMA Conference
Accounting/Business Practices to
Improve Profitability

• Robert Papes
• rpapes_at_bellsouth.net

2
Effectively Managing in a Soft Economy

• In a soft economy, managing effectively is
  critical
• New business development
• 2. Controlling costs
• 3. Improving productivity
• Raising the performance of the
• organization
• 5. Holding people accountable for results
• 6. Providing incentives effectively
• Utilizing key flash reports of critical
  measurements
• Effective action plans

3
Human Resource Management

• Most effective way to improve the bottom line is
  through a high performance organization
• People are an organizations most important
  asset.
• The number one issue in under performing
  organizations is the lack of accountability for
  results

4
Accounting/Business Programs for Human
Resource Management

• Measurements
• Objective, measurable goals
• Effective Performance Appraisals
• Incentive Programs
• A) Pay-for-performance program
• (managers)
• 
  
• B) Gain Share program
• (hourly)

5
Key Result Areas

• A key result area is a business activity that
  significantly affects the bottom line
• May or may not appear on your Profit Loss or
  Balance Sheet statements.
• Examples
• 1. inventory turnover
• 2. labor productivity
• 3. cost of quality

6
Measurements

• Measurements must be identified for the key
  result areas
• key result areas are those things which have a
  significant impact on the bottom line
• Once the key result areas are identified, how do
  we measure the efficiency and effectiveness of
  how well we are managing them?
• Once the measurements are identified, goals must
  be set for those measurements

7
Utilizing Measurements to Manage

• Many businesses do not utilize enough
  measurements to manage effectively
• All Fortune 500 companies extensively utilize
  measurements to manage
• Difficult to manage effectively without extensive
  use of measurements
• Most key operational measurements are not on
  monthly financial reports

8
Goals

• Goals must be objective, quantifiable and
  measurable
• Goals they must be mutually set (not a blue sky
  want)
• Achievement of goals is the primary method to
  evaluate an employees performance
• Goals are the foundation to achieve
  accountability for results
• Without accountability,
• profitability is sub-optimized

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Goals

• Examples of bad goals
• 1. reduce returns for bad quality
• 2. secure more sales
• 3. improve on time shipments
• Examples of good goals
• 1. reduce returns for bad quality
• from 2.0 of sales to 1.0
• 2. increase sales dollars by 10
• 3. improve on time shipments from
• 90 to 95

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Goals

• Not all goals are equally as important
• Goals must be weighted and differentiated
• Goals can be approximately 80 objective and
• 20 subjective
• 3. Achievement of goals should be utilized for
  
• - performance appraisals
• - bonus gain sharing plans
• - wage/salary increases
• - promotions

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Weighted Goals for a Sales Mgr

• 
  Potential Actual
• in 000s
  Points Points
• 1. Achieve sales of 1,700 20 pts
• 2. Achieve gross profit of 625 40 pts
• 3. Achieve new business of 135 20 pts
• 4. Achieve close rate of 50 10 pts
• 5. Achieve 20 prospecting
• contacts 10 appts. Per week 10 pts
• Total
  100 pts

12
Performance Appraisals

• Performance appraisals are the principal tool to
  establish accountability
• Cannot have effective appraisals without
  comparison to goals
• Accomplishment of goals is the primary evaluation
  tool

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Tying Salary Increases to
Achievement of Goals

• Not all performance appraisals need to be tied to
  a salary increase. E.G.
• All salary increases must be tied to performance
  appraisals
• Differentiate increases tied to performance
• Good performance equals achievement of goals
• Goal driven performance appraisals are critical
  to achieving a high level of accountability!

14
Pay for Performance Plans

• There should be two different type of bonus plans
  
• Managers/supervisors should be paid based on a
  combination of company profit results and
  individual performance
• Hourly employees should be on a gain sharing
  program, based upon those elements they can
  control, e.g., production, quality, on time
  delivery, past due receivables, etc.

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Management Pay-for Performance Plan

• Program is based upon the individuals job
  performance against goals and the company
  achieving/exceeding predetermined profit levels.
• If the company does not achieve its predetermined
  profit targets, there are no bonus payments even
  if some management employees achieve their goals
• Management bonuses are paid from additional
  profits generated by good performance

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Ineffective Bonuses Plans

• An incentive plan is not a substitute for good
  management (cannot put it on auto pilot)
• Most bonus plans tend to be gifts. Worse yet,
  over time they become entitlements!
• These type of bonuses do not stimulate
  improvements in performance and profitability

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Management Pay-For-Performance Program

• A pay for performance plan is an incentive based
  plan to provide a stimulus to improve the bottom
  line.
• If the bottom line does not achieve its targeted
  profit improvement, managers are not performing
  well and accomplishing their goals
• Bonuses must be earned

18
Creating Potential Bonus Pool

• Position Pay Pool
  Potential
• 
  Bonus
• Sales Mgr. 53.9 29.7 5,940
• Accountant 33.0 18.2 3,540
• Office Mgr. 44.6 24.6 4,920
• Controller 50.0 27.5 5,500
• Total 181.5 100.0 19,900
• Total potential bonus pool
• generated from additional
• profits

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Appling Performance Appraisal Ratings

• Potential X Points Bonus
• Bonus Perf. Appraise.
• 5,940 90 pts
  5,346
• 3,540 100 pts
  3,540
• 4,920 85 pts
  4,182
• 5,500 80 pts
  4,400

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Management Pay-For-Performance Program

• You should shed Christmas bonuses, profit sharing
  programs and interim bonuses for salaried
  employees and replace them with a pay-for
  performance program.
• A pay-for-performance program will improve the
  performance of managers and improve your bottom
  line

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Gain Sharing Program

• Designed for hourly employees
• Based upon achieving the goals of the entire
  group, e.g. operational employees
• Hourly support employees should be included

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Program Objectives

• Program rewards employees for executing those job
  responsibilities they can control
• - productivity - quality
• - safety - waste
• - past dues - returns
• Incentives for work they normally do will produce
  better results

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Generating Incentive Payments

• Exceeding the objective, quantifiable goals of
  the job will generate cost savings
• The savings should be split with the employees
  along the lines of 1/3 to employees, 2/3 to the
  company or 50/50
• Savings should be calculated on current month
  results or total project results
• Gain sharing bonuses are free!!!

24
Flash Reports

• Flash reports compare actual key operating
  results versus a standard, e.g. a budgeted result
  or a goal, for key result areas
• Examples of key result areas can be
• New business development
• Labor productivity
• Quality costs
• Labor cost per unit
• Material price discounts
• ROI
• Cash flow
• Inventory turnover
• Number of days receivables outstanding

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Flash Reports

• Most businesses do not utilize flash reports
• Tend to rely on monthly PL statements
• Businesses without extensive use of flash reports
  have sub-optimized profitability
• Finding out after the fact doesnt help. Must
  monitor key result areas as they occur

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Business Unit Segmentation

• Business unit segmentation means developing
  several PL statements for the key segments of
  your business. Examples business segments
• 1. A product line or group of
  products/services
• 2. Products and Service
• 3. Retail and Commercial
• 4. Direct and on line
• Every business has winners and losers.
  The problem is that most small businesses lump
  sales and cost of sales together and do not
  identify gross profit or gross margin by product
  line or service

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Business Unit Segmentation

• ( in 000s) Seg A Seg B Seg C
  Total
• Sales 1,000 700
  500 2,200
• COGS 800 560
  450 1,810
• Gross Profit 200 140
  50 390
• G.P. 20 20
  10 18
• Overhead (a) 177 124
  99 400
• Operating Profit 23 16
  (49) ( 10)
• (a) Allocated on COGs (specific activities
  related
• to each segment should be assigned and
  not
• allocated)

28
Branded Versus Private Labeling

• Potential Pricing and Cost Per
  Unit
  
• 
  Private
  
  Brand Label Comments
• Sales 300
  240 lower price
• COGS
• Materal/Labor 130
  130 same product costs
• Warehousing 10
  0 paid by customer
• Outbound Transport 15
  0 paid by customer
• Warranty 20
  0 provided by customer
• Total COGS 175
  130
• Variable Margin 41.7
  45.8 better variable margin
• Marketing 10
  0 no mktg. costs
• Sales 15
  0 no selling costs
• Other Overhead 50
  50 based on equal volume
• Total Period Costs 75
  50
• EBIT 50
  60

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Fully Burdened Labor Costs

• Businesses uniformly under state their direct
  labor cost per hour
• The two principally reasons
• Payroll related employer funded taxes and
  benefits
• Basing costs on hours paid, not hours worked

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Employer funded payroll costs

• Employee John Doe
• Gross Pay
  22,700
• FUTA
  56
• Medicare
  329
• FICA
  1,407
• SUTA
  320
• 401k
  377
• Medical
  1,404
• Total Fully Burdened Cost 25,190
• Percent difference 11

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Paid vs. Worked Hours

• Employee John Doe
• Paid Hours 2,080 (no O.T.)
• Holidays (9 x 8hrs) (72)
• Sick Days (5 x 8hrs) (40)
• Vacation (10 x 8 hrs) (80)
• Worked hours 1,888
• Percent difference 10

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Traditional Vs. Actual Cost/Hr

• Traditional Employee cost per hour
• Gross Pay 22,700
• Paid hours 2,080
• Cost/hr. 10.91
• Actual Employee cost per hour
• Fully burdened pay 25,190
• Worked hours 1,888
• Cost/hr. 13.34
• Percent cost difference 22!!!

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True Profitability of Long Runs Vs. Short Runs

• 
  Long Run Short Run
• SELLING PRICE 12.86/M
  14.14/M
• MATERIALS 5.00/M
  5.00/M
• LABOR 2.00/M
  2.00/M
• MFG. OVERHEAD 2.00/M
  2.00/M
• SET UP COSTS O
  .90/M
• TOTAL COSTS 9.00/M
  9.90/M
• MARGIN _at_ 30 3.86/M
  4.24/M
• QUANTITY 1.0 MILLION
  1.0 MILLION
• RUN TIME 27.8 HRS
  27.8 HRS
• SET UP TIME 0
  9.0 HRS
• TOTAL TIME 27.8 HRS
  36.8 HRS
• SALES DOLLARS 12,860
  14,140
• MARGIN DOLLARS 3,860
  4,240

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True Profitability of Long Runs Vs. Short Runs

• Many Mfg. businesses quote for short run, custom
  products
• They usually have higher selling prices and
  margin dollars per unit of measure
• comparable margin percents
• Feel they make more profit on short runs
• Conclusion
• Short run business can be less profitable
• Not recovering lost margin on materials during
  set up times!

35
New Business Development

• Define marketing as impersonal contact, ,
• 1. brochures, web sites, flyers, e-
• mail, business cards
• Define sales as person to person contact
• 1. phone conversation
• 2. face-to-face
• Define service as interface with
  clients/prospects to help/respond to them

36
Point of Brilliance

• All businesses must identify their point of
  brilliance
• point of brilliance means what is your
  competitive edge
• Competitive Edge means what do you do best and
  better than your competition?
• It doesnt have to be high tech or a patent, it
  can be something as simple, yet important as
  home town advantage

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Leveraging Your Point of Brilliance

• You must market and actively sell your point of
  brilliance
• It is the principle reason why a customer will
  change their current supplier or do business with
  you
• Without a Point of Brilliance, you are
  basically selling a commodity service, a me too
• 1. If you are selling a commodity i.e., a
  me too, you better be the low cost provider to
  be able to offer the best pricing

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Non-Traditional Marketing Programs

• Word of mouth
• 1. Least expensive very effective
• 
  
  
• 
  
• 2. Customers to proactively
• recommend you, satisfying them
• isnt enough!
• 3. You must
• A) exceed their expectations
• B) stay in touch afterward
• C) offer financial incentives

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Non-Traditional Marketing Programs

• Staying in touch
• - Follow up phone calls
• - Christmas cards or e-mails
• - Birthday cards or e-mails
• - Stopping by when in the
• neighborhood (e.g. Realtors,
• sub-contractors, etc)
• - Sharing news/market info by e-
• mail and videos

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Non-Traditional Marketing

• Networking
• 1. Chamber of Commerce
• 2. Trade Associations
• 3. Trade Shows (including
• industries that can generate
• leads for you
• 4. Social networking
• A) Linkedin

41
Action Plans

• The lack of written action plans is rampant in
  businesses
• Without them
• responsibility for actions is ill defined
• Due dates are not established
• Little or nothing gets done

42
Action Plans

• description of what will be done and what results
  will be accomplished
• 2. Identify who is principally responsible for
  the outcomes
• Identify when the outcomes (results) will occur
• Progress must be reviewed regularly in order to
  assure timely completion

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Conclusions

• Dont wait to start implementing some of these
  good practices
• Provide leadership for change
• Improved profitability is a win/win for everyone

44

• Management During an Economic Crisis is the bible
  for businesses that are struggling to improve
  their bottom lines. To buy your copy, go to
  productivepublications.com
  
• 
  
• Best Practices for
• Business Survival
•  
• By Robert Papes
•  
• Best practices which are vital to every small
  business to help them survive because "hope" is
  not a viable strategy. This book is all meat and
  potatoes with no filler. Softcover, 169 pages,
  29.95
•