Author Archive | Daniel E

Marketing Fraud

See also:
Intangible Assets: Protecting Your Brand and Reputation
The Red Flags of Fraud
Dealing with Employee Fraud
Marketing Plan
7 Warning Signs of Fraud
Marketing Mix
Protect Yourself: A Guide to Non-Compete Agreements
Does Your Business Need A Financial Audit?
Becoming a Smart CEO

Marketing Fraud Definition

The marketing fraud definition is the false promotion of a product or service and/or the making of false claims. Some of the most common forms of marketing fraud is selling authentic versions of a product for it to only be an imitation or knock-off brand. This issue of false advertising led to the famous expression, “if it’s too good to be true, it probably is.”

Mass Marketing Fraud Explanation

There’s a significant difference between marketing fraud and mass marketing fraud. The US Department of Justice defines mass marketing fraud as “any fraud scheme that uses one or more mass-communication methods – such as the Internet, telephones, the mail, or in-person meetings – to fraudulently solicit or transact with numerous prospective victims or to transfer fraud proceeds to financial institutions or others connected with the scheme.” Marketing fraud can occur anywhere as it doesn’t need to reach a massive amount of people for people to fall for it. But mass marketing fraud is typically hosted on a web-based platform (email, telemarketing, internet, etc.).

Examples of Marketing Fraud

Some examples of marketing fraud include exaggerating claims, false advertising, and misrepresenting the product. Although it is sometimes difficult to see your own company’s marketing fraud,  it is easy to identify other company’s participating in this fraud. Ever seen a commercial for the next supplement that will magically loose weight? If you pay attention to what they are saying, then you may find that they do not mention medication, prescription, FDA, etc. All you hear is about the results, the method, and how taking it will give you six pack abs.

How to Prevent Fraud in Your Marketing

When a company deals with marketing fraud, there are a myriad of issues that stem from it. Some of those consequences include bad reviews, customer backlash, lawsuits, and even prison time depending on the severity of marketing fraud. Needless to say, your company needs to have processes in place to prevent fraud in your marketing because it can have financial repercussions. As the financial leader in your company, you need to know know what marketing fraud looks like and how to flag it if it’s happening in your company.

Know What Marketing Fraud Looks Like

Before you can prevent fraud in your company, you need to know what marketing fraud looks like. It can come in the form of overnight engagement sensation on social media, significant boosts in traffic or followers, and emails made to look like they are coming from someone else. For example, a company that uses social media heavily got 20,000 more followers in a day. That company also saw a 400% increase in comments (and those comments all raved about the product being sold). Although some companies may naturally experience this, you may want to look at the quality of followers you have and if they are even real. Unfortunately, some marketers manipulate the analytics to please the financial leader. But that is fraud.

Flag That Company

If your company is dealing with marketing fraud, then it is destroying the value of your company. But you do not have to continue in old habits anymore and can remove those “destroyers” of value in your organization. Download your free Top 10 Destroyers of Value guide to avoid letting the destroyers take value away from you.

Marketing Fraud definition

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Culture Drives Financial Results

culture drives financial results

As social media and search engines become more intelligent and prevalent, companies are battling the image that others outside the organization see as well as what employees feel. Entrepreneur Magazine even said that, “Company culture is more important than ever. It’s not that company culture was ever unimportant, but it’s quickly proving to be a “must-have” rather than a “nice-to-have.”” Have you ever worked in a company that had a bad culture? I have. I counted down the minutes until I could leave the office. Work for me was not enjoyable. As the financial leader of the company, I was not focused on driving financial results. Simply put, culture drives financial results.

Culture starts with your team. Before you add anyone else into your organization, click here to access your free 5 Guiding Principles for Recruiting a Star-Quality Team.

How Company Culture Drives Financial Results

Before we get into how company culture drives financial results, what is culture? Investopedia defines culture as “the beliefs and behaviors that determine how a company’s employees and management interact and handle outside business transactions.” In other words, you cannot say and it be with culture. Culture is organically developed over months or years. It depends on how is in the organization and how the organization acts as a whole through trials and successes.

Culture is also often created by the corporate governance and leadership of the organization. The tone starts at the top. Cultural changes happen also, especially when there is a change in ownership. A change in ownership can bring a change in governance, personalities, processes, and even language. Depending on the complexity of business, it may take from one year to three years to really complete an integration of an acquisition. The leadership of the organization must know what is going on in the culture of the organization as this has a direct effect on the bottom line.

Increased Performance

If employees are happy in an organization, then they will have increased performance. Some of the causes of increased performance stems from increased flexibility, professional development, and knowing that they are making their mark on the world.

Millennials are the largest generational cohort in the workforce in today’s world. As a result, they are spreading their desires in the workplace to other generations. For example, they value flexibility – the ability to work remotely, to have a standing desk, to work in a co-working space, to have odd-hours instead of the 9-5.

Additionally, they want to be further trained and develop. I once had an employee who told me that they didn’t care about the money if they were able to get professional development. At first, I was hesitant to provide that extra training because they were just going to leave me for more money after I had invested. But that employee didn’t leave. In fact, that employee was the most loyal in my organization.

Millennials are a funny generation! They definitely think outside the box and often bring ideas that the “traditional” worker would have not thought about. A good leader needs to know what drives his employees. What I have learned is that they want to know they are making a difference in people’s lives. They want to know that they are doing more good than harm. This could be supporting the homeless community or sponsoring an orphan. Or it could be storytelling how the organization’s efforts changed a customer’s life. It’s a simply thought, but when you expand work outside of the four walls of your office, those employees have more purpose and passion about their work. Thus, increasing their performance.

culture drives financial results

Increased Productivity

Additionally, you can also expect increased productivity from good company cultures. Think about Google and their office environment. With ping pong tables, napping pods, and playful environments, employees are told that they can have fun. Many times, entrepreneurs and executives think that working hard 8-12 hours a day will result in incredible results. But the employees feel like they can’t relax. There’s increased stress, decreased productivity, and eventually high turnover.

Increased Retention

Staffing, recruiting, hiring, and talent acquisition is both costly and time consuming. When you factor in the time to review resumes, interview, hire, train, onboard, then pay and provide benefits, that individual is an expensive asset on your financial statements. A good company culture will keep and retain those talented assets.

Looking to add more people to your team? Before you start recruiting, download our free 5 Guiding Principles for Recruiting a Star-Quality Team.

Examples of Company Culture Driving Financial Results

One of our team members once helped transition a company through a merger. All hands were on deck. There was no room for mistakes. And every client of theirs seemed angry. The product was great. Clients had great success from implementing the products. But it was clear there was something severely wrong! Employees were either fired or they quit. Within several months after the merger was official, the company was in financial distress. What we found that it wasn’t pricing or the product… Instead, it was the company culture! A good culture has gone bad.

Another example comes from a study that focused on the financial results of companies with and without performance-enhancing cultures. Needless to say, there is a strong correlation between company culture and growth. In the book Corporate Culture and Performance, John Kotter argues “that strong corporate cultures that facilitate adaptation to a changing world are associated with strong financial results.” When we talk about company culture driving financial results, it’s impacts more than just profit – but the shareholders, employees, and economy.

It’s Start With Who You Hire

Zappos has been known for its culture and prides itself in attributing its success to its corporate culture. What they have realized is that it starts with who you hire. Instead of looking at a resume for credentials, the recruiters essentially court them in a relationship. Similarly, we frequently say to our clients that if you can’t have lunch with a potential hire, do not hire them. When you take an employee out of an office and into the real world, you see how they really perform. Are they rude to the waiter? Or are they patient and kind? Do they hold the door open for people or let it fall in their faces?

For example, the CFO position should have discretion, responsibility, and confidence. If they show up to the wrong coffee shop for a meeting due to assumptions or carelessness or if they are indecisive in choosing a meal, then you need to assess whether they are capable for the position of CFO.

Personality Over Credentials

We once had a client that emphasized that trust was by far the most important quality for their CFO to have. It didn’t matter if they had X, Y, and Z qualifications. In fact, the CEO would rather hire someone who maybe wasn’t as qualified but he could trust over someone who was both qualified and untrustworthy. Especially when considering those high level positions, chose personality over credentials. Obviously, we are not saying to hire someone that cannot do their job. But if you had to decide between two candidates with similar credentials, chose the one that will fit your culture the best.

Be Slow to Hire & Quick to Fire

Bad employees can be a huge drain on resources and can potentially cause more damage than anticipated. That’s why the best corporate cultures are slow to hire and quick to fire. Those entities are protecting their most valuable intangible assets. In order to determine which candidates are the right fit for your company, download and access your free 5 Guiding Principles For Recruiting a Star-Quality Team whitepaper.

culture drives financial results

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Increasing Pricing on Products

increasing pricing on productsRecently, Netflix – streaming service giant – increased their pricing on two of their products by more than 10%. At first, media and customers displayed anger and backlash. But after the pricing increase, many customers remained at the increase was approximately a $1 difference. Plus, you have to factor in that many people are “cutting the cord” from traditional cable companies and converting to streaming services, like Netflix, Hulu, and Amazon Prime, for their entertainment. Netflix isn’t the first company, nor the last, to increase their pricing on products or services. But how to you manage to increase pricing without losing customers?

Increasing Pricing on Products

Increasing pricing on products is a result of various things – such as increased costs, additional services, improved quality, etc. When a company decides to hike their prices, we found that it stemmed from either two things: costs increased or they had their economics wrong in the first place. The other big one is taxes.  Taxes actually increase prices.  Companies that have their act together and run a streamlined operations will capture even taxes in their costs, even it is “below the line”.   Be assured when taxes go up, so do prices to the end user.  One of our goals when we work with clients to be more profitable is to look at their prices. Will increasing the price retain more customers or drive them away? Will there be more value added to compensate for the increased prices? When do you increase prices and how?

When to Increase Prices

Timing is everything when you want to increase prices! If you time it wrong, then customers will be annoyed that they didn’t get the special or backlash because their monthly payment just increased a certain percentage. Netflix timed their pricing really well. Because they were releasing a new season of House of Cards, Stranger Things, and The Crown (all of which have been award winning and original content) within the next month or two, Netflix was able to communicate added value. For that extra $1, you will get more seasons of your favorite shows.

But what if you aren’t a streaming service? For example, you may be a Tax CPA firm. If you needed to increase prices for your services, then the wrong time would be in the middle of the tax season. Find those gaps between the rush of customers and communicate the value – even if you aren’t necessarily adding anything new. Be sensitive to price increases and avoid the “shock” factor.

How to Increase Prices Effectively

When you have figured out the timing of when to increase prices, you have to answer the question, “how to do it?”. As a financial leader, this is where you cross lanes from the accounting department into the operations, sales, and marketing departments. You know the economics of your company, but if the salespersons cannot sell the product/service at that price, then it will fail.  I actually had a CFO tell me that they had a “pricing problem”.  Come to find out, they did not have a pricing problem.  They knew exactly what the price needed to be, they had a management problem because the sales guy did not want to put pressure on his buddy who is the buyer.  I guess the sales guy was afraid of losing the invitation to the annual fishing trip.

Pricing is a sensitive subject. We get it. But are you pricing your products to result in profit? Click here to download our free Pricing for Profit Inspection Guide.

Add Extra Offerings

One of the things that we have found with our clients is to add something “extra.” For example, Company ABC wants to increase their price on widget A from $80 to $150. They don’t have any other products, but they need to increase the prices so that they will be profitable. Instead of losing customers that may not be able to afford the $150, Company ABC splintered their products into three separate items – priced at $47, $56, and $89. Once a customer saw value in those smaller products, they opted-in to purchase the $150 product.

This is also a numbers game. When you provide extra offerings, you are able to capture more market. Hopefully, you will be able to promote those purchasing the cheaper products into a higher price range.

Adjust the Product

While this option isn’t necessarily increasing pricing on products, it is changing the cost structure and improving profitability. This tactic is used frequently in restaurants. Have you ever frequently visited a restaurant and your favorite meal started getting smaller… Yet, you were still paying the same price? Many companies chip away parts of the product to reduce costs, and therefore, increasing the price per plate, ounce, etc.

increasing pricing on products

Occasionally Run Specials

Think of that customer that is very price conscious and sensitive. Every once in a while, offer your products with a discount – essentially bringing it back down to its original price. This is a great way to retain previous customers that were conditioned with their prior expectations. Retailers do this all the time.

Change Your Customer

Increasing pricing on product often brings to light the fact that you have the wrong target audience. For example, one audience is highly sensitive to price due to the currency exchange. While another is less sensitive. Explore what it would look like to focus on that preferred audience. Maybe your specialized expensive item belongs in a specific industry that values your product, and not in a more general industry that maybe does not need or appreciate it.

Do Your Homework

Increasing pricing requires a lot of work on behalf of your marketing, sales, and operations team. If you are increasing pricing on products, are you absolutely sure that you will not have to do it again in the next few months? Because this process is an undertaking, do your homework and research the costs of your product. Will there be anything that could influence your costs?

When is the last time you had a price increase?  You would be surprised how many times we speak to a business and they had gone years without a price increase.  These companies are not evening covering the cost increase attributed to inflation.

Increase Pricing on Intervals

Service companies frequently use this pricing tactic. They increase their pricing after a 6-month or 12-month membership. It’s expected. Sure, you may have customers that work around the system – finding new services, signing under a different name, etc.

Examples of Recent Price Hikes

While we have discussed extensively about Netflix, there are other industries, companies, and areas of the market that are having to adjust to a) the loss of customers, b) the increase of costs, and c) growth.

Movie Theaters or Cinemas

Before the era of streaming networks and DVRs, movie theaters or cinemas were all the rage. That was the only place you were able to watch new releases before you could purchase their respective DVDs. But as we have seen, more potential customers choose to stay home and watch on their home television instead of going out. Maybe this is caused by generational preferences. Regardless, movie theaters are having to increase product to compensate for decreased customers AND add value. Theaters are now offering fully stocked bars and restaurants, reclining chairs (or pods), and creating a high scale environment. iPic Theaters is a great example of how the environment of movie watching is changing.

Price for Profit

Whether you are increasing the prices of your products in the next couple of months or years, it’s important to price them right the first time. Oftentimes, when we work with our clients, we find that their pricing was not resulting in profits. After seeing this so often, we developed a Pricing for Profit Inspection Guide that you can access here for free. Download the free Pricing for Profit Inspection Guide to learn how to price profitably.

increasing pricing on products

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

increasing pricing on products

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You Can’t Afford Not to Spend Money on the Accounting Department

As a former CEO to some CEOs, this Blog is to my counterparts that “don’t know what you don’t know.”  I have seen time and time again closely held businesses that have experienced growth make the same mistakes over and over again. To the CEO that believes bookkeeping is a necessary fixed cost that should be minimized, here is a money making tip. You can’t afford not to spend money on the accounting department if you want to be successful.

The Big Mistake

Your company has grown over the years; you have experienced good times and maybe some bad times. Additionally, you have taken a nice paycheck and sometimes, some nice bonuses.  You got used to a certain life style. And you did all of this with a bookkeeper that does not cost you much.  But your company has grown. Still in the back of your mind, you know something tells you that you are not comfortable with your accounting records. But you elected to keep cost down for the bookkeeper and you do not spend much on accounting.

You Can't Afford Not to Spend Money on the Accounting Department

My Tax CPA Does It All

Maybe until now, some of you have your outside CPA that prepares your tax return also prepare year-end financials. This is not a knock-on tax preparers, but your CPA that prepares your tax return is an expert in one of many fields CPAs work in. For example, I am a CPA, but there is no way I would prepare my own tax return. Tax laws change way too often. I just want to maximize my deductions and pay my fair share of tax, but not more than that. That is why I have my tax CPA prepare the tax return.

But over the course of my career, I have found that most tax CPAs do not have operational expertise. They have not run a manufacturing or service business, nor have they had any P&L responsibility. The Tax CPA is considering accelerated depreciation, maximize expenses, etc. This is quite the opposite from a management set of financial statements. The role of the CPA Tax preparer is totally different from a “operational” CPA, Controller or even CFO.

Minimizing the Back Office For the Wrong Reasons

Most CEOs that I have worked with argue to minimize the cost of the back office. That includes the cost of preparing financial and accounting records. But think about this… The Securities and Exchange Commission (SEC) does not require public companies to prepare their financial statements according to Generally Accepted Accounting Principles (GAAP) because they pulled this out of thin air as another way to regulate.  The SEC requires public companies to prepare their accounting records and financial statements based on GAAP because it is the best way to present fairly the results of your financial operations to third parties reading your financial statements.  In other words, It’s the RIGHT way to keep your books!

In some cases where there is significant debt and exposure, some banks also require that the company present your accounting records based on GAAP – regardless of whether it is a Public or Private company.  Some debt situations even require an audit. The banks simply make it one of the covenants related to your debt. When you present your books and records per GAAP, you have accurate financial statements, everyone is assured your accounting is correct.


Click here to download: The Smart Back Office for SMBs


The Importance of Using GAAP

So, if a lot of brain power has been put into coming up with GAAP, and the general consensus is that GAAP is the right way to present your financials and accounting records.  Why would you as CEO not require that your financial statements be presented per GAAP?

I have been an “operational” type CPA for over 27 years now. In addition, I have held the office of CEO twice. I have used my expertise in public company environments and private companies both as an employee and as a consultant in the U.S. and in other countries. I have seen many very successful small, medium and large private companies and they were all keeping their financial records per GAAP. Yet, I have NEVER seen a significant company (not a micro or small business) be successful and properly run without keeping their books and records per GAAP.

So why is it that CEO’s of closely held (private) business still permit their accounting records to be kept some other way?   The answer: they do not want to spend money on a fixed cost such as accounting. But they will spend money on the sales team, hunting leases, extravagant meals or parties.

Not getting the basics down – such as GAAP – leaves money on the table when you are exiting the company. Increase value with our Top 10 Destroyers of Value whitepaper.

You Can't Afford Not to Spend Money on the Accounting Department

You Can’t Afford Not to Spend Money on the Accounting Department

These are real life examples and outcomes of minimizing the cost of your accounting department that I have lived…

The service company incorrectly books gains on U.S. dollar receivables. In conclusion, they had to reverse $8 million from earnings.

I have seen this one several times. The company does not have some large assets on the balance sheet, because their tax preparer said they used accelerated depreciation. As a result, the balance sheet assets are severely understated. Hint: your value is understated. IT’S ABOUT THE MONEY DUDE!

The manufacturing facility does not properly accrue costs. As a result, their margins are way off, and the CEO wondered why they were always short on cash.

The company did not properly reconcile accounts including cash. This led to fraud.

The company did not properly recognize revenue. In conclusion, the company was understating revenue by millions of dollars.

I can go on and on with more real-life examples.

If you do not have your financial statements presented per GAAP, how are they prepared and presented? Do you really know your margins in your P&L. Do you really have all your assets, liabilities and equity presented correctly? Is your P&L, Balance Sheet and Cash Flow statement presented correctly? Guess what? Your ratios that your controller or CFO should be analyzing are not correct.

Leadership Needs to Believe in GAAP

Why do you think Exxon, Walmart and all other public company CEO’s believe in GAAP?  I have also seen many small, medium and large closely held private companies keep their accounting records per GAAP.  These are all successful companies. They know their margins, they know where cash is, they know their ratios and guess what, they know how to forecast!

I have also seen time and time again good companies that have been around a while and have experienced growth, and NOT prepare their financials per GAAP.  And every one of these CEO’s and companies has the exact same issues.

  • They really don’t know their margins in their P&L
  • Some companies don’t even really know their actual revenue
  • There is always that doubt in the CEO’s mind as to what is really going on in the business
  • The CEO lives a stressful life
  • Every time there is even the slightest decrease in margins, there is even a bigger disproportionate stress on cash
  • If your books are not per GAAP, then most likely they are not on the accrual basis; if that is the case, then you are 60-90 days behind your business
  • Having your books on an accrual basis is just the first step. There are many other accounting rules, procedures and pronouncements to get your books per GAAP. Just because they are on accrual basis, does not mean they are per GAAP. GAAP “rules” actually change frequently

You Can't Afford Not to Spend Money on the Accounting Department

In Summary

In my consulting business, I have seen CEOs that are “smart” as in they know what they don’t know. They bring us in to get the problem fixed. Although it takes time and money, the CEO is fully supportive and we get it done. These are the companies that grow and ultimately have a successful liquidation event. Or they leave a well-run machine to their family or employees.

But it shocks me to continue to see companies as large as $120 million in revenue, with a couple hundred employees that have not professionalized their accounting department. No one knows the true margins. Everyone stresses out about the “accounting records.” There are no correct historical financials, and most certainly, there are no forecasts. Unfortunately, there is no analysis of the business at all. In some high margin “hot” industries, this works for a while. The sins are buried. But millions of dollars are lost without knowing it. But, since ultimately everything ends up in cash, when that “hot” industry has even a slight downturn, the CEO feels the cash crunch.

Whether you are trying to increase the value of your company or positioning it for sale, this issue of unknowingly leaking cash is a destroyer. Learn how to tighten your belts and increase value with our Top 10 Destroyers of Value whitepaper.

Don’t be Cheap

Don’t be cheap. Spend the money (which is usually less than the hunting lease) to get your books and records based on GAAP basis.  Get your priorities straight.  Continue to have a professional accounting department in your business. YES, you will spend more than you are currently spending. But you can’t afford not to spend money on the accounting department!

Consider this… I had one investment banker with a very large firm tell me the difference in a valuation of an acquisition target from a company that has accounting records per GAAP and solid accounting department versus one that does not have a professional accounting department and accounting records not per GAAP is a difference of 20%-30%.  I had another investment banker tell me the difference in valuation is “one turn of EBITDA”. The use of EBITDA and multipliers is often used in valuation.

So if your company generates $2 million EBITDA and the multiple used is a 5, then your value would be $10 million with a professional accounting department and books per GAAP. In comparison, your value is $8 million with an unsophisticated accounting department and accounting records not per GAAP. I don’t think your professional accounting department will ever cost you $2 million per year! But not having it will.

Not having your financial records per GAAP is one of the destroyers of value. If you want to protect the value of your company, download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your value.

You Can't Afford Not to Spend Money on the Accounting DepartmentYou Can't Afford Not to Spend Money on the Accounting Department

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Budgeting: It’s About Achieving Success

Budgeting is All About Achieving Success, common budgeting problems

Ron Rael, author of 13 ½ Strategic Ways of Winning the Budgeting Wars, once said that, “To achieve success in anything, you need two ingredients: a target to aim for and a way to measure your progress towards it.” Budgeting is all about achieving success in business. When you improve the budget process, you are able to foster both empowerment and accountability. Eventually, it will lead to a better company. Although initiating change in your budgeting process will be challenging, it will further demonstrate your financial leadership.

The Most Common Budgeting Problems

The reason why you may have not seen much success come from your budget is because of the following common budgeting problems. First, the goals that are established before the budget is created are either too easy to reach or are simply unachievable.

If you know your economics, then you can avoid potential unrealistic goals or assumptions. Click here to download the Know Your Economics Worksheet to shape your economics to result in profit.

Then the budget is built on faulty or unrealistic assumptions. If the assumptions are correct, then maybe not everyone agrees on the assumptions or principles. This disagreement of what to build the budget on results in a dysfunctional team.

After the budget is built, there is often little to no feedback from management about the budget. We have seen this time and time again in companies. Those not involved in the budgeting process simply don’t care about the budget. They think that because they are not the CFO or Controller, it’s not their job. But everyone in an organization should care about the budget.

Additionally, when the budget is completed (usually after weeks of non-stop focus), it is filed away. It is rarely taken out and use in the daily strategy of the company. There is a lack of follow up.

When leadership has to meet with shareholders, stakeholders, etc. regarding the budget, they realize that they haven’t used the budget at all. Then they go to any means to achieve their budget. This manipulation defeats the purpose of having a budget. We suggest to design a budget that cannot be manipulated.

If you are thinking that the most common budgeting problems are more like cultural issues, then you’re correct!

Top 2 Budgeting Problems

Everything we have already said concerns the entire company. But the majority of our audience consist of CFOs and Controllers. The two problems that impact CFOs, Controllers, and budget directors the most include hidden agendas executives may have, the lack of commitment from executives for having a budget, and executives seen budgets as the CFO’s job. The responsibility of the budget is not solely reliant on the accounting department or CFO.

Budgeting is All About Achieving Success, common budgeting problemsHow to Budget Successfully

Budgeting successfully requires you to transform how you think about budgeting overall.

Use It As Decision-Making Tool

If you want to budget successfully, then you need to use your budget as a tool for decision making. It is not some disconnected document that has little to do with the company’s actual business. Instead, it should be a living and breathing part of your decision making. Plus, it is more effective when you use it to make decisions. When people ignore it or play games with it, your budget becomes ineffective.

Additionally, understanding the need to improve the quality of decision making and making it happen are two different animals. What you get all depends on the leaders’ commitment and attitude.

Use It As Management Tool

Budgeting is a very important management tool for achieving lasting success. A budget should establish the discipline to set up a plan. But you must also adhere to the plan. Furthermore, this management tool always you to measure your progress, and ultimately, your success.

“Without a yardstick, there is no measurement.  And, without measurement, there is no control”
– Pravin Shah

Issues Are a Result of Culture

We said it earlier, and we’re saying it again because it’s that important. Most budgeting issues are a result of an organization’s culture. Issues that lead to a poor quality budget process mean that these problems already exist within the organization ALL THE TIME!

Cost Associated

Everything has its cost! The budget is no exception. Budgets take work! They are not easy to implement nor are they easy to manage. Some of these costs include the following:

In addition, there are other costs associated with budgeting that could impact the bottom line. If employees are not conserving costs and making the most of opportunities, the bottom line will suffer. If leaders are not investing in their tangible and intangible assets equally while employing them to their fullest potential, the future bottom line will suffer.

Require Specificity

The budget and the plan it drives from is only effective when it leads to specific actionable and measurable activities and generate stakeholder value. Therefore, a budget must require specificity.

Assumptions Drive Everything

Also, your assumptions drive everything. Therefore, it is crucial that everyone be on the same page regarding assumptions in relation to decisions on what is important in your budget.

Governance of Budgeting Process

When your leadership team establishes governance in your organization, they are deciding how to best use all their resources to accomplish the purpose or mission.

Governance Principles

Use the following governance principles in your budgeting process. A reality based budget and planning system that enhances accountability is necessary for the good governance because it increases transparency. Furthermore, the key factor in a realistic and honest budget is people and their accountability. A well conceived and thoughtful budget improves the governance demanded by all stakeholders. In addition, the budget is a reflection of the importance that your executives place on governance and ethical conduct. Every game played with the budget is actually a breach of the organizations Code of Ethics.

CFO’s Role in Making the Bottom Line Commitment

 The CFO is essentially the CEO’s cheerleader! The CFO inspires higher level of performance.  The greatest challenge is to ensure that the strategic objectives and operational plans are adequate and inspirational enough to achieve the leaders’ desired financial objectives. The leader’s three plans, when combined into a cohesive strategy, will generally lead to success; however you define it. Furthermore, the CFO and executive team are the guardians of all assets – physical, financial and human ones. Use these assets to implement the plan and achieve the goals!

 CFO’s Discipline

Having the discipline to build a healthy budget, and having the budget instill discipline across your firm has many benefits. Not only will your budget properly serve as a management tool, but the benefits of discipline will filter over to other areas of your operation which will lead to efficiency and profitability. The next step in achieving success through your budgeting is knowing your financials or economics. If you want to shape your economics to result in profit, then click here to download the Know Your Economics Worksheet.

Budgeting is All About Achieving Success, common budgeting problems

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Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

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Budgeting is All About Achieving Success, common budgeting problems

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Turnover in Collections is Destroying Your DSO

One of our clients called us up because his DSO went from 34 days to over 72 days within a couple months. He couldn’t figure out what was causing his daily sales outstanding (DSO) to increase so dramatically in such a short time. When we came in the office to investigate, we found that there was significant turnover in the A/R and A/P staff. As a result, collections were not being consistently collected on. Turnover in collections is destroying your DSO. But how does turnover impact your DSO?

Turnover in Collections is Destroying Your DSO

What happens when there is high turnover in a company? Decreased productivity, bad communication, reduced training, lost processes, and so much more. When we started working with our client mentioned above, they were turning over A/R personnel very quickly. At first, the management didn’t think about their DSO. Sales were going great! But no cash was being collected. What they originally thought was a cash flow problem became more of a management issue.

How are you managing your cash? After 25+ years of working with clients in cash crunches, we designed the A/R Checklist AND you can access for free here. Enjoy!

maintaining accurate records

What Happens When Turnover Is High The Collections Departments

Think about what happens when turnover is high in the collections department. Communication is not clear on who has been contacted, what to charge, if an invoice has been sent out, etc. It can easily get out of hand if communication is not seamless during the transition. There simply is no continuation and follow up.

You also need to address why turnover is high. Are you firing your employees? Are many employees retiring? Is morale down due to an upcoming transition? Are you not compensating them enough to stay? There is typically a reason for high turnover. But it may take some investigating. Do you have a good idea for what is an acceptable turnover rate?

Consider calculating the transaction turnover per A/R employee. If your number is low, you need to start improving the collections process.

      Number of Transactions Processed      
Number of Accounts Receivable Employees

Collections Cannot Be Automated

There’s a lot of things you can automate, but collections are not one of them. You cannot automate human behavior and nothing can replace a live call or meeting between two parties. While we may see some sort of automation built into this process, we don’t foresee it taking the humans out of this role. For example, if a client needs to explain that they need to extend their payment another week, they need a speak to a person, someone authorized to extend payment terms. Furthermore, if their contact person in A/R keeps changing, then those receivables will not be collected timely.  Management often underestimates the importance of having someone in receivables developing a relationship with the customer.

[HINT: Turnover may be high for a myriad of reasons, but your company still needs cash. Consider offering a discount to the client for paying in a certain number of days. Read more about discounting receivables here.]

 

How to Save Your DSO When Turnover is High

Your DSO is a key indicator for management to look at. But like other indicators, you need to know what impacts those variables and why. Employee turnover in A/R can directly impact DSO as those employees are the people responsible for collecting. When turnover is high, communications and processes don’t always get passed down properly or effectively. Let’s learn how to save your DSO when turnover is high.

Know the Cycle

First, you need to know the cycle. Companies (and economies) going through cycles where cash is tight, turnover is high, and credit becomes tight. .  Look at the recent oil & gas crisis. Oil price hit record highs, companies began to spend more, they took on more debt. Then the price of oil drops, companies find themselves paying for debt service based on a bigger size and larger revenue, cash gets tight.  The bank and other creditors tighten up until things get better down the road.

But if you’re experiencing high turnover that doesn’t reflect what the macro economy is doing, then you need to look internally.

Start by tracking your DSO at regular intervals. Make this part of your normal monthly reporting process.  This will give you a basis to predict cash flow and indicates when things are going south. When you create a DSO trend, it is easier to spot irregularity.

Identify Areas With Low Turnover

What areas in your company have low turnover? Is it sales, operations, upper level management, etc.? Identify the areas with low turnover. Regardless of their role in the company, someone needs to collect the cash or the company will be in trouble. For example, you have 5 sales people that have been there for an average of 15 years. Your A/R department has turned over 5 employees in the last 2 years. Choose one of your sales persons to manage the transition between A/R employees. Your sales people often have the relationship with the customer.

Write Down Your DSO Improvement Strategies

This is probably the most important step to saving your DSO when turnover is high. Write it down! A strategy isn’t a good strategy if you don’t write it down. Have written processes for collections as well as notes of what has been done for the entire accounting department will help everyone know where you are at.

Write the collections process down with all your DSO improvement strategies.

Then, write down notes from client conversations, steps in the collections processes. Have frequent internal meetings about collections.  Assign tasks to individuals and write down the progress or lack of progress.  The CFO should be made aware of collections, DSO and trouble accounts.

Improve Your DSO

Whether you are experiencing high turnover in your A/R staff or not, it’s important to continually improve your DSO. For more ways to add value to your company, download your free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.

Turnover in Collections is Destroying Your DSO, Turnover in Collections

Turnover in Collections is Destroying Your DSO, Turnover in Collections

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