Tag Archives | SG&A

Margin Compression

money in a viseEver heard the term “margin compression”?  Put simply, margin compression occurs when the costs to make a product or deliver a service rise faster than the sales price of the product or service.  Hence, putting pressure on profit margins.

Causes of Margin Compression

There may be many causes of margin compression…

Increased Competition

When I started The Strategic CFO over 16 years ago, I remember how hard it was to sell the idea of a part-time CFO.  Nobody was doing it, so it was tough to convince people that there was a need.

These days, there are so many new companies providing interim CFO services that trade show sponsors struggle to separate our booths in the exhibit hall.

As you might expect, the influx of new firms offering the same services as SCFO put pressure on our margins.  One of the ways that we have responded is by developing alternative income streams.  As a result, we now offer additional services complementary to consulting that aren’t yet so competitive.

 Internal Production Problems

Sometimes, a business can put pressure on itself.  Internal problems such as not using resources wisely can cause a business to incur more costs than necessary.

Resource waste may take the form of labor or material cost overruns due to poor planning, out-of-date processes or equipment, poor systems design, etc.  Regardless of the source, it’s important for businesses to monitor and improve key drivers in order to ensure that all resources are as productive as possible.

Macroeconomic Factors

Unless you’ve been living under a rock, you’re probably aware that low oil prices are wreaking havoc on much of the energy industry, as well as many tertiary industries.  While it may seem like there’s little a business can do to deal with such macroeconomic factors, there’s still hope.

Even though it’s tempting to be reactionary in the face of crisis, focusing on the long-term goals of the company rather than the short-term obstacles is critical.  Yes, you should closely examine costs and cut those that aren’t mission-critical.  It’s important to realize, however, that the crisis will end and you must still have the necessary resources to take advantage of the recovery.  The best antidote for these “black swans” is to plan for the crisis before it’s upon you.

SG&A Costs Out of Whack With Pricing

How do you price your products or services?  Some companies apply a markup to their direct costs.  Others set their prices to achieve a desired margin.  Very few, however, take their pricing down to the net income level.

While it may seem heavy-handed, examining all costs that go into making a product or delivering a service is necessary.  Otherwise, it’s easy to ignore creeping SG&A costs and their impact on profitability.  To guarantee that you’re pricing for profit, make sure that your pricing model takes into account SG&A costs.

Think you might have a pricing problem?  Download our free Pricing for Profit Inspection Guide here.

Margin compression

Margin compressionRegardless of what is causing your margin compression, there is a solution.  Diversification, improving productivity, planning for lean times and pricing for profit are just a few ways to deal with the problem.

How have you dealt with margin pressure?  Leave us a comment below with you thoughts.

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Problems in Chart of Accounts Design

See also:
Standard Chart of Accounts
Chart of Accounts (COA)
Complex COA Number for SGA Expenses
Example Chart of Accounts for Selling General and Administrative
Time Saving Tip for Filing Vendor Invoices

Problems in Chart of Accounts Design

Too Many General Ledger Accounts

Often when using QuickBooks or Peachtree accounting software the number of general ledger accounts grow over time. Usually the person entering the data is not a trained accountant. When faced with an accounting entry that is not specifically described by an existing general ledger account they will often set up a new account. It is especially easy to do in QuickBooks.

Too Much Detail in Selling General and Administrative Expenses

Similar to the problem mentioned above, often the person maintaining the general ledger is a detail oriented employee. This trait is both a blessing and a curse. The theory goes as follows: If a little detail is good then a lot is better! In order to get more and more detail on the general ledger they set up new general ledger accounts. In the end they are counting paperclips with numerous accounts with less than a thousand dollars charged to them.

Not Enough Detail in Revenue and Cost of Goods Sold Categories

Often revenue consists of one line item labeled “Sales” and “Cost of Goods Sold” as another line item. On the other hand there is considerable detail in Selling General and Administrative expenses. Most accountants manage profitability by controlling costs, however, you can create more value by managing “above the line” or gross margin.

Cost of Goods Sold Not Aligned with Revenue

It is not uncommon to see revenue sorted by product or category and the Cost of Goods Sold being tracked under a different segregation. You should sort revenue and Cost of Goods Sold by the same methodology so you can manage gross profit by category.

No Logic in Assigning General Ledger Account Numbers

Account numbers, especially in Selling General and Administrative expenses, are not assigned in any logical order. Accounts are not entered alphabetically or within a logical grouping. Consequently, it is difficult for the clerical staff to code payables properly or consistently.

Poor Titles on General Ledger Account Descriptions

In some instances, you may use acronyms to title accounts. This makes it difficult for a reader of the financial statements to decipher the accounts.

Inadequate Detail in Chart of Accounts

Too little detail in the chart of accounts can be as bad as having too much. An example is having two inventory subsidiary ledgers posting to one general ledger control account making reconciliation difficult.

No Departments, Product Lines or Regional Data Tracked

Part of a company’s strategic plan should be to manage growth and profitability by major categories. By putting this level of detail in the general ledger, you will refocus management’s focus or target on strategic goals.

Chart of Accounts Does Not Relate Back to Pricing Model

In bidding jobs or quoting sales orders it is important to estimate indirect overhead or direct overhead. If you do not compare these estimates to actual results, then over time profitability may suffer.

Using the Chart of Accounts for Job Costing

In companies where job costing is important it is common to see the Chart of Accounts used to track job cost. This is a result of not setting up the accounting software properly or not purchasing the appropriate accounting software package.

No Standard Chart of Accounts for Different Companies

In this situation multiple companies are either formed or acquired over time. Because they are often in different industries, use a different Chart of Accounts for each company. It would be preferable to use a standard Chart of Accounts customized in the few areas necessary.

Too Many Digits in Chart of Accounts Numbering

Accountants trained in a large company environment often bring that same logic to an entrepreneurial company. The result is an account numbering system six or more digits long. Most modern day accounting software use departmental accounting making the required digits to be no more than five.

Not Using a Numbering System

QuickBooks is great accounting software for beginners and non-accountants. Consequently, use an alpha system to establish the Chart of Accounts. This practice makes it difficult to sort accounts in anything other than alphabetical order.

Using Alpha Numeric Chart of Accounts

Another problem is using a combination of alpha/numeric accounts. Just as using alpha only systems causes organization problems so does a combination of alpha/numeric.

Not Leaving Gaps in the Numbering System

When you set up a chart of accounts for the first time, assign account numbers sequentially. Later when you want to add an account in alphabetical order there is not a gap in the numbering system to allow you to insert the new account.

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Problems in Chart of Accounts Design

 

Problems in Chart of Accounts Design

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Complex COA for SG&A Expenses

See also:
Problems in Chart of Account Design
Standard Chart of Accounts
Example Chart of Accounts for Selling, General, and Administrative Expenses
Generally Accepted Accounting Principles
Financial Accounting Standards Board

Complex COA / Chart of Accounts for SG&A Expenses

In lieu of a simple chart of accounts for SG&A expenses (selling general and administration expenses), you can design a numbering system with more information and structure.

Once the major class codes have been assigned (i.e. 6NNNNN..NN = Manufacturing Overhead) the nominal accounts such as labor, fringe benefits, consulting fees, supplies, telephone, etc. that have been identified as required accounts during the NAP, should be grouped into natural groupings (1–9) that can be rolled up to facilitate management planning and decision making.

Example of Chart of Accounts for SG&A Expenses

For example in the retail industry, the relationship of total wages and employee benefits (expenses impacted by adding employees) to sales by retail unit, or region, or total facility costs (rent, utilities, property taxes) to sales, provide management important barometers of store managers’ operating efficiencies and expense controls. Grouping the nominal expense accounts (which may total 50 -100 accounts) into the appropriate series, rather than numbering them alphabetically, for example, facilitates the comparison/analysis process.

6NNNNN, 7NNNNN, and 8NNNNN – Operating Overhead, Research, Selling, and General & Administrative Expenses – These divisions facilitate analysis, as in the homebuilding industry, where management may want to compare Construction Overhead and/or Marketing Expenses per unit by subdivision, product line, or geographical area.

9NNNNN..NN – Non-Operating Income and Expenses such as interest income, other miscellaneous income, and interest expense.


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Salary Expense

Therefore, the 100 series may capture salary expense data as follows:

  • Executive salaries
  • Exempt Salaries
  • Non-Exempt Salaries
  • Overtime Compensation
  • Incentive Compensation
  • Vacation & Holiday
  • Sick Leave
  • Others appropriate to the company

Fringe Benefits

The 200 series may include fringe benefits data as follows:

Thus, the 100s and 200s represent the employee expenses that are directly impacted by changes in headcounts. As a result, they can be rolled up into reports by department, state, division, or other management designated requirement.

The remaining groups may be compiled as follows:

Travel & Entertainment

300s = Travel & Entertainment, such as:

  • Airfare
  • Seminar Fees
  • Meals, excluding entertainment
  • Entertainment
  • Auto Rentals
  • Mileage

Office Expense

400s = Office & Other Miscellaneous Expenses, such as:

  • Office Supplies
  • Insurance
  • Miscellaneous Taxes & Licenses
  • Donations

Outside Services

500s = Outside Services, such as:

Rentals and Leases

600s = Rentals & Leases, such as:

  • Office Rent
  • Equipment Rent

Utilities

700s = Utilities, such as:

  • Electricity
  • Natural Gas
  • Propane

Depreciation and Amortization

800s = Depreciation & Amortization

Non Operating Income and Expense

900s = Non- Operating Income & Expense, such as:

So for example, a homebuilder may have the following accounts:

6 120 24 11- Construction Overhead; Non-Exempt Salaries; Subdivision 24; State 11

7 120 24 11- Marketing; Non-Exempt Salaries; Subdivision 24; State 11


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chart of accounts for sg&a expenses

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chart of accounts for sg&a expenses

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Calculate EBITDA

See Also:
EBITDA Definition
EBITDA Valuation
Operating Income (EBIT)
Operating Profit Margin Ratio Analysis
Net Income
Adjusted EBITDA

Calculate EBITDA

Calculate EBITDA (Earnings before Interest, Tax, Depreciation, and Amortization) in three easy steps. For an EBITDA meaning and use in valuation, click the above links for a better description.

EBITDA Calculation Formula

Step 1) The EBITDA calculation formula is quite simple; in fact, all of the information needed is contained within the income statement. The first step to calculate EBITDA from the income statement is to pull the operating profit or Earnings before Interest and Tax (EBIT). This can be found within the income statement after all Selling, General, and Administrative (SG&A) expenses as well as depreciation and amortization.

Step 2) Because the EBIT has already had the depreciation and amortization expense taken out within the income statement, it is necessary to add these expenses back to see what sort of cash flow the company really has contained within EBITDA. Once you add non-cash expenses to EBIT it is then considered the EBITDA and true amount of cash contained within the company. Many investors and users of financial statements use this number because the non-cash expenses do little to say about the actual cash flows of the company. Thus, the EBITDA reveals the true position of the company.

Use the following EBITDA calculation formula:

Operating Profit(Income) or EBIT
+ Depreciation Expense
+ Amortization Expense
EBITDA

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calculate EBITDA, EBITDA Calculation Formula

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calculate EBITDA, EBITDA Calculation Formula

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Administration Expenses

Administration Expenses Definition

In accounting, administration expenses are listed on the income statement as operating expenses. Administrative expenses are often included in an expense category called selling, general and administrative expenses, or SG&A. Administrative expenses include items such as administrative personnel wages, rent expenses, and utilities. The most effective ways to manage administrative expenses down are by either cutting overhead costs or laying off administrative personnel.


Is your closing process as efficient as it could be? Access our Complete Monthly Close Checklist to use when closing your company’s or your client’s monthly books.

Periodic inventory System

 

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administration expenses

See Also:
Example Chart of Accounts for Selling General and Administrative Expenses
Complex Chart of Accounts for Selling General and Administrative Expenses
How to Estimate Expenses for and Annual Budget
How to compensate sales person
Average Cost
Administrative Costs

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