ima conference accounting/business practices to improve profitability robert papes...
TRANSCRIPT
Effectively Managing in a Soft EconomyIn a soft economy, managing effectively is
critical
1. New business development2. Controlling costs3. Improving productivity4. Raising the performance of the organization5. Holding people accountable for results6. Providing incentives effectively 7. Utilizing key flash reports of critical
measurements8. Effective action plans
Human Resource Management
• Most effective way to improve the bottom line is through a high performance organization
• People are an organization’s most important asset.
• The number one issue in under performing organizations is the lack of accountability for results
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)
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
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
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
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
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%
Goals
• Not all goals are equally as important
1. Goals must be weighted and differentiated
2. 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
Weighted Goals for a Sales Mgr
Potential Actual $ in 000’s Points Points1. 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 ptsTotal 100 pts
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
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!
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.
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
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
• 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
Management Pay-For-Performance Program
Creating Potential Bonus Pool
Position Pay % Pool Potential Bonus $Sales Mgr. $53.9 29.7% $5,940Accountant $33.0 18.2% $3,540Office Mgr. $44.6 24.6% $4,920Controller $50.0 27.5% $5,500Total $181.5 100.0% $19,900Total potential bonus pool generated from additional profits
Appling Performance Appraisal Ratings
• Potential X Points = Bonus$ 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
• 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
Management Pay-For-Performance Program
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
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
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!!!
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:1. New business development2. Labor productivity 3. Quality costs4. Labor cost per unit5. Material price discounts 6. ROI7. Cash flow8. Inventory turnover9. Number of days receivables outstanding
Flash Reports• Most businesses do not utilize flash reports
• Tend to rely on monthly P&L statements
• Businesses without extensive use of flash reports have sub-optimized profitability
• Finding out after the fact doesn’t help. Must monitor key result areas as they occur
Business Unit Segmentation
• Business unit segmentation means developing several P&L 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
Business Unit Segmentation
• ($ in 000’s) 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)
Branded Versus Private Labeling
Potential Pricing and Cost Per Unit
Private Brand Label Comments
Sales $300 $240 lower priceCOGS: Materal/Labor $130 $130 same product costs Warehousing $ 10 $ 0 paid by customer Outbound Transport $ 15 $ 0 paid by customerWarranty $ 20 $ 0 provided by customerTotal COGS $175 $130Variable Margin % 41.7% 45.8% better variable margin
Marketing $ 10 $ 0 no mktg. costsSales $ 15 $ 0 no selling costsOther Overhead $ 50 $ 50 based on equal volumeTotal Period Costs $ 75 $ 50EBIT $ 50 $ 60
Fully Burdened Labor Costs
• Businesses uniformly under state their direct labor cost per hour
• The two principally reasons:1.Payroll related employer funded taxes
and benefits2.Basing costs on hours paid, not hours
worked
Employer funded payroll costs
• Employee: John Doe
Gross Pay $22,700FUTA 56Medicare 329FICA 1,407SUTA 320401k 377Medical 1,404Total Fully Burdened Cost $25,190
Percent difference 11%
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%
Traditional Vs. Actual Cost/Hr• Traditional Employee cost per hour
1. Gross Pay $22,700 2. Paid hours 2,0803. Cost/hr. = $10.91
• Actual Employee cost per hour
1. Fully burdened pay $25,1902. Worked hours 1,8883. Cost/hr. = $13.34
• Percent cost difference 22%!!!
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 @ 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
• MARGIN $ PER MACHINE HOUR $139 $115
True Profitability of Long Runs Vs. Short Runs
• Many Mfg. businesses quote for short run, custom products:
1.They usually have higher selling prices and margin dollars per unit of measure
2.comparable margin percents3.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!
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
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 doesn’t have to be high tech or a patent, it can be something as simple, yet important as “home town advantage
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
Non-Traditional Marketing Programs
• Word of mouth: 1. Least expensive & very effective
2. Customers to proactively recommend you, satisfying them isn’t enough!
3. You must: A) exceed their expectations B) stay in touch afterward C) offer financial incentives
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
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
Action Plans
• The lack of written action plans is rampant in businesses
• Without them:1.responsibility for actions is ill defined2.Due dates are not established 3.Little or nothing gets done
Action Plans
1. description of what will be done and what results will be accomplished
2. Identify who is principally responsible for the outcomes
3. Identify when the outcomes (results) will occur
4. Progress must be reviewed regularly in order to assure timely completion
Conclusions
• Don’t wait to start implementing some of these good practices
• Provide leadership for change
• Improved profitability is a win/win for everyone
• 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
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