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Archive for May, 2008

“How much is that little widget in the window?” – Part II

May 21st, 2008 Comments off

     I left off after Monday’s commentary with a summary of the activity based system we had implemented at a prior company and how our Controller was a good friend and colleague who I had learned so much from.  But we weren’t a single method system at that company, which necessitated the need for a bit of a hybrid system.

     Since approximately 40% of the revenues were project-based systems, a simple ABC structure was not going to do. These were complex projects that involved individual and custom bids for each customer. These bids might range from the mid-six figures to as high as $10-$15 million.  While we had to have a basis for the bid, which typically reverted back to our activity based system, we still had to develop custom bids that were constantly fluctuating with what our competitors were doing.  We encountered some pretty significant differences in margins, which ultimately depended on the customer as well as the product family that was involved in the bid.

     What we were lacking when I had first arrived at the company was a reporting structure that allowed us to track the progression of our margins from the bid stage of the project until the time we shipped the product to the customer. Make no mistake, it was a painful process to put this in place and gain the cooperation of all parties involved. This was not just a Finance function either. It took the cooperation of Finance, Sales, Engineering, Technical Solutions, Services, and a number of other key individuals. It also took quite a bit of time to put the discipline in place to be able to obtain the information.  In the end, we had reached a point that if we had a margin variance at the time of shipment versus what was originally bid, we could tie it to customer change orders, non-performance on our part, increases in material pricings, installation issues, or whatever other action caused a change in our margins.  For the better or worse.

     We were able to accomplish this level of reporting because we had an excellent costing structure in place, clearly understood our manufacturing process, and pressed ourselves to improve our performance. Unfortunately, much of this reporting was not considered a priority during the merger. While it was considered a priority in discussion, the reality of following through on the effort was overshadowed by the energy required in the merger.

     What prompted me to write the last two entries is the lack of comprehensive costing information that most companies have to work with and the valuable information they provide for making strategic decisions and operating as a “world class organization”. 

What is the state of your costing structure? Do you have the information you need to make appropriate business decisions and drive better performance in your company?  Only you know the answer to that one……

Thanks for reading,

Jeffrey

Categories: CorpFin Cafe, Mfg / Costing Tags:

“How much is that little widget in the window….?”

May 19th, 2008 Comments off

     Not sure about you, but I am constantly amazed by the number of companies that do not have a firm handle on their ability to successfully cost product and understand what the true cost of their manufacturing operations are.  These are not smaller companies who are working on some home-grown spreadsheet or an ERP system that was implemented by consultants and they never got a firm grasp on the intricacies.  No, these are “world class” organizations that are using massive “buckets” to just dump in their costs and see what comes out the other side in their Operating margin or EBIT calculations.

     I originally took a prior position as I did not have any cost accounting experience and a business mentor of mine advised me that this would be a key area for me to fortify on my resume.   I was fortunate enough to hire in to a company that had a Controller who had a solid 25-years of cost accounting and controllership experience, who was also gracious enough to teach me what he knew and to help me apply it in my ongoing analysis and forecasting. Eventually, I was promoted to the North American CFO position, and while he reported into me, we had a fantastic working relationship that was very complimentary to our mutual skillsets.

     In this particular company, he had been a key factor in developing a rather comprehensive ABC (activity based costing) system that provided us tremendous insight into each one of the product families we manufactured in Southern California. Come the end of the month, when it came time to draft our monthly management letter, we would review each one of the product families and could specifically identify each of the contributors to the variance within each product family. While we were constantly being challenged and questioned by our corporate team in France, our reporting always withstood the scrutiny. 

     We tended to be our own worst critic and were constantly striving to increase the accuracy of the reporting and using the data to identify areas of opportunity for further improvements.  Under an environment of drastically increasing metal prices, this constant effort allowed us to actually increase our margins, when if all things were held constant, they should have declined in a rather material way. 

     What I learned from my friend and colleague, I was able to roll into a Project-based costing system to track our large systems.  These were the custom bid systems that could take anywhere from a month to a year to complete, after we successfully bid the project.  But more on this approach tomorrow……

Thanks for reading.

Jeffrey

Categories: CorpFin Cafe, Mfg / Costing Tags:

Time to get back into gear….

May 19th, 2008 Comments off

It’s been a rough 3 weeks, but it’s definitely time to get back into gear on the daily updates and editorials.  For those that have dropped me emails as a sort of prodding…thank you.  I’ve been busy on a new engagement in Vegas and needless to say, the change in routine has affected my consistency. 

Thank you…and now time to get into gear!

 Jeff

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Financial restatements….is it only a matter of time?

May 6th, 2008 Comments off

While I have not had to go through the anxiety of a financial restatement at any of the companies I have worked with, I know a number of colleagues who have had to go through such an exercise and the subsequent fallout.  In my discussions with them, although some were legitimate system issues, most were the affect of human error and judgement calls. 

While most of the situations I have had the opportunity to discuss with colleagues have been relatively minor, and usually done collaboratively with the auditors, there was one at a public entity in which the majority of the executive team was replaced, interim appointments made, and it ultimately turned into a nasty public escapade. 

Is it enough to be initimately involved in all aspects of the business, to have a great relationship with the auditors, and to have a staff that you believe have the appropriate skillsets, along with a well-tested set of internal controls?  Or is it just a matter of time before every senior finance chief encounters this form in one respect or another?

The following article from CFO.com discusses this topic in more detail.
Read the full article at:  
http://www.cfo.com/article.cfm/11080109?f=alerts

When did you last see an IFO?

May 1st, 2008 Comments off

     Depending on the size of the organization you are running, and the number of entities, one of the more important questions you can ask is whether you are running an Integrated Finance Organization.  While there has been some recent press on the topic touting it as something near “revelation”, it should be standard operating procedure.  It doesn’t matter if you’re coordinating multiple entities in just a North American capacity or a combination of entities throughout the globe.  They all need to be on the same page and communicating under the same guidelines.

     So what is an IFO as opposed to any other Finance department?  When you’re looking at the organization you are are managing and asking whether it’s worth of “IFO status”, there are some key considerations to table and determine whether you meet the criteria.  If you don’t, it certainly gives you something to shoot for.

     First, your organization should be using a “global set of standards” in your reporting process/structure.  Let’s not be too literal in the word global, since this can apply to a strictly NAM entity or a true international structure.  Regardless, all entities need to be working under the same set of rules and have a clear understanding of what those rules are.  Second, there needs to be a standardized chart of accounts that are used through all the functional areas.  Where possible, there needs to be consistency in the use of accounts and little variation for “special” accounts, which end up adding up and clouding the reporting structure.  Third, the entire organization needs to be using terminology that is clear and concise to the completion of tasks, defining processes, delegations of authority, etc.  Any ambiguity will ultimately lead to a breakdown and the potential for risk.  Fourth, the entire Finance organization needs to be working on a standardized set of processes that is used by all entities.  Again, it comes back to a defined structure and scheduling that all parties are clear on and accountability can become a common theme in the delivery of information.

     During my time at MGE, in a pre-merger capacity, I was fortunate to be working under a global CFO who was entirely committed to putting this type of structure in place.  Not only was he committed to it, but it was achieved.  In hindsight, the experience that I received working with him and helping to shape and put his policies in place in North America was invaluable.  In the end, this type of process leads to the effective management of the Finance organization, decreases your levels of internal and external risk, and allows you to deliver information of the highest integrity.  In the end, Finance becomes a true value added service within the company.

Categories: CorpFin Cafe, Domestic, International Tags: