Tag Archives | efficiency

What Should Your Month End Reports Contain?

what should your month end reports containBack in the day, month end reports consisted of a income statement, balance sheet, and maybe a cash flow statement. These are the three statements that made up your financial statements for month end reporting. As technology advanced and people got smarter about tracking trends, analysis, and operations today, the month end report includes much more. In this week’s blog, I answer the question, what should your month end reports contain?.

We should not think of the month end report as just your financial statements. Just as the role of the accounting department and the role of the CFO continues to evolve, so should the month end report. The month end report should be a management report that captures key data that will be used to make decisions and drive the business. It should include much more than just your financial statements.

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What Should Your Month End Reports Contain?

The month end report should include the financial statements. But they should also include operational data, metrics, and dashboards that are both usable and meaningful. Remember, whatever data is provided should be used to make decisions.

In general, for a manufacturing facility your month end report might include the following:

I would argue that the above list is the bare minimum for month end reporting. Depending on your organization, you may have many other indicators that must be tracked at month end.

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what should your month end reports contain“Analysis Paralysis”

Be careful though… Providing meaningful useful information at month end does not mean overkill with useless data. Time and time again I see businesses adopt dashboards and metrics, but they go to the other extreme and enter into analysis paralysis. What should your month end reports contain? Not so much that there is an overload of information that cannot be used effectively or at all.



Example of Analysis Paralysis

Allow me to give you an example… If you manufacture valves, your revenue is $10 million per month, and your related EBITDA per month is $1.5 million, then does it really make sense to track an expense line item that is $500? I would argue no. It costs you more time and money to track that item individually. If you do track it, then having that data will not lead to big decisions that are meaningful. All expenses and revenue line items are important, but that does not mean you need to track and analyze every penny. If you are a huge company and have a very expensive system that does all this automatically, then good for you.

There is a famous quote that I have used before, “a small leak sinks great ships.” I truly believe that. We do not want to have a small expense item that over time is a problem. But this blog is intended for your standard monthly close reporting and assumes you have your business in order so that you capture and put a stop to those small leaks.

Efficiency

The month end report should not be a binder 4 inches thick. The ideal financial report at month end should be one that the executive team can review in one hour and get a good feel for where the company is and where it is going. This will vary from company to company. In general, the report should be detailed enough to capture the most important items to make decisions, but condense enough so the management team does not spend a full day reading a large binder. Again, this will vary company to company. Some CEOs want the large binder, and that’s fine. Follow your CEO’s request.

The CFO and the accounting department are responsible for gathering this data working hand in hand with the operations. That is why I preach that a good CFO is actually someone that has a very good understanding of the operation. The Controller should also be someone that understands the operation. Furthermore, the CFO and the Controller should understand both the operation and the operating metrics. The CFO must full understand and interpret the operating dashboards and metrics before this information is passed on to the CEO.

When a CFO has a good understanding of the entire business, they are able to be more effective in their role. Learn about the 5 Ways a CFO Adds Value to take your role to the next level.

In Summary

In summary, your month end report should capture more than just your financial statements. It should also capture the following:

  • Capture key operational data
  • Capture information that is useable to make meaningful decisions
  • Key metrics and dashboards for your business and industry
  • Keep it short and sweet so the executive team can review this report in an hour or less
  • Careful not to overanalyze

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What Should Your Month End Reports Contain

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What Should Your Month End Reports Contain

10

ROCE (Return on Capital Employed)

See Also:
ROE (Return on Equity)
ROIC (Return on Invested Capital)

ROCE (Return on Capital Employed) Definition

ROCE stands for Return on Capital Employed; it is a financial ratio that determines a company’s profitability and the efficiency the capital is applied. A higher ROCE implies a more economical use of capital; the ROCE should be higher than the capital cost. If not, the company is less productive and inadequately building shareholder value.

ROCE Formula

Use the following formula to calculate ROCE:

ROCE =  EBIT/Capital Employed.

EBIT = Earnings Before Interest and Tax
Capital Employed = Total AssetsCurrent Liabilities.

Calculating Return on Capital Employed is a useful means of comparing profits across companies based on the amount of capital. It is insufficient to look at the EBIT alone to determine which company is a better investment. You also have to look at the capital and calculate the ROCE. Many consider ROCE a more reliable formula than ROE for calculating a company’s future earnings because current liabilities and expenses.


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ROCE Example

Look at the following table to see the importance ofReturn on Capital Employed (ROCE) in action.

Return on Capital Employed

Both Company A and Company B sell computers. Company A represents the Old Factory model; they are a distribution company that sells business to business. Company B is the New Factory; they are also a distribution company, but they sell on the Internet via credit card. Due to this modern convenience, Company B is able to receive payment within two days instead of the forty-five it takes Company A.

If you were to just consider EBIT, then Company A looks like the better investment at 7% return on sales compared to Company B’s 5%; however, with such a large DSO number, Company A is out $6,000,000 more than Company B at any given time. This means Company B needs less capital invested in the company which would result in a higher return on equity (ROE).

Thirty years ago, a similar scenario played out between IBM (Company A) and Dell (Company B). In his college dorm room, Michael Dell started taking credit card sales over the phone and was able to grow a billion dollar company with very little capital.

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Return on Capital Employed

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Return on Capital Employed

(Originally published by  on June 9, 2016)

4

Variance Analysis

See Also:
Direct Labor Variance Formulas
Direct Material Variance Formulas
Asset Market Value versus Asset Book Value
Accounting Income vs Economic Income
ProForma Financial Statements

Variance Analysis

Variance analysis measures the differences between expected results and actual results of a production process or other business activity. Measuring and examining variances can help management contain and control costs and improve operational efficiency.

Prior to an accounting period, a budget is made using estimates of material and labor costs and amounts that will be required for the period. After the accounting period, compare the actual material and labor costs and amounts to the estimates to see how accurate the estimates were. The differences between the estimates and the actual results observed at the end of the period are called the variances.

Commonly measured variances include direct labor rate variance, direct labor efficiency variance, direct material price variance, and direct material quantity variance. These variance analyses compare expected results to actual results. The purpose is to see if budget targets were met. Or they see if the operations ended up being more expensive or less costly than originally planned.


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Variance Interpretation

Variance analysis will let managers and cost analysts see if the budgeted costs and requirements for an operation accurately forecasted the actual costs and requirements of the operation.

Often, you will find variance between the budgeted requirements and the actual requirements. It is then up to managers and cost analysts to determine if that variance was favorable or unfavorable.

When a variance is favorable, that means that the actual costs and requirements of the operations were less than the expected costs and requirements for the operations. In other words, they expected the production process to cost a certain amount and it ended up costing less. Hence, this is a favorable variance.

When a variance is unfavorable, that means that the actual costs and requirements of the operations were more than the expected costs and requirements for the operations. In other words, they expected the production process to cost a certain amount and it ended up costing more. In conclusion, this is an unfavorable variance.

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variance analysis

Source:

Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.

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Ten In-house Secrets For Reducing Your Company’s Legal Costs

See Also:
Tips on How to Manage Your Lawyer
What Relationship Should the General Counsel Have With the Board
How to Keep Your Corporate Veil Closed
Corporate Veil
Sunk Costs
Bankruptcy Costs

Ten In-house Secrets For Reducing Your Company’s Legal Costs

General Counsel,’ or “Chief Legal Officer,” is the job title of the lawyer who heads up the legal department in a corporation. As former general counsel of a small oil and gas company, as well as the assistant general counsel of two Fortune 100 corporations with annual sales exceeding a billion dollars per year, my job involved delivering and managing in-house legal services, managing external law firms, and contributing to corporate strategy. However, much of my time was occupied with finding ways to reduce your company’s legal costs.

Major corporations need a full-time general counsel, and supporting legal staff made up of other in-house lawyers and supporting administrative staff. However, smaller growth emerging companies may not have the luxury and the resources to hire such legal support. This article will assist you in developing legal management principles that can reduce cost and increase efficiency in your business. The primary goals of managing legal costs include the following:

  • Negotiating the cost per hour of a lawyer’s time
  • Reducing the number of hours of lawyer time required by the Company for external lawyers

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Reducing The Cost Per Hour for Legal Services

1. Recognize the ‘In-House’ Advantages

Corporations with in-house lawyers typically generate internal legal services at a cost per unit of time lower than hourly rates of external law firms. When legal services are delivered on-site, the lawyer becomes a familiar face, and can learn a lot about the company and the overall strategy of its management team. This makes it easier for the in-house lawyer to give pro-active advice that is in line with the company’s corporate strategy and business objectives. Having one lawyer responsible for delivery and management of all company legal requirements gives continuity critical to strategy implementation and facilitates cost management of the legal function.

2. Identify Legal Work Critical to the Strategy of the Company

Identify legal work critical to the core mission or strategy of the Company. Target doing it on an ‘in-house’ basis. As in other skill areas, the approach of ‘new economycompanies is to hire for core mission critical and strategy requirements. Then outsource the rest.

3. Recognize the Requirements of the Job and Obtain the Skills Needed

The ability to perform legal services at a high performance level is the primary basis of evaluation for a potential in-house counsel. Just as important are the in-house counsel’s ability to source and manage legal requirements that exceed his or her geographic, skill or time limitations. A third quality that you should desire in an in-house counsel is the ability to design and deliver internal legal liability reduction programs. They should accomplish this by creating standardized practices, materials, and processes aimed at reducing the Company’s legal costs over time. They should also reduce any potential legal liability, or risks, as the Company pursues its business goals and objectives.

4. Calculate Your Company’s Legal Costs

This requires adding up all of your legal bills for the previous year AND estimating the cost of productive executive time lost due to involvement in, concern about, or management of legal issues. Now you have identified the value of managing the Company’s legal environment. Adjust this amount upward or downward to reflect how you expect the current year’s business activity, and legal activity, to compare to the past year for the same activity. You can label the adjusted amount as your Company’s ‘projected legal costs.’

5. Assess the Cost of ‘In-House’ Employee vs External Lawyer ‘A La Carte’

Assess the cost of bringing a full-time lawyer on board as an employee (‘in-house’ employee cost). Then compare the cost to buying legal services from an external lawyer ‘a la carte.’ Recognize the value of educational, business, legal, ‘in-house’ and management experience and skills necessary to do the legal job for the Company as it is now and as you plan it to be in the future. Remember technical and industry knowledge may be important candidate factors. The fully loaded ‘in-house’ employee cost for an in-house lawyer recognizes lawyer recruitment fees, salary, executive benefits, support staff, allocated office space, office furniture, equipment, law library and electronic legal research costs, law society and practice insurance annual fees, and costs of ongoing legal education courses. If there is a risk that the newly hired in-house lawyer will not work out, then an allowance for costs of severance is prudent.

6. Compare the Projected Legal Costs to the Fully-Loaded ‘In-House’ Employee Cost

Make sure that you compare ‘apples to apples’. Avoid the “pitfall” of hiring an in-house lawyer that is too junior to do the job that you need done. This could be because of lack of experience, skills and knowledge. This could actually increase your Company’s costs because of the need to use external lawyers to supplement the work of your under skilled in-house lawyer. Of course, the more junior a lawyer is in experience level, the lower their salary for employment. But all other costs (which usually exceed salary) are more or less the same regardless of experience level of the lawyer employed.

7. Consider Permanent Outsourcing

If a new full-time ‘in-house’ employee is not in your Company’s current plans, due to staffing freezes, lack of desired flexibility, or other reasons, consider going for the ‘in-house’ advantages by permanent outsourcing. Some common benefits identified for outsourcing legal services for your Company include the following:

(a) strategic benefits such as an ability to focus company resources on its core business, access to better, and more efficient, technology
(b) operational benefits such as access to legal expertise, and experience, not otherwise available in the marketplace, scalable solutions, increased accountability
(c) financial benefits such as cost reduction and the “freeing-up” of capital for key projects

8. Consider Outsourcing

If you do not require a ‘full time equivalent’ for your company’s mission-critical and strategic legal work, then consider outsourcing. Outsourced legal services provide an opportunity to buy the services you need on a flexible, scalable basis. For example, The Phillips Law Group offers experienced in-house lawyers on a flexible schedule based on your Company’s legal requirements; such schedule can include a morning a week to full time. The services for such in-house lawyers can be priced on an hourly fee arrangement. They can also be priced on an alternative billing arrangement, such as target-fees, monthly retainer, project fees, or other basis. They work on-site at your premises. The pricing model reflects aggressive use of labor-saving technology and a belief that your Company should not pay any more for legal services than that which is absolutely necessary.

Reducing The Quantity Of Legal Services Required

9. Divide Your Company’s Legal Functions into Four Categories

Divide your Company’s legal functions into the following four categories:

  • Maintenance-related
  • Avoidable,
  • Transaction-related
  • Crisis-related

Then adopt management plans for each of those categories. Avoidable legal expenses are those that can be reduced through training employees responsible for causing them. An example would be targeting reduction of wrongful dismissal lawsuits by developing standard Company employment contracts and providing related training to the human resources staff.

10. Develop Standardized Materials and Procedures to Delegate Low-Level Legal Functions

Develop standardized materials and procedures to delegate low-level legal functions to business staff. Then have a lawyer monitor those functions. Functions relating to the Company’s compliance status and asset maintenance (e.g. routine procurement contracts, company and securities compliance filings, trademark and patent renewals) may offer a substantial opportunity to save money. Completion and return of standard forms can be delegated to trained staff and then monitored by a lawyer. Your Company can develop a process to review all patents and trademarks. Make sure that the Company is exploiting them, or has a potential use or revenue from each, before spending money to renew registrations.

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company's legal costs, reducing your company's legal costs

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company's legal costs, reducing your company's legal costs

See related article:
Tips on How to Manage Your Lawyer

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Tax Efficiency

See Also:
Federal Unemployment Tax Act (FUTA)
Tax Brackets
Prepaid Income Tax
Marginal Tax Rate
Cash Flow After Tax
Ad Valorem Tax

Tax Efficiency Definition

Tax efficiency, defined as the process of organizing an investment so that it receives the least possible taxation, is as important in general investment as it is in business. Business, commercial investments, and even private investment vehicles can experience tax efficiency through planning. Any time a person has caused a change which avoids a higher tax rate they are experiencing the benefits of a change in their tax efficiency rating.


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Tax Efficiency Meaning

Tax efficiency means paying less to the government due to some changes in the structure of an investment. This can have relatively minor or an extremely profound effect on net profit depending on the scale of the investment in question.

For public market investments, achieve an increased tax efficiency ratio through a variety of means. Tax free bonds and money market accounts, stocks which are held over one year, and tax efficiency of etfs other than this can be utilized for an income which is greater than their taxed counterpart.

For businesses, tax efficiency can be gained through other means. The structure of the legal entity that is the business can effect tax efficiency: LLC’s do not experience double-taxation like corporations do. Additionally, moving finances from account to account inside the business can also leave less to be taxed. Reinvesting profits into research and development rather than taking company profits is one option: the business experiences less capital gains than if it kept the income.

In personal finances, other investment tools can increase tax efficiency. For example, a Roth IRA has increased tax efficiency over some other tools. For proper planning it is important to consult with a financial planner and find out which tool is best for each circumstance.

Tax accountants are the experts in creating tax efficiency. For those who have a large amount of funds tied up in investments a tax accountant is a necessity. These trained professionals can inform the business owner on the proper structuring of business, investment, and personal finances.

Example

Dom is a business owner who is experiencing new success. His business is taking off like never before and has provided a lot of extra income as it does this. Dom has no need to reinvest this money into the business as it already has enough free cash flow. Dom has decided to diversify his holdings by investing in other places. He now needs to bring it together to increase his tax efficiency of index funds and business dealings alike.

Dom arranges a meeting with both his financial advisor and his tax accountant. He knows these two will not see eye-to-eye on everything but wants to bring his investments to work together.

His meeting goes quite well. Dom has received advice that will benefit him immensely. From his tax accountant, he received advice on restructuring his business entity as well as accounting methods. From his financial advisor, he was informed about places to invest which hold value steady and will increase tax efficiency of mutual funds. Dom leaves with a good attitude that tomorrow will be better than today.

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0

Problem With Days Sales Outstanding Example

See also:
Daily Sales Outstanding Calculation
Operating Cycle Definition
Unlock Cash in Your Business
Turnover in Collections is Destroying Your DSO
Daily Sales Outstanding (DSO)

Dales Sales Outstanding Explanation

Often days sales outstanding (commonly referred to simply as DSO) is used as a measure of the average number of days it takes for a company to collect on its credit sales, using the accounts receivable balance at the end of a period and the amount of credit sales for that period. Days sales outstanding is closely related to accounts receivable turnover, as DSO can also be expressed as the number of days in a period divided by the accounts receivable turnover. The lower the DSO, the shorter the time it takes for a company to collect. Whereas a higher DSO means a longer time period to collect and usually indicates a problem with a company’s collection process and/or credit underwriting.


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How To Use Days Sales Outstanding

Days sales outstanding is a measure which should be monitored often in order to gauge the efficiency and effectiveness of a company’s accounting department. Closely examine the trend in DSO over a period of weeks or months to identify problems. This is especially true before they get out of hand. As a result, comparing the Days Sales Outstanding industry average with that of the company will help to gauge whether or not a company is lagging or surpassing its competitors in its accounting operations. One way to monitor trends in days sales outstanding is through the use of a flash report. For example, a company may also consider implementing a daily cash report to manage its cash on a daily basis, with an eye towards improving its DSO by improving its collections.

It is important to understand the days sales outstanding formula and what assumptions are made in its calculation. The following days sales outstanding example highlights a common problem.

Problem With Days Sales Outstanding Example

Unfortunately, the conventional methodology for calculating days sales outstanding weighs heavily on a company’s average annual sales, or a running 12 month average. Consequently, this approach overlooks the impact seasonality of sales can have on that statistic and can sometimes provide a misleading picture of the status of accounts receivable.

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Let’s assume two situations with the following facts:

Annual sales: $36,000,000 (or $100,000 per day)

Company A

A/R balance at end of current month: $7,000,000

Sales
Current Month: $6,000,000
1 Month Ago: $5,000,000
2 Months Ago: $2,000,000

Company B

A/R balance at end of current month: $7,000,000

Sales
Current Month: $2,000,000
1 Month Ago: $2,000,000
2 Months Ago: $1,000,000
3 Months Ago: $2,000,000

DSO Calculation

To calculate the traditional DSO for both companies, divide $7,000,000 by the average daily sales for the last 12 months of $100,000. This returns a DSO of 70 days.

However, Company A’s receivables are in much better condition as they only have receivables equal to the last 36 days sales (calculated as (A/R balance/current month’s sales)*# of days in month, or
($7,000,000/$6,000,000)*30 = 35).

Meanwhile, Company B’s receivables represent sales from the past 108 days.

So for Company A, assuming the traditional DSO measure of 70 would overstate the time it would take to collect sales from the last month by two times. Comparatively, Company B would be understated by 38 days.

The Problem With Days Sales Outstanding

Although this example is an exaggeration of extremes, the traditional DSO methodology falls short when you consider seasonality trends. A high DSO usually indicates inefficiencies and problems in a company which are costing a company dearly. It is important not to just mechanically compute financial ratios such as days sales outstanding. But it also important to take a look at the numbers underlying your calculations to ensure that you have an accurate picture of a company’s performance. For more ways to improve your cash flow, download the free 25 Ways to Improve Cash Flow whitepaper.

Problem With Days Sales Outstanding Example

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Problem With Days Sales Outstanding

4

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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