Tag Archives | benchmark

Overhead Expense Reduction

See Also:
Predetermined Overhead Rate
Activity Based Costing vs Traditional Costing
Activity Based Cost Allocation
Standard Cost

Overhead Expense Reduction

As a general precursor to Overhead expense reduction, Group Purchasing Organizations, Co-ops and Consortiums always lead to lower prices because they aggregate spends and create buying power. This may be true for smaller spends but as spends get larger ($100,000+ annually), you will often do better on your own when a supplier can customize a program to your specific purchasing patterns and needs.


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Category Specific Expertise

In reducing overhead expenses, expertise in purchasing for one cost category or in the request for proposal process will produce similar results in another cost category. What expertise in purchasing really means is an understanding of the unique data requirements and what drives supplier pricing to achieve the best results. You may use the same process in different categories. But without the category specific information, the results may not be the same at all.

Category specific information includes changes in the industry, contract nuances, and benchmark data.

Stay Loyal to The Supplier

Loyalty to a supplier always translates into the best value for your company (value = price + service) as well as the best opportunity to reduce overhead expenses. Quite often, long time loyalty leads to complacency from both the supplier and the purchaser. Industries and companies change over time and vendors providing operating supplies and services are no exception. Modest price increases year after year may seem acceptable when in reality the market may have changed, and the cost should actually be going down year after year. Compounding increases add up over the years.

How To Reduce Overhead Expenses

There are three things that you can do to reduce overhead expenses:

  1. Lower Costs with Incumbent Suppliers
  2. Ask Vendors to Help Manage Spend
  3. Create a Competitive Environment for Each Category

Lower Costs With Incumbent Suppliers

Ask your incumbent suppliers what you can do that will result in lower costs from them. Lower Cost can lead to a smaller Overhead-Rate which ultimately can lead to a reduction in overhead expenses. Work with your vendor as a team member – not as an adversary. If you can change a process or an ordering habit in your organization that reduces your vendor’s expense, then your vendor should reward you with lower prices which can lead to reduced overhead expenses.

Ask Vendor to Help Manage Spend

Then, ask your vendor to help you manage the spend. A proactive approach must be taken to reduce overhead expense. Are you leveraging the vendor’s platforms for ordering and managing information? Or can they track purchases by department and provide invoices already allocated to departments to ease the work of your Accounting Department? Can they inform you if employees do not follow established business rules (e.g., buy-off contract)? Do they have the technology to prevent your employees from buying off contract without proper approval?

Create Competitive Environment for Each Category

Finally, create a competitive environment for each category. Let your team and vendors know that there are no “sacred cows“. Have someone other than the supplier’s daily contact manage the expense review process. This enables greater objectivity and keeps personal relationships out of the process. Then give suppliers all of the information they need to sharpen their pencils and minimize their risk. The more they know about your usage and requirements, the better. Customers who inspire confidence and minimize the suppliers’ risk are rewarded with the most aggressive pricing. Reducing overhead expense requires an understanding of both your personnel, as well as the vendor’s.

When you know your overhead and how much you need to reduce it by, you can add real value to your organization.

The CEO's Guide to Improving Cash Flow


Overhead Expense Reduction

Originally posted by Jim Wilkinson on July 24, 2013. 

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Quick Ratio Analysis

Quick Ratio Analysis Definition

The quick ratio, defined also as the acid test ratio, reveals a company’s ability to meet short-term operating needs by using its liquid assets. It is similar to the current ratio, but is considered a more reliable indicator of a company’s short-term financial strength. The difference between these two is that the quick ratio subtracts inventory from current assets and compares the quick asset to the current liabilities. Similar to the current ratio, value for the quick ratio analysis varies widely by company and industry. In theory, the higher the ratio is, then the better the position of the company is; however, a better benchmark is to compare the ratio with the industry average.

Quick Ratio Explanation

Quick ratios are often explained as measures of a company’s ability to pay their current debt liabilities without relying on the sale of inventory. Compared with the current ratio, the quick ratio is more conservative because it does not include inventories which can sometimes be difficult to liquidate. For lenders, the quick ratio is very helpful because it reveals a company’s ability to pay off under the worst possible condition.

Although the quick ratio gives investors a better picture of a company’s ability to meet current obligations the current ratio, investors should be aware that the quick ratio does not apply to the handful of companies where inventory is almost immediately convertible into cash (such as retail stores and fast food restaurants).

Quick Ratio Formula

The current ratio formula is as follows:

Current ratio = (Current assets – Inventories) / Current liabilities

Or = Quick assets / Current liabilities

Or = (Cash + Accounts Receivable + Cash equivalents) / Current liabilities


If you want to start measuring your company’s KPIs, then click here to access our KPI Discovery Cheatsheet.

quick ratio analysis

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quick ratio analysis

Resources

For statistical information about industry financial ratios, please go to the following websites: www.bizstats.com and www.valueline.com.

See Also:
Balance Sheet
Working Capital
Current Ratio Analysis
Financial Ratios
Quck Ratio Analysis Benchmark Example

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Quick Ratio Analysis Benchmark Example

Quick Ratio Analysis Benchmark Example

Quick ratio calculation is a useful skill for any business that may face cash flow issues. Furthermore, quick assets include those current assets that presumably can be quickly converted to cash at close to their book values. It normally includes cash, marketable securities, and some accounts receivables.

Current liabilities represent financial obligations that come due within one year. It normally included accounts payable, notes payable, short-term loans, current portion of term debt, accrued expenses and taxes.

For example, a business has $5,000 in current assets, $1,000 in inventories and $2,500 in current liabilities.

Quick ratio = (5,000 – 1,000) / 2,500 = 1.6

Since we subtracted current inventory, it means that for every dollar of current liabilities there are $1.6 of easily convertible assets.

Quick Ratio Example

The following is a quick ratio analysis benchmark example. Suzy has started a boutique-style bakery which is mainly servicing customers who desire wedding cakes. Suzy, who works in a trade which she is truly passionate about, is by no means an expert in financial statements. She is, however, an expert in the operations of her business. She knows that if she wants to scale, something that her customers are driving her to as much as her own desires for financial success, she needs a partner who can provide the business expertise. About the time she realizes this Suzy meets Monica, an experienced restauranteur. The two women quickly develop a rapport. Suzy learns that Monica is looking for a new deal and communicates her needs over lunch. They resolve, after a testing period, to support each other by applying their expertise to Suzy’s business. The two women become partners.

Calculation

Monica knows that lack of cash is one of the main reasons that causes any business, especially in food-service, to close doors. As Monica takes her initial look at the financial statements of the business she keeps this in mind.

Monica wants to know if the company can pay its debts. Due to the fact that the business desperately needs all inventory to continue scaling, she resolves to use quick ratio vs current ratio calculation. Since there is no quick ratio accounting calculator, she performs this calculation:

If:

Current Assets = $5,000 Inventory = $1,000 Current Liabilities = $2,500

Quick ratio = (5,000 – 1,000) / 2,500 = 1.6

This means that for every dollar of current liabilities there are $1.6 of easily convertible assets.

This is a major relief to Monica. Finishing her analysis of the company statements Monica feels very confident. As long as employee turnover remains the same the two women have avoided two of the most important issues a business could face.

quick ratio analysis benchmark example

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quick ratio analysis benchmark example

See Also:

Quick Ratio Analysis

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Retail Markup Example

See Also:
Margin vs Markup

Retail Markup Example

Max owns a retail store called Retailco. Retailco sells clothing as well as other items common to department stores. Max’s company has just opened their doors and is still finding a place in the market. As a result, some of the essential financial ratios have not been calculated yet. Max would like to calculate his retail markup for his various selling items so that his new business can determine the retail actual retail price of the products that they are selling. These markups will serve as benchmarks for the rest of the business team in an effort to show the company’s likelihood of success. Achieve these efforts by estimating the total amount of profits by comparing the retail price of the products with the overall spending and costs of the company.

(NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step process to maximizing your profits on each sale. Get it here!)

Recently, the amount of profit made on the average pair of women’s jeans has come into question. Max, from working in the industry for years, has an intuition that he is making a profit on these products. Still, he needs to prove this to the rest of his company. Personally, he also wonders what is standard retail markup for a department store just like his.

Calculating Retail Markup

Max initially searches Yahoo for the term “retail markup calculator”. Though he does not find a function to provide his calculation, he does find a formula which will serve the purpose. Max will utilize the formula known as the retail markup formula. Because this formula takes the retail price of the cost to produce a unit of product and subtracts that price from the retail price of the product, what is left is a retail markup price.

Max sells the average pair of jeans for $15. His cost of goods sold on each unit is $10. Max uses the retail markup formula to calculate the retail markup average on his pair of jeans:

$15 – $10 = $5

Knowing his retail markups will help him to build confidence and courage in his team. He resolves to find retail markups for all of his products. As a result, he finds that this amount is standard with industry expectations.

Additionally, the retail markup percentage is calculated by taking the retail markup and dividing the value by the unit cost of the product. The fraction that remains after the calculation is known as the retail markup percentage. To learn how to price for profit, download our Pricing for Profit Inspection Guide. Easily discover if your company has a pricing problem and fix it!

Retail Markup Example

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Retail Markup Example

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Price to Sales Ratio Analysis

See Also:
Price Earnings Ratio
Price to Book Value Ratio
Financial Ratios

Price to Sales Ratio Analysis Definition

Price to sales ratio (PSR ratio) indicates how much investor paid for a share compared to the sales a company generated per share. It measures the value placed on sales by the market. A higher ratio means that the market is willing to pay for each dollar of annual sales. In general, the lower the P/S, the better the value is. However, the value of the ratio varies across industries. A better benchmark is to compare with industry average.

(NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step process to maximizing your profits on each sale. Get it here!)

Price to Sales Ratio Formula

Price to sales ratio = Market price per share ÷ Sales per share

Or = Market Cap ÷ total sales

Price to Sales Ratio Calculation

Example: assume $20 in market price per share and $5 in sales per share.

Price to sales ratio = 20 / 5 = 4

This means that investors pay $4 for every dollar of sales that a company generates.

Applications

Price to sales ratio values a stock relative to its historical performance, market competitors or general market. In general, a low price to sales ratio means a good investment because investors are paying less for each unit of sales. However, price to sales sometimes provide very limited information because it does not take into account any expenses or debt and a company with high sales maybe unprofitable.

Resources

For statistical information about industry financial ratios, please click the following website: www.bizstats.com and www.valueline.com.

To learn how to price for profit, download our Pricing for Profit Inspection Guide.

Price to Sales Ratio Analysis

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Price to Sales Ratio Analysis

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Price to Book Value Analysis

Price to Book Value Analysis Definition

Price to book ratio analysis (PBV ratio or P/B ratio) expresses the relationship between the stock price and the book value of each share. In general, the lower the PBV ratio, the better the value is. However, the value of the ratio varies across industries. A better benchmark is to compare with industry average.

Price to Book Value Analysis Formula

Use the following price to book value analysis formula:

Price to book value = Market Cap ÷ book value

Calculation

Book value is the value of the company if you subtracted all liabilities from assets and common stock equity.

For example, assume $ 20,000 in market cap and $ 10,000 in book value.

Price to book value = 20,000 / 10,000 = 2

As a result, investors pay $2 for every dollar of book value that a company has.

Applications

Price to book value ratio measures whether or not a company’s stock price is undervalued. The higher the ratio, the higher the premium the market is willing to pay for the company above its hard assets. A company either is undervalued or in a declining business if the value of 1 or less. Although investors use price to book value ratio to get some idea of how expensive a company’s stock is, it provides very limited information for some industries with hidden assets, which are of great value but are not reflected in the book value.

Resources

For statistical information about industry financial ratios, please click the following website: www.bizstats.com and www.valueline.com.

Price to Book Value Analysis

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Price to Book Value Analysis

See Also:
Price Earnings Ratio
Price to Sales Ratio
Financial Ratios

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Management Audit

See Also:
Total Quality Management
Capital Structure Management
Activity Based Management (ABM)
Retainage Management and Collection
Management Definition

Management Audit Definition

A management audit can be defined as an audit which analyzes the effectiveness of the management team of a company. The purpose of this is seven-fold: understand current practices, relate these to company financials, suggest new procedures which will improve the efficiency of managers, present a financial gain related to these new procedures, and create benchmarks and projections for the future. Finally, a management audit letter is the last piece of material shared with the client; it is a report of the findings.

Management Audit Explanation

The management audit process can be explained by the auditing of both the management method as a whole as well as key management staff. This is important to establish the effectiveness of both the leaders of the department as well as how it performs as a team. In this way, it can fill the purpose of a staff audit or performance audit, depending on the scope of the company.

Management Audit Example

For example, Stan is an auditor for a major, Fortune 500 auditing firm. Rather than focusing on the accounting side of the process, Stan has another focus: management. His work, analytic in nature, involves paying attention to the qualitative as well as quantitative factors surrounding the process of managing client companies. Stan loves his work because he gets to attack a new problem constantly.

Recently, Stan has begun work with a new client. To serve this client, as well as all the others, will require application of fundamentals while still customizing the project to the specific needs of the customer. Management audits generally use certain processes as a control technique while applying industry specific analysis techniques.

Evaluation & Management

Stan begins by asking the initial evaluation and management audit with questionnaire forms. These questions lay the groundwork for him to begin the process. Next, he looks at company financials. This tells him how much all of the management operations are effecting company profits. He continues the process with a number of variables until he understands the company quite well.

Completion

Stan finally completes his management audit. From this he can present his audit to the client company board of directors. His assessment with leaders improve the processes which support company revenue creation. His assessment has several gems of information but one stands above the others: a key manager in the company is not as effective as expected. The company will deal with the problem in a way they see fit.

Stan loves his work. Though sometimes he has to provide negative feedback, he appreciates that he is the messenger which leads businesses to the path of success. With his skills in the process of performing a management audit, Stan will help clients, his employer, and himself. If you want to find out how you can become a valuable financial leader, download the 7 Habits of Highly Effective CFOs for free.

Management Audit

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Management Audit

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