Tag Archives | bottom line

Maximizing Your Bottom Line In 3 Simple Steps

Sales are great, but wouldn’t they be better if you were actually able to reap the rewards? Many CEOs that were not trained with an accounting/finance background struggle to understand profitability. They think that if sales are great, then the business is great. But when sales increase, inventory and overhead increases. Productivity also decreases – due to exhaustion or overwork. Collections lapse because there isn’t a “pressure” to collect. And unfortunately, that is when companies suffer the most. Sales start to decline, but they don’t change their habits. In this Wiki, you will learn how everything below sales on your income statement is critical to your company’s success and how you should be maximizing your bottom line – net income – at any stage of your company’s life cycle. Let’s look at how maximizing your bottom line in 3 simple steps can happen.

What is the Bottom Line?

First, what is the bottom line we are referring to? It is the net income on your income statement or P&L statement. This is what you have left after all the costs of goods sold, administrative expenses, and overhead have been subtracted from revenue. We look at this number carefully because that is how much you are able to put into retained earnings or reinvest back into your company. In addition, the amount can be used to issue dividends to their shareholders. Maximizing your bottom line should be an integral part of your company’s processes.

Profitability starts at the top of the income statement. If your prices are not set to create profitable environment, then you will be not able to maximize the bottom line. Learn how to price for profit using our Pricing for Profit Inspection Guide.

Maximizing Your Bottom Line In 4 Simple Steps

There a are several ways to maximize your bottom line – some more extensive and time consuming than other. But there are 3 areas to focus on to maximize your bottom line – including productivity, overhead, and collections.

1. Productivity is Key

It’s been a common theme among business blogs and news sources (Entrepreneur, Forbes, WSJ, etc.) to improve productivity. Why? Because productivity is key in maximizing your bottom line. But what really happens when you improve productivity? You have more supply, decrease the cost to produce 1 unit, and increase sales. It speeds up your operations so that you can fulfill more orders for quickly.

2. Manage Overhead

Great revenues have very little meaning if your overhead costs are not properly managed. Look deeper into your overhead expenses and find out if there are any costs you can reduce or completely remove. The problem is often more complex than large expense accounts on the P&L. You must interact with various departments to think critically and solve problems. Ensure that every single overhead cost is necessary to provide the desired service levels. Maximum controllability over costs leads to higher profits for the company to reap.

3. Collect Quicker

Collections are an important part of business. If a company sells $10,000 worth of product but only collects $3,000, then their cash is tied up in inventory, etc. As a result, they experience a cash crunch. We have worked with clients who were in the same situation and they neglected to ever collect the outstanding balance. Their bottom line suffered, but they didn’t think to look at their collections process. There are two metrics that you can look at to monitor collections and use to collect quicker.

The first metric is DSO. Do you know your Days Sales Outstanding (DSO)? This is a great measurement to know where you are currently and how by making slight adjustments, you can increase profitability. Use the following formula to calculate DSO.

 DSO = (Accounts Receivable / Total Credit Sales) * 365

The second metric to look at is Collections Effectiveness Index (CEI). This is a slightly more accurate representation of the time it takes to collect receivables than DSO. Because CEI can be calculated more frequently than DSO, it can be a key performance indicator (KPI) that you track in your company. If the CEI percentage decreases one month, then leadership are alerted that something is going on. The goal here is to be at 100%.

CEI = [(Beginning Receivables + Monthly Credit Sales – Ending Total Receivables) ÷ (Beginning Receivables + Monthly Credit Sales – Ending Current Receivables)] * 100

Another method to collect quicker is to tie receivables to the sales person’s commission. This will not only encourage your sales team to be part of the collections process, but it will help keep your company cash positive.

Effective Strategies for Improving Profitability

While we’ve been focused on maximizing your bottom line as your current financials stand, we also wanted to share some effective strategies for improving profitability.

Price for Profit

Are your prices leading to a satisfying net income?  If not, then these are some questions you can inquire:

  • Are additional costs being reflected on the price?
  • Are you using Margin vs Markup interchangeably?
  • Is your overhead being covered?

The solution might be simple: Adjust your price!

Learn how to price for profit using our Pricing for Profit Inspection Guide. This whitepaper will help you identify if you have a pricing problems and how to fix it.

Create Standard Operating Procedures (SOP)

Also, create Standard Operating Procedures (SOP). SOPs are step by step instructions written by a company to assist employees in completing routine procedures. They are necessary in a company to ensure operations run smoothly. The better your company’s SOPs are, the more efficient it will run. Create operating procedures that are simple, easy to read, and most importantly make them lead to a purpose.

Focus on Profitable Customers

Identifying profitable customers is instrumental to a company’s success. Once you completely identify your most profitable group of customers, focus your attention on them. Use your marketing funds primarily on you most profitable customers. A customer outside of that target market is still a viable customer, but they just shouldn’t receive as much marketing attention since they are not their primary and most profitable customer segment.

When maximizing your bottom line, start with your prices and pricing process. Access the free Pricing for Profit Inspection Guide to learn how to price profitably.

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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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Net Income

See Also:
Net Sales
Net Operating Loss Carryback and Carryforward
Financial Ratios
Financial Reporting
Accounts Payable

Net Income Definition

The net income definition is a company’s profit in a given fiscal period. It consists of total revenues earned in the period less total expenses incurred to generate the revenues in the period. When revenues exceed expenses, the company has a net profit. When expenses exceed revenues, the company has a net loss. Report it on a company’s income statement. Net income is an important measure of a company’s profitability and financial performance for the relevant fiscal period. Also, call it net earnings, net profit, or the bottom line.

Net Income Formula

Basically, compute this income by subtracting all relevant costs and expenses from total revenue. Start with total revenue, also known as the top line as it is shown at the top of the income statement. Then subtract the costs of sales, operating expenses, non-operating expenses, and taxes. This gives you NI. It is also known as the bottom line because it is shown at the bottom of the income statement.

NI = Revenues – Cost of Sales – Operating Expenses – Non-Operating Expenses – Taxes

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

Net Income

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Controller vs Comptroller

See Also:
Controller
Controller vs CFO
The Importance of Knowing Your Leadership Competencies
Flash Reports Are a Game Changer

Controller vs Comptroller

What is the difference is between a controller vs comptroller? At the end of the day, the controller vs comptroller relationship is not all too diverse. A controller is a person that is at the highest accounting level in an organization. In other words, he/she is the head of the financial division of a company. Controllers are responsible for the financial accounting reporting, analysis and interpretation to the executive management team. They also administer the internal controls within an organization. A comptroller must possess the same duties of a financial controller. There is not a significant difference in the roles of a controller versus comptroller. A comptroller definition is a senior accountant in a government organization, however, the duties of a comptroller and controller do not differ. However, there seems to be a slight difference between the two entities when examined at a closer level.

(NOTE: Want to take your financial leadership to the next level? Download the 7 Habits of Highly Effective CFO’s. It walks you through steps to accelerate your career in becoming a leader in your company. Get it here!)

Origins Of Comptroller Vs Controller

Because both definitions seem strikingly similar, why have two terms in the first place? Years ago in the 1800’s, the term “comptroller” arose from a careless misspelling of the term “controller.” At the same time, if one was to examine the etymology of the term “comptroller,” the word itself has French roots that date back to the 15th century. The original English word, countreroller, is a word that means “one who specializes in checking financial ledgers.” From then on, the spelling, along with the duties of a regular controller, stuck and the term “comptroller” became a similar term referring to a financial officer in the government sector.

Controller in the United States

While in the United States, where capitalism seems to have caused a consolidation of the terms controller versus comptroller, it seems that the term “comptroller” seems to have developed a slight difference in the European sector. The difference in question seems to be one involving the expenses involved with products in a company. A comptroller seems to oversee the overall costs that go into the services a company is providing.

On the other hand, the controller is merely concerned with the bottom line; more specifically, the costs that are associated with the final product within a company. Because the controller is more concerned with the bottom line at the end of the day, his job seems to carry a little more weight financially. Therefore, you would most likely pay a person with the title controller more than a comptroller. Though, the amount paid most certainly depends upon the company hiring. If nothing else, the New York Times, when referring to the controller-comptroller relationship states: “the official title controller, in all laws, public records, and documents, be spelled controller, that being historically and etymologically the true and right spelling; and that the false and offensive form ‘comptroller,’ born of ignorance and continued in darkness, be discarded.”

A controller or a comptroller can act as a financial leader in your company. Download the free 7 Habits of Highly Effective CFOs to find out how you can become a more valuable financial leader.

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Accretion

See Also:
Depreciation
Asset Market Value vs Asset Book Value
Fixed Asset Turnover Analysis
Research and Development
Straight-Line Depreciation

Accretion Definition

Accretion is the increase through time of a natural asset like land or a financial asset. The increases occur through growth and multiplication like through the following:

Meaning

Businesses often use this type of accounting for the development of assets in the form of an accretion expense, or an increase in the present value as the asset draws closer to its final future value. It is also used in Mergers and Acquisitions (M&A) when discussing the earnings per share for the company using pro forma statements after the transaction takes place. In other words, these accounts for the synergies which are likely to be realized. In addition, it will feed directly into the combined entity’s bottom line. Accretion real estate is simply the development of land through the growth and development of land. This can be through the development of a shopping center or something simple like the growth of livestock through breeding.

accretion

 

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Defend the Bottom Line!

During a downturn in the economy the overriding goal of the Chief Financial Officer and management team is to defend the bottom line or profitability of the company. At a minimum you should achieve break even. The economy ebbs and flows like the tide. During the good times a company should generate profits and pay down debt. During a slow economy they should do everything they can not to give up the profits they have earned.

How to Defend the Bottom Line

So once you find yourself in an economic downturn what should you do? You should first recognize that you can’t save your way to profitability. Cutting costs though a useful tool will not get you to your goal.

The first step you should take is to get a good handle on cash and cash flow. You should prepare a daily cash report and a twelve month cash flow projection. You cannot run out of cash! Most managers fail to shift their focus to cash management until they have run out of it. By then it may be too late.

The next step may seem counter intuitive but is key to prospering in a downturn. You should increase your marketing expenditures and efforts. Most companies do the opposite! They slash advertising expenses and lay off salesmen to cut costs. If anything you should be doubling up on your sales effort! In a downturn there are still sales transactions taking place. There are just fewer of them. To maintain your revenue stream you need to get a larger percentage of the market. That takes more effort, not less!

Finally, to survive a downturn remember rule number one: Don’t lose money! So restructure your costs to achieve break even with the revenue stream you are generating. The goal is to survive to fight another day! Improve your pricing – and your profits– by downloading the free Pricing for Profit Inspection Guide.

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