Author: Steven Martin

Reconcile Now or Pay $600,000

A local law office recently reported that they lost well over $600,000 to embezzlement by their bookkeeper over a 5 year period. The perpetrator was caught, convicted and sentenced to jail for up to 4 years and to pay restitution of $400 per month for 16 years ($76,800).

There are two primary reasons for reconciling your bank accounts every time a statement comes out.

  1. The reconciliation allows you to maintain the accuracy of your accounting records and those of the bank. The sooner an error is caught, the easier it is to correct.
  2. A bank reconciliation is an opportunity to detect fraud and theft.

Either of these reasons should be adequate so don’t let reconciliations fall through the cracks. Small businesses with small accounting departments are especially vulnerable to fraud and theft so it is wise to use this powerful and inexpensive tool. Oh yes, it is absolutely necessary that someone you trust do the reconciliations.

If your business has been subject to loss by theft at some level from office supplies to money, you are probably the only one in the world. Think about it. The theft of time happens every single day.

Seven Symptoms of Costly Chaos

The president sat in his high backed chair behind a desk piled high with files and a credenza spilling off onto the floor. “Steve,” he said, “I just don’t understand why we are not making money. Cash is running out the door. What can we do?” The phone rang and he yelled at the person on the other end for about two minutes before abruptly hanging up. He then told me that he was about to fire the caller because even after 10 years they just could not get the orders right. “He’s my problem, him and the other fools that I have hired.”

I asked the president what system they were using to track orders. He showed me a computer program that was functionally obsolete. It did not track order details from inception to completion. It failed to communicate the critical information needed by the dozens of people involved in the process. They were supposed to “know what to do” from past practice. It did not integrate with the accounting system or the inventory system.

When asked why he had not upgraded to an integrated system he said that it cost too much money and would be a distraction to implement. Couldn’t I see that they were too busy? His people did not need systems and training; they needed to pay attention to the details and do their jobs.

Here are seven of the symptoms of chaos that indicate you might be paying too little for your systems, management, training and other methods of chaos reduction:

1) Piles of papers where they don’t belong
2) Quality problems
3) Disorder in the office and in the plant
4) Surplus materials accumulating
5) A frequent need for troubleshooting and problem solving
6) Safety problems and/or accidents
7) You do not have an effective continuous improvement process

A continuous improvement process like the Profit Improvement Process engages the entire team in making order out of chaos and putting cash back into the company where it belongs.

PS: I left this president in his office when he started yelling out the door at another incompetent employee about another mistake. He seems content to be paying the price of chaos. I estimate they’ll last another year at this pace. Then chaos will win.

Don’t let chaos beat you.

The Ultimate Dashboard Metric

Velocity is the ultimate dashboard metric. The velocity at which your business resources generate free cash flow is the ultimate determination of success.

The realities are simple. If cash flows out faster than in, you must find working capital to replace it. When you can no longer replace it, the business is finished. If cash flows in at a higher velocity than out, you have the opportunity to sustain or grow.

If you measure nothing else, measure and forecast your cash flow. To the extent that you can determine the cash contribution margin of every significant current and planned activity of your business, you have the opportunity to manage your business.

Leading businesses use this information to either fix, fire or exploit their product lines and services for maximum near- and long-term value.

One of my clients doubled their profits within 6 months by using this simple dashboard metric. This set the stage for a doubling in top line revenues over a period of just 48 months.

Too Much of a Good Thing

Stock Keeping Unit (SKU) proliferation is a tempting thing. It can be hard to argue against the logic of adding another product or service type to your catalogue to increase sales.

The problem is that every SKU carries real costs with it. In an article published in the Journal of Operations Management “Too much of a good thing: The impact of product variety on operations and sales performance” Xiang Wan and his colleagues examine the sales and operational performance of a major US soft drink bottler that distributed 328 SKUs from a network of 108 distribution centers where the range of SKUs ran between eight and 114. They determined that the optimal number of SKUs was 84. Below 84 there was opportunity to better serve customer niches and above that the cost of lower operational performance exceeded any benefits.

Cost per SKU should take into account factors including the following:

  • Capital for production
  • Capital for  inventory
  • Productivity losses due to changeovers
  • Labeling and cataloging
  • Storage
  • Obsolescence and damage losses
  • Picking
  • Shipping
  • Reduction in inventory turns
  • Increased forecasting problems
  • Cost of stock-out
  • Clogged supply chain
  • Added complexity
  • Customer confusion

The bottom line is to apply the Pareto Principle wisely when tempted to add SKU’s. You just might find that you have too much of a “good thing” and that less is more. I have personally worked with clients who have put hundreds of thousands of dollars back into cash and increased profitable sales significantly just by eliminating 10-20% of their SKU’s.

People Expense or Asset?

The mantra of Profit Improvement is: “You cannot cut your way to long term success.” Reference: Achieving World-Class Profit Improvement.

You must engage and empower your people to have any chance of success. Engage them with leadership and empower them with training.

Do you look at your payroll and think “expense” or “asset?”

When the pressure is on to increase profits it can be very challenging to answer this question properly. The right answers can be vital to success or, in some cases, survival.

The reality is that people cost money but without their productive efforts most businesses will fail. You have two questions you can ask when you look at payroll:

  1. How can I cut payroll costs?  This is the “expense” question that infers that payroll is a burden.
  2. How can I increase revenues and profit from my existing payroll?  This is the “asset” question that infers that payroll is a source of revenues.

Best practices asks both of these questions but asks #2 first. It is incumbent upon management to maximize the revenue generating capability of their staff before resorting to cutting head count.

The mantra of Profit Improvement is: “You cannot cut your way to long term success.”  Reference: Achieving World-Class Profit Improvement.

You must engage and empower your people to have any chance of success. Engage them with leadership and empower them with training.

What’s it worth?  It’s worth everything.

Save Money on Fees

The other questions to ask your financial people and your bankers are what hidden fees are you paying and what hidden costs are you incurring. These show up in the form of minimum account balances, accounts that don’t earn interest and quite often in lower than market interest rates earned.

How much are you spending on bank fees?  It could easily be hundreds to thousands of dollars annually. Even if you think it is zero how much do you think you are paying in hidden fees?

This can be a tough one to answer so you might want to pass this one on to your company bookkeeper or controller.

We all know about the usual highly visible fees such as those associated with minimum deposits, check processing fees, account maintenance fees, returned check fees and on and on. What you may not be aware of, however, is the fact that banks are continuously adding new fees to try to bolster their profits. The easiest approach might be to have someone sit down with representatives from your banks and ask them to explain what fees you have paid in the last 6 to 12 months and how to reduce them.

The other questions to ask your financial people and your bankers are what hidden fees are you paying and what hidden costs are you incurring. These show up in the form of minimum account balances, accounts that don’t earn interest and quite often in lower than market interest rates earned.

Reconcile Now or Lose Big

Small businesses with small accounting departments are especially vulnerable to fraud and theft so it is wise to use this powerful and inexpensive tool. Oh yes, it is absolutely necessary that someone you trust do the reconciliations.

A local law office reported that they lost well over $600,000 to embezzlement by their bookkeeper over a 5 year period. The perpetrator was caught, convicted and sentenced to jail for up to 4 years and to pay restitution of $400 per month for 16 years ($76,800).

Once you look for them, you will see that the news feeds are filled with similar stories of embezzlement and the miss-use of funds.

There are two primary reasons for reconciling your bank accounts every time a statement comes out.

  1. The reconciliation allows you to maintain the accuracy of your accounting records and those of the bank. The sooner an error is caught, the easier it is to correct.
  2. A bank reconciliation is an opportunity to detect fraud and theft.

Either of these reasons should be adequate so don’t let reconciliations fall through the cracks. Small businesses with small accounting departments are especially vulnerable to fraud and theft so it is wise to use this powerful and inexpensive tool. Oh yes, it is absolutely necessary that someone you trust do the reconciliations.

 

Zero Base Budget for Better Profits

Increase your profits with new planning. Zero-based budgeting, that is building your budget from the bottom up based on the demand drivers of your business is a gold standard for planning. If you aren’t doing it maybe it’s time to start with a single department.

You perpetuate problems when you start your budget from what you did the last period.

Zero-base. When is the last time you zero-base budgeted your entire company?  How about a single department?

Zero-based budgeting, that is building your budget from the bottom up based on the demand drivers of your business is a gold standard for planning. If you aren’t doing it maybe it’s time to start with a single department.

I raise this issue now because many of you should be thinking about the quarterly or annual planning cycle and this is none too soon to think about improving it.

The opportunity is to rethink your entire business (or department) from the ground up in the context of the forecast conditions. You are hopefully smarter, faster; more capable than you were the last time you planned so you can build those efficiencies into the new plan and reap the rewards on the bottom line. Yes, you have to trust that top management (maybe that’s you) will back you up and support you when you take risks.

The easiest thing to do is to stick with the status quo and just add inflation onto last year’s budget. The quickest way to budget yourself out of business and your competition in is to do just that.

Accounts Receivable as a Loss

Two companies I worked with, for example, were able to take steps to recapture $150,000 and $900,000 per year respectively by being more aggressive with accounts receivable, more selective with credit limits and by monitoring and managing cash as a “business” within the business.

How much money are you losing by giving interest free loans to your customers – $150,000 to $900,000 per year?  This is a valid target for cost reduction and profit improvement.

Take a quick look at the accounts receivable line on your balance sheet. What is that amount?  Now look at the line item(s) on your financial reports that capture your interest payments. Do the math to calculate what your borrowing costs are to carry the amount you are loaning to your customers.

Two companies I worked with, for example, were able to take steps to recapture $150,000 and $900,000 per year respectively by being more aggressive with accounts receivable, more selective with credit limits and by monitoring and managing cash as a “business” within the business.

Stop the Losses

Stopping losses is often as important as finding improvements – especially in a worsening business climate such. Your sales and credit departments are going to come into conflict over this matter so it is going to take strong management leadership to make the right decisions.

Stopping losses is often as important as finding improvements – especially in a worsening business climate such. Your sales and credit departments are going to come into conflict over this matter so it is going to take strong management leadership to make the right decisions. The names have been changed in the following story but the essence is true. A client told me:

“We’d been doing business with Samssco for about 15 years and they were an important customer to us. We held their hands and were patient with them over the years when they were late making payments off and on over the years. I’d call Sam, he’d tell me what was going on and we’d ship him more product and wait. He’d always pay us. We got a really large order from Samssco – almost twice the normal size but they were already late on the last payment. I called Sam but he wasn’t available. That worried me so I asked our shipping department not to ship. I called Sam again and had to leave a message. Two weeks later I learned that Samssco had filed for bankruptcy. I was devastated. I thought Sam was a friend. We lost over $25,000 but if I had let the last shipment go it would have been over $75,000 and we would have been in trouble along with Sam.”

Revenue may be nice but sales that are written off are far more than lost revenue when they eat the profits from other sales! Make sure you understand the credit health of your customers at all times and don’t rely on sales people to make the credit judgments that you need a financial professional to make. You’ll save yourself a lot of tension and morale in the sales force and probably a lot of money in the long run. How large is your reserve for such losses? In what ways could you reduce it?

Here are six warning signs that may indicate credit trouble ahead before a meaningful change shows up in their credit rating – which you should be monitoring in any case.

Credit Warning Signs

1. Delays in payments. This is an obvious sign and your accounts receivable system should be set up to monitor and report on this on a continuous basis. Make sure you have a team of managers who are in the loop so they can see this and any of these other warning signs and take action quickly.

2. Changes in ordering patterns. The first sign may be a slowing in order volume. This is usually an indication that your customer is experiencing a slowdown in their business. The last sign may be a surprise order of a much larger size than usual. This could indicate that your customer is trying to stock up in advance of getting cut off.

3. Communication problems. You or your staff may have more trouble than usual getting through to your contacts at the company that owes you money. This is especially worrisome when the usual channels of communication for following up on open invoices suddenly slow down.

4. Pressuring the sales force. Your sales force might start getting pressured to make sales in spite of existing credit limits. This is the time to advise your sales team to keep their eyes and ears open for any signs of trouble at the customer or changes in the market.

5. The business sector is in trouble. Know which sectors your customers service directly and indirectly. Remember that that business slow-downs trickle down.

6. The grape vine is humming. Keep your ears open for those tidbits of information that are known to make their way through the industry. Ask all of your people who are in the field or talk to people in the industry to pass on information for the good of the company. Use any “casual” information legally and responsibly and only with appropriate verification.

Manage your credit risk deliberately

It is very costly to write off bad debt because you not only lose the profit on the original sales (if derived from sales) but you also have to make additional sales to cover the cost of sales just to break even.

Profit Improvement

Bad debt is a profit killer. A good profit improvement process invariably includes measures to reduce losses. Don’t give your profits away.