Sunday, March 24, 2013

Major Areas for Supplier Cost Reduction and Management: Production Materials


Part I: Production Materials 

Professionals can miss areas of opportunity for supplier cost reduction and management.  Usually when we think about costs management, the manufacturing, retail, or wholesale environment comes to mind.  Service industries usually do not take top rung.  However, all industries as well as all areas within a business need to rein in costs for greater efficiency and profitability.  Manufacturing is not the only industry just as the inventory management process is not the only area for managing costs.  The supply chain also encompasses more than the production floor, and costs toward end user targets are just as important as costs toward value added and resale.  Three areas of opportunity exist for managing costs within a firm:

1.      Productions materials

2.      Product-related contract services

3.      Outsourced organizational components
 

Production Materials

The most obvious areas of cost reduction and management consist of production processes and inventories. However, the obvious does not automatically translate into management best practices. With more companies considering outsourcing for manufacturing, the following questions arise:
1.      What does the vendor outsource?
2.      Who supplies assembled component producer materials?
3.      Is your company in control of the entire supply chain concerning the number of vendor links in that chain?
4.      Does your risk management plan safeguard your supply chain?
5.      Does that plan insure provide for quality, proper disclosures, confidentiality, technical requirements, and on time deliverables?
6.      Do vendor deliverables meet your customer requirements?
Herein lay the key for supplier management: customer-driven management.  The customer drives answers to all of the above questions.  Therefore, the entire supply chain matters for quality, price, performance, and differentiation.  Brian Everett highlights this importance in Lenovo’s success.  He notes that outsourcing has its “competitive advantages” but highlights Jim Molzon’s concerns about outsourcing challenges, coordinating the outsourced pieces may indeed create new challenges in product development and procurement along the supply chain interface.”    Molzon states that some of those risk challenges include import and export execution, transportation, shipment visibility, and vendor managed inventories.  For this reason, it is important to have the supply chain trained on customer-driven management and to allow that principle to guide every vendor in the process.
On a similar note, successful manufacturing firms grasp the importance of multi-sourcing.  While doing so, best practices may not always be front and center.  Vendor transparency and risk management constantly tug at one another.  Vendors have concerns that too much disclosure will cause a loss of competitive edge while customers focus on risks with vendors.  Tension arises between these two areas.  How do you control risks while gaining greater disclosure from companies in your supply chain?
Anna Frazetto highlights several key management practices in a related supplier area – information technology (“10 Tips for Multisourcing Success,” http://bit.ly/ctlmp0).  I will underscore five of these areas:
1.      A strong internal support team – Having a point person or team overseeing multi-sourcing
2.      Standardization across vendors – Criteria and requirements specification management
3.      Due diligence in vendor selection – A change control management team or something similar to one
4.      Proper internal governance and risk management – Governance and risk management strategic plan and written policies
5.      Key performance indicators (KPIs) and key risk indicators (KRIs) – These two types of indicators complement on another
Such a brief article cannot do justice in sufficiently explaining these five areas.   However, a good place to start is with the links provided for the above noted specified keys words.  Implementing these five best practices can provide substantial cost reduction and management. They can also address corresponding risks associated with costs due to lost opportunity, fraud, theft, and embezzlement.  Multi-sourcing best practices in themselves will drive costs down through increased vendor competition for your business and lend to streamlining internal processes.  Performance and risk indicators can highlight prior unknown areas of high business costs and set targets for further cost reduction.


Tuesday, March 12, 2013

Are you Concerned about the Cost of Risks in Your Business?


In my book, I write the following:

"The Committee of Sponsoring Organizations of the Treadway Commission (COSO) raises a sense of urgency for giving attention to proper safeguards. It identifies the framework for safeguards as key risk indicators (KRIs) and defines them as “metrics used by organizations to provide an early signal of increasing risk exposures in various areas of the enterprise. "

 
A company needs to decide on the level of priority it gives to the segregation of duties for insuring proper risk management. Th e lower the priority the higher the company has risk exposure. Without this priority, the company could throw up roadblocks to market opportunity and corresponding revenue."

Businesses must gauge the risks they want to take in penetrating the market.  This is risk to revenue.  However, there are many other risks s business faces, which could be costly if not addressed.

Costly risks occur in all functions and organizations among private and public firms alike. The “2010 Report to the Nations on Occupational Fraud and Abuse” found that inventory management comprised the highest percentage of fraud cases (29%). Accounts Receivable came in second (25%) with plant and equipment coming in a distant third (14%). Cash accounts, loans, investments, and prepaid expenses comprised the rest where liabilities from risks occur.

Commitment to risk management serves to close the risk gap and lends to cost reduction. Five risk management deterrents can be excellent starting points for a firm lacking risk management or may be in a rudimentary stage of implementation:
  1. The tone at the top
  2. A code of ethics
  3. Risk management committee
  4. Internal controls
  5. Key risk indicators (KRIs)
Once in place, building on them incrementally through process and technological improvements as further discoveries arise strengthens operations and provides for greater efficiency.

These five deterrents will enable a company to respond positively to risks affecting it.  Start today with their implementation.

AFB Business Solutions provides such solutions.  E-mail us to discuss them with us info@afbbusinesssolutions.com.

Monday, March 11, 2013

Risk Management

Why take risks with your business?


Fraud, theft, embezzlement, and other losses constantly threaten your business! What do you do about it?  Watch your business and you watch your money! $$$

Facts about risk losses to businesses

The SAS Institute concluded that 90% of all companies in the financial sector have lost more than $10 million yearly due to poor risk management. Gary Cohn, President of Goldman Sachs, noted, “Poor risk management, and not sophisticated products, is to blame for financial-company losses and failures” (Bloomberg Business Week, September 25, 2011).

Forensic accountant Tracy Coenen writes that 91% of fraud schemes occur by asset misappropriation. However, its costs dwarfed financial statement reporting fraud, which cost companies as much as $2 million.

A Sacramento, California construction company suffered a financial loss in 2011 when an accounting manager embezzled nearly half-million dollars. Other risky events can bring businesses to their knees financially. The emergence of newer risks to a company’s existence causes risk management to leap in attention among business executives and owners.


The chart below from ACFE 2010 Report to the Nations on Occupational Fraud and Abuse
the shows the risks vulnerabilities for small businesses:

 
 
 

Saturday, March 9, 2013

What Others Say about Hiring a CFO...and More on Criteria and Other Options

Amy Errett highlights additional criteria for the qualifications for a CFO, and Marie Hollein suggests when a good time would be for bringing a CFO on board.

Read more at this link:

How to Hire a Chief Financial Officer or CFO

However, neither  Errett nor Hollein mention outsourcing the CFO.  Read what Todd Guthrie and Chris Thomajan say about CFO outsourcing at this link:

Should We Use an Outsourced CFO?

Another condition companies should consider in outsourcing the top finance executive for its company is risk.  This CFO has access to highly sensitive and confidential data.  Additionally, outsourcing does not mean full time.  Concerning this, how much can an outsourced CFO do strategically and in the giving of direction when this role serves on a part time basis.  This speaks to commitment to the company's success.

The argument may arise, "We do not have the funds for a full time CFO.  What do we do then?  There are several options left open:

  1. The CEO or President should have adequate financial savvy and acumen for oversight;
  2. Settle for a lower role such as a Controller or Business Manager.  With one of these selections, do deep dives into qualifications during the interview process and be intuitive concerning the best interest of the company;
  3. Consider your industry and the knowledge required for a finance manager for that industry.  Be wary of a prospect whose experience is in services if you are a manufacturing company.
  4. Consider a sound firm rather than an individual wanting a gig.  What is that person's availability, and does the prospect have an alternative if he or she is not available at certain times?
  5. Prepare a checklist of functions, processes, and procedures first prior to any interview
  6. Consider consulting with your Board of Directors;
  7. Consider someone as a sounding board or in an advisory capacity whose breadth and depth is in financial statements review and interpretation, month end close processes, staff training in accounting, cost accounting, the control environment, audit, and planning;
  8. Write out a contract and non-disclosure agreement.  The contract should outline your requirements and the qualifications you seek.  Both documents should be tightly written with legal consultation;
  9. Do your research on the role of a CFO or related financial roles in a company.  Your research should heavily influence your contractual and non-disclosure agreements;
  10. Consider best fit for your business.

More on AFB Business Solutions products and services

Planning...risk management...business processes...accounting practices...training in finance...staff selection...

Visit our website to learn more about these services: http://www.afbbusinesssolutions.com.

Friday, March 8, 2013

10 Criteria for Hiring a CFO for Your Company

To insure successful business management, the CEO or board of directors must insure that the finance management role meets several criteria:
  1. Understands the “tone at the top” principle and becomes the evangelist for it throughout the company;
  2. Possesses expertise and experience in all areas of financial management for guiding the organization’s financial affairs;
  3. Ensures appropriate oversight over financial performance and be a resource for interpretation of general accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS);
  4. Values sound policies and practices and internal controls;
  5. Provides visibility and encouragement for proper governance of financial matters;
  6. Exhibits leadership that gives equal standing and voice in executive strategic decision-making;
  7. Expresses capacity to address the challenges to financial issues and mediates them to the benefit of all functions and the entire organization;
  8. Exercises leadership to oversee accounting for resources, resources allocation, strategic management, and related matters;
  9. Exhibits an entrepreneurial attitude that reflects ownership;
  10. Possesses and voices a business management vision that drives action and results;
Financial management is collaborative and requires leadership participation but primarily a highly active role from the one whose expertise and experience drives the money train. The finance manager leads by example not only by being the champion of sound financial practices but also by practicing them himself. The financial manager has the capability to visualize the whole picture without sacrificing the details and casts a strategic financial vision for company resources, risk management, and wealth creation. A firm but inviting hand gives respect for financial matters and it communicates and champions the importance of stewardship, responsibility, and accountability. This is what Rose Hightower refers to as “governance.” It encompasses the strategic, tactical, and operational portions of the business.

Steven Bragg emphasizes several of these criteria in writing, “…it is critical to have the complete support of the top management team” for the successful implementation of best practices. Strong leadership that guides the tone at the top, experience and expertise, and placing value on best practices must be well ingrained in the finance manager for financial management to be successful. To the degree any one of these essentials are reduced or missing, the business will fail to value sound financial management. When such importance becomes reduced, the firm will suffer substantial setbacks in its growth, market presence, mission, and goal attainment.

The CFO is the finance leader of the company.  This role requires experience, expertise, and the education to deep dive into the challenging issues facing the business.  This role also must approach this leadership with strength, collaboration, and a sense of market and operational strategic direction for guiding the company toward growth and wealth creation for shareholders.

Thursday, March 7, 2013

Small Business Financial Leadership

Experience and Expertise for Financial Management

The black belt ranking goes to the person who rise to the level at which he or she masters certain skills, techniques, and acumen.  The same holds true in any professional discipline in which a person wishes to advance.  This principle is particularly true for a Chief Financial Officer (CFO) of a company.  This role's mastery of the numbers must be in a wide variety of areas.  For this reason, many CFOs may be Certified Pubic Accountants (CPA).  Much like the black belt, the CFO must pass certain tests for skill level, knowledge, accounting and auditing techniques, and applied wisdom. This level of financial management is a necessary ingredient for a company's success.  This is not to say that all companies require a full time CPA.  That may not be financially possible for start up and ongoing small businesses.  However, not having the financial capability to have a CPA at the business financial management helm does not dismiss the priority of finance in a company and the expertise for its oversight.

Managerial expertise in financial and accounting matters establishes the level of priority and importance to the firm’s financial governance. The degree of managerial expertise will decide the span and scope of necessary oversight. For example, a lower level of expertise will focus narrowly, that is, only on the accounting or related function. Such focus fails to recognize the reach of financial management within the organization. Furthermore, other functional managers will also fail to view its importance and will brush off financial management as having low priority. Consequently, such a lower level focus as accounting or bookkeeping may disregard the strategic importance of financial management for the entire organization.

Additionally, a low level of experience and expertise assigned to financial management oversight will fail to roll out control mechanisms to other functions within the organization. This will result in other functions not recognizing the value of sound financial policy and practices and thereby resist them to the detriment of the business.

Breadth and Scope of Financial Management

 
A complementary component to expertise and experience is management span or scope. The business owner, chief executive officer, or board of directors must insure that the finance manager not only has financial expertise and experience but also appropriate span of management. This is needful for being able to roll out financial management policies and practices throughout the entire organization.

If the organization does not vest sufficient authority for financial oversight, the consequences could be competition for financial resources and a disruptive environment rather than all organizational functions working together toward the same mission and goals. Marketing or operations could ignore the finance manager as having an insufficient voice in their financial matters. Consequently, unhealthy competition for financial resources could intensify for building individual kingdoms within the firm, and capital expenditures could spiral out of control.

Proper leadership in financial matters requires appropriate expertise in both strategic breadth and scope.  Having such available whether internally or as an outsourced role brings a sense of safety for mitigating risks and bringing to the company the accuracy in the numbers necessary for informed decisions.  It also provides greater foresight for the future.  A small company needs to be on top of the markets to succeed in the them.  For such a company to get ahead of its financial resources in its market launches can spell a quick demise or lead to wasteful resources with little means of measuring return from the resources applied to market penetration.

Tone at the Top - Reinforcing Business Integrity and Ethics

The Tone at the Top


Financial management begins with the tone at the top. Christine Bruinsma and Peter Wemmenhove characterize tone at the top in the following manner:
It is the message, the attitude and the culture the board of directors disseminates throughout the organization. It is best described as the consistency among statements, assertions, and explanations of the management and its actions. Tone at the top is seen by some as a part of and by others as equal to the internal control environment.
This principle points to executive management and has utmost priority for business and financial management. Numerous past scandals teach us the importance of tone at the top. Enron’s Jeffrey Skilling, Phar-Mor’s Michael Monus and Patrick Finn, Rite-Aid’s Martin Grass serve as examples of the importance of tone at the top. Each of these executives received prison sentences for embezzlement and fraud.

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) highlights some very revealing statistics about publicly traded companies. Fraud cases in them increased 18% from the decade of 1987-1997 to 1998-2007. Financial misstatements led to nearly $120 billion across 300 fraud cases. The CEO and/or CFO had some level of involvement 89% of the time. Bankruptcy and stock exchange delisting resulted from fraud discovery.

The tone at the top had significant influence on fraud and embezzlement, thereby rating its importance extremely high. Publicly traded companies have a higher degree of required financial disclosure. Consequently, it would be difficult not to conclude that privately held companies can be more prone to fraud.

According to Caroline McDonald, Senior Editor of CFO Publishing, fraud by corporate employees continues to climb according to the Quarterly Corporate Fraud Index from The Network, Inc. and BDO Consulting. McDonald cites Jimmy Lin, Vice-President at The Network, as suggesting, “The CFO has a crucial role to play in measuring the financial impact and reputational damage of fraud” and “should be an active and strategic participant in shoring up compliance and preventing fraud.”
The lack of segregation of duties and internal controls contribute to fraud or embezzlement with private small companies.

A $50 million annual revenue company engaged my services for bringing its accounting books and financial statements up to date after its accounting manager was caught embezzling funds of over $50 thousand in a two-year period. A couple of years ago, the Sacramento Bee reported that a privately held building developer suffered a similar but much larger financial loss. Two mortgage brokers in Northern California received stiff sentences in August 2012 for falsification of home sale prices and monetary kickbacks of $40,000 to $60,000 per home.

 Public and private and small and large companies alike fail to escape ethical breaches due to not having a sound tone at the top.  The small business cannot afford not having the principle of tone at the top becoming the guiding principle.  Unless integrity makes its imprint on the business, failure in areas or in the whole will negatively affect it.  Therefore, top decision makers must make the choice in the early stages of the business for gaining a sound reputation with all its constituents: employees, vendors, customers, bankers, and others who have a vested interest in seeing the business succeed.

Wednesday, March 6, 2013

The Business of Business: Leading the Money Train, Part #1 - The Start



Starting a business? Got a business already and having money management challenges?

Many start-up companies and small businesses existing for a number of years outsource a large portion if not all of its financial management component.  If they staff it internally, they sometimes relegate it to a bookkeeper, family member, or a business manager whose expertise may be in another discipline or one who lacks financial management breadth and depth.  During my career of advising small businesses in financial management, I observed a weakness that poses a significant risk to companies as going concerns: financial leadership.

Visit our website for more information on financial management: www.afbbusinesssolutions.com.

Effective financial management for both profit and nonprofit requires experienced and astute leadership joined with integrity.  Without such leadership, the organization could not survive for long, remain financially healthy, and expand into its markets.

The finance manager (CFO, controller, or accounting manager) informs the organization of the importance placed on strategic and tactical allocation of company resources in line with business mission and goals.  This importance expresses itself in several ways.   

1. Sound financial management weighs heavily on the “tone at the top.” 
2. Sound financial management requires expertise and experience.
3.  Sound financial management means vesting the appropriate level of management oversight to the finance manager for insuring successful business management.

If these traits do not rise to the level for addressing the challenges and issues the organization faces with its finances, proper oversight would be elusive and missing.  Successful business management directly relates to sound financial management.

NEXT:  Part #2 - The Tone at the Top