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Archive for August, 2008

Pending projects – September topics planned

August 29th, 2008 Comments off

Today is really turning into one of those days where it’s not quite coming together for a quality update and I’ve really tried to focus on Quality versus Quantity in my postings. Maybe it’s partly due to the looming holiday weekend & that its also been an incredibly busy week. Between a client project I’ve been working this week, as well as “meetings” with a number of other companies, recharging the batteries are key this weekend.

However, I have been thinking about all the topics I do want to address in the coming weeks. I’ve been trying to schedule more time to address these since I think they’ll be very interesting subjects to table. I really want to address points #2 and #3 since these have the potential to have far reaching implications in the conversion to IFRS. Some of what I had in mind:

1. Further breakdowns of the Sales & Operations Planning (S&OP) process and the development of a white paper on this topic.
2. Revenue recognition and the differences between IFRS and GAAP.
3. Fair Value reporting and the differences between IFRS and GAAP.
4. Overviews of the Budget/Forecast process as it relates to a traditional 4-quarter view versus the implementation of a rolling 5-quarter approach.
5. SEC reporting and the differing levels of transparency between companies in the same industry. (Not all 10-K’s are created equal….)

I also need to compile a few of my multiple updates into a single white paper, such as the Internal Audit thread. I’ve also created an account on SlideShare where I plan on posting some of my slide presentations. Looks like it’s going to be a busy month ahead…..

Thanks for reading . . . .

Internal Audits & a review of Information Systems

August 28th, 2008 Comments off

In my last few posts about the internal audit process I reviewed the approaches that were applied to the Finance/Control and Sales/Marketing areas. Equally important, perhaps the most, was the review of the Information Systems. For my time at MGE, I had actually found system uptime and the quality/consistency of data to be some of the best at any company I had worked with. I had not encountered any issues with security breaches of info, nor had I heard any horror stories.

This was one area of the audit that we had any differences of opinion regarding the findings of the auditors and the processes that we had in place. It finally came down to an “recognition” of their findings as opposed to agreement. We also found ourselves in a position in which one finding in the North American audit was the direct result of directives from our headquarters in France not to implement specific action plans. Some of the findings of the auditors included:

1. No comprehensive Disaster Recovery plan. This was the interesting one since we had such a plan in each of our capital budgets for the previous two years and were told by our headquarters that there was no room for this in the Budget. Well….I guess there would be now. The auditors were looking for defined system recovery requirements, storage and data locations, emergency procedures, along with a recovery framework.

2. Lack of segregation / out of date access rights. This was an area that I had addressed in an earlier post regarding access to Finance info. While we had addressed this issue within the Finance department, there was not the follow through to address this on a greater company-wide basis. This was a valid point but ranked lower on their priority list.

3. Lack of formal IS procedures. Another interesting one since they were looking for a set of KPI’s to be implemented to measure the performance of this group. It came down to the fact that we did not use their KPI’s. We had a fairly extensive list of indicators that we used to measure everything from system uptime, storage performance, user service requests, to project management.

4. Platform access rights. We had a single individual who had access rights to both the Production and Development environments within a certain software application. It was a little difficult to get around this since we only had one person who had an expertise in this platform and were not going to make additional investments in the platform moving forward. Point noted….

As I had mentioned in earlier posts about the internal audit process, this continued to be a very valuable process to help identify potential areas of risk. Fortunately, there continued to be very few surprises as we progressed through this project. I would highly suggest to any Senior Finance professional coming into an organization to read the last internal audit report, or conduct one if one has never been undertaken. Know where your risk is and how your career could potentially be impacted.

Thanks for reading . . . .

IFRS – potential rollout after 12/15/09

August 27th, 2008 Comments off

As expected, the SEC announced a preliminary overview of the roadmap that would be put into place for the transition of financial reporting to IFRS. Overall, the Commission expects that there will be a full transition by 2014, but that there will be further details released with respect to the milestones needed achieve the goal.

Specifics of the information released this morning outlined the ability of certain companies to be able to begin reporting under IFRS after December 15, 2009. Companies that are considered to be in the Top-20 for their industry will be allowed to begin reporting after this date. There are approximately 110 companies in 34 industries that would be able to begin reporting after this date. This is probably a bit quicker than some might have anticipated, since this is only 16-months out.

Although the milestones have yet to be released, the Commission has tentatively scheduled a review of these milestones in 2011 to gauge the progress and determine if they will open up the ability to report under IFRS to a larger population of companies. There are also proposals for companies to provide reconciliations between prior GAAP reporting and the revised reporting under IFRS. The proposal calls for a 3-year reconciliation. This should be more than just a proposal at this point but an absolute requirement for investors to see the “walk” between the two reporting structures.

Even for a later date of 2011, this is not a very large window for governing bodies and schools to organize appropriate curriculum to cover the topic. The Commission requested that the AICPA and States add questions to existing exams for IFRS. Rather than add questions to the exam it would seem that there should be the introduction of a new module (?) that would cover IFRS. I still have a hard time believing that we are potentially looking at a 100% conversion to IFRS with no carry forward of GAAP. Not with the energies that have been expended over the last decade on new regulations, and prosecution of those regulations.

Time will tell. Thanks for reading . . . .

How do you measure your daily efforts?

August 27th, 2008 Comments off

A little less technical on the topic matter today, but sometimes the daily discussion calls for it. I was on one of my daily training rides, which if you know me you know how much cycling I do. I realized that the vast majority of my rides occur alone, early in the morning, to accommodate my professional obligations. For my training I use a Powertap wattage meter that tells me exactly how hard I am working. It tells me the specific wattage output for each ride. There’s simply no hiding from the number on a daily basis or longer-term trends. I can immediately tell if I’ve been slacking on the ride, or over the longer term. I have specific long-term goals for my training.

Recently I have started racing a series of Crits, which involves a closed course with a grouping of 50 riders or more. It’s very tightly grouped and not for the faint of heart. One of the known technicalities in a group ride is that you can preserve your energy by riding behind others and let them do the majority of the work. The effort that I put out on a solo ride might average 225w for a 2-4 hour period. If I’m riding in a group and staying in the middle or back portion of the pack, I might only average 160-170w. However, I’m not one to sit idle in the pack. I’m either going to chase down the breaks or instigate a break of my own and try and go off the front. At a minimum, I’ll try and do a fair amount of pace setting. At the end of a 1-hour race pace I will ultimately put in an average effort of 290-310w. And yes, I will spend a little time recovering inside the pack.
You can see the difference in efforts. What energy and effort are you going to bring to the pack? Are you simply going to be pack fill? You know where I’m going with this…

In a professional capacity, how do you measure your efforts with your team and what energy do you bring as a leader to the group or what actions provide the example? Are you going to be on your game and are you going to continue pushing yourself and increasing your level of performance? It’s very seldom that others can prompt you to instantly change your approach, but with hard work and “professional training”, every member of the team is capable of increasing the performance of the group. While we don’t have wattage meters at our disposal at work, we do know when we’re “pack fill” and letting others do the work, or driving peformance. Which are you?

Thanks for reading . . . .

Sales & Operations Planning – why should you care?

August 26th, 2008 Comments off

In a more recent topic of discussion last week, I touched on one of the more significant efforts that we had kicked off – an extensive S&OP initiative. In my opening commentary I touched on the reasons that caused, and in some cases, necessitated our commitment to this process. But for those that had not gone through this process previously, myself included, we needed to have a clear understanding of what the process meant and the efforts we would need to commit.

S&OP 101: As a group that had a a high number of newbies, we had to know the basics. At the most basic level, S&OP is an Executive Decision making process that involves all key areas of the organization, including Sales & Marketing, Manufacturing, Design / Engineering / R&D, Finance, and Logistics, which are then coordinated to optimize the planning and forecasting efforts of the organization to efficiently utilize available resources. Depending on the size and nature of the organization, some of the functional areas may change, but bottom line, it involves EFFECTIVE communication among all functional areas. It comes down to an achieving an effective balance between the Supply and Demand forces placed on the firm.

For the firm and the participants involved, this is not a project that involves capturing some improvements in cost, but a firm commitment to the changing of processes and almost retooling the input process in your forecasting. But this should involve only a few areas….right? Let’s take a look at some of the areas that will likely be targeted for review in this process:
1. Statistic, Marketing, and Management Analysis.
2. Review of the Analysis for use within long-term and short-term forecasting efforts.
3. Review of the demand plan, supply plan, shipments, deliveries, and scheduling efforts.
4. Review of bills of materials, bills of resources, and capacity constraints.
5. Assessment of materials and resources in support of short-term and long-term capacity planning.

So when it comes down to Sales & Operations Planning, any member of executive management should care that their resources are being deployed in the most efficient manner. Although results might be good, and on Budget, how much better could company be performing if this effort were undertaken?

Thanks for reading . . . .

SEC set to announce IFRS dates. . .

August 25th, 2008 Comments off

The SEC has announced that on Wednesday it will release the tentative target dates for U.S. companies to convert to IFRS. There has already been quite a bit of speculation regarding the potential dates that might be rolled out, which ranged from initial targets of 2011 to coincide with Canada, India, and Japan, to 2015 for adoption by small companies. This change will involve more than just a simple restructuring of reporting standards. It will also have a huge ripple effect through accounting/finance curriculum and professional training standards.
In the coming weeks I’ll also be posting commentaries outlining the differences between IFRS and GAAP on a variety of subjects, including Revenue Recognition, Fair Value, and others. Until then, I’m eagerly awaiting the news on target dates.

The text of the article is listed below:

The long-awaited deadline will come in the form of a roadmap that the SEC commissioners will consider whether to propose — and which would open up the conversion date to public scrutiny and debate.

The SEC also plans to consider proposing amendments to various rules and forms that would allow “a limited number of U.S. issuers” to prepare their financial statements using IFRS rather than GAAP earlier than the roadmap proposes, the commission announced on Friday.

For the past year — ever since the SEC began allowing foreign companies to submit their SEC-prepared filings without reconciling them with GAAP — companies, academics, and accounting firms have been waiting to hear when U.S. publicly traded companies would be given a similar allowance. In the meantime, the Big Four accounting firms have been telling their clients that an SEC mandate for IFRS use is inevitable.

In Europe, companies were given three years to change over their financial reporting systems from their home-country GAAP to IFRS — an enormous switch that was completed in 2005. The experience has given large multinationals domiciled in the U.S. fodder for persuading the SEC that the largest of U.S. registrants could make a similar conversion by 2011. In that year, Canadian, Indian, and Japanese companies are expected to begin using the global standards.

Accounting firms also have predicted that the year 2013 could be cited by the SEC as an IFRS-switchover date for large U.S. companies, with 2015 being the deadline for small companies to begin using IFRS. Earlier this summer, Conrad Hewitt, the SEC’s chief accountant, said the U.S. shouldn’t be left behind while the rest of the world makes the switch to IFRS within the next three years.

While IFRS has become the most popular accounting language worldwide, it’s looked at speculatively by accounting experts based in the United States. Some say it’s more principles based and than the more time-tested GAAP, which provides accountants with more guidance for each of its rules.

For the better part of this decade, the Financial Accounting Standards Board and the International Accounting Standards Board have working on harmonizing U.S. GAAP and IFRS. Accounting experts say the standards are not yet close enough to ignore the quality differences between the two and the need for U.S. accountants to be schooled in IFRS.

How would you rate your professional network? Really….

August 20th, 2008 Comments off

When I first found myself in the first forced search of my career I thought I had established a fairly strong personal and professional network that I could look to for guidance and feedback in my search. After all, I graduated from USC with my MBA, which has a tremendous network, and I have spent most of my entire professional career in Orange County. Whenever there were challenges or I needed to add to my staff I always knew what contacts I could turn to. What my network provided me was the insight on further dialing in my search and helping me to expand my network. They helped me become acquainted with new organizations that I will likely continue using for the rest of my career.

The most redeeming part though is that I have made some fantastic new contacts within these groups, that I have met with personally away from the dinners and networking meetings. Folks that I equally enjoy helping in their efforts, but absolutely appreciate for their feedback, professionalism, and expertise. So what are the groups that might be worth your time?

1. Financial Executives International (FEI): There are chapters in most major metropolitan areas across the country. They run about a 9-month calendar with a monthly dinner that hosts speaker(s) from market leading companies or to panel discussions affecting the Finance community.
2. Financial Executives Networking Group (FENG): Another great Finance network that shares professional expertise and has been a great source of potential career leads and subject discussion boards.
3. USC Marshall Alumni: The alumni group for the business school at USC. The group hosts monthly breakfasts with a variety of speakers, lunches, as well as informal evening mixers. Another great way to meet your professional peers.

I could continue profiling more groups, but it comes down to the question of what you’re doing to bolster your professional network. This is not simply to prepare you for a potential search that you will likely encounter over the next few years, but surrounding yourself with talented individuals that can be a great source of expertise. Individuals that you can call on when it comes time to call in some artillery for one of those key projects. The formation of my network will extend far beyond any search efforts that I will encounter in my career. So how do you rate your professional network? Really…..

Thanks for reading . . . .

We’re mid-Q3, are you achieving your plan?

August 19th, 2008 Comments off

I apologize in advance for republishing an earlier white paper, but I felt that this one was worth revisiting considering recent conversations about Finance departments and their staffing levels. I am continuing to hear from my peers, as well as recruiters, that departments are being run extremely lean. With this in mind, it becomes even more necessary to keep our groups motivated and focused on the task at hand. When the targets for hitting our annual plans are those home runs that take the better part of a year to achieve, it becomes harder to keep teams focused, and should those goals not be met, almost instills a sense of failure within the group. Something we can certainly do without in this demanding environment.

I would also have to assume at this point that most organizations have already achieved their “big hits” over the last year since we really started to see the current slowdown in the latter part of Q3 last year. If you’re a company with a revenue range of $200 million and OpEx in the $50 million range, and you want to trim 5% from you expenses, where do you begin? For starters, you not only need to trim the 5%, but you also need to counter the inflationary impact on salaries, insurances, and other variables. However, if you start breaking that $2.5 million down into smaller increments, it becomes much more achievable and manageable. You can also keep the team motivated as you check off the incremental goals achieved through the year.

Depending on how efficient your entity is operating, those incremental savings might pose a significant challenge if your company is seeing significant growth, which then comes down to evaluating whether you’re leveraging your OpEx. In that situation, what would your Budget look like if viewed on a constant basis year over year? Winning the “Budget Game” is about consistent base hits and keeping our teams motivated.

Thanks for reading . . . .

Achieving your plan with Base Hits

When Audit teams and Sales staff collide….

August 18th, 2008 Comments off

In my last commentary on Internal Audits, I went into an overview on the segment concerning Finance & Control. When it comes to this group, internal audit exercises are rather straightforward and generally not intimidating. But how do you coordinate this same exercise for a group that’s not used to being questioned and are accustomed to generally running in a fairly independent fashion, like the Sales department? Answer, very carefully and with a bit of handholding. Again, like the Finance portion of the audit, this is only intended as a brief overview and there was a much more comprehensive approach behind the scenes.

Although the intended scope of review for this department was not going to be the least bit exhaustive, it did mean that Sales personnel were going to be questioned on protocols and that their approach was going to come under some level of scrutiny. With regards to the auditors, they were going to key some of the following topics:
1. Efforts & action plans to achieve synergies with the parent company.
2. Project margin tracking was in place to achieve the original commitments.
3. Sales personnel bonus plans were definitely structured and approved.
I knew that the first couple parts were not going to be much of an issue, but once you start questioning Sales folks about their bonus plan you know there’s the potential for fireworks.

As we went through the various topics, we began to dig into more detail about how higher value jobs were being quoted and how the change orders on those jobs were being charged to the customer, or in some cases, how they weren’t. Fortunately, we had already implemented a new reporting structure prior to the audit that had us tracking the margin progression of every job over a specified value. We would track every progression in the job to the point that if we encountered even 50bp of margin change by the completion of the job we could bridge every element contributing to that change. For the better or the worse….

The delicate balance in this portion of the audit was working with the Sales team, who were instinctively working in the best interests of the customer and meeting their goals, and the Audit team, who was only focused on whether protocols were being followed, regardless of the outcome. We encountered some very short tempers but were able to work through it once each party understood the motives of the other. Not that the Audit team really cared…..
The valuable perspective for this part of the audit was that you had one group who worked in multiple shades of grey, and the Audit team who only worked in black and white, and how do you generate a productive outcome? We did so by educating all parties involved and making sure that all parties were working towards the same outcome – Making sure the company continues as a growing and profitable entity while mitigating risk.

Thanks for reading . . . .

CFO.com Working Capital survey. Not all bad….

August 15th, 2008 Comments off

From the first summary read on the 2008 Working Capital scorecard that was published on CFO.com yesterday, you would think that the majority of the companies fell short of expectations. At a top level, working capital levels increased by 1% versus the prior year levels. Considering that these results were through the end of 2007, there was certainly an opportunity for things to deteriorate a bit more in the 4th quarter. However, what is not reflected in the summary is that these results are for only European-based companies. While they obviously have their U.S. results on a consolidated basis, which we would have been a part of the Schneider Electric figures, the figures recently released are absolutely European-centric. These results do not reflect a full global economic slowdown, as we are now starting to see.

Getting into details of the results a bit more, DSO levels have continued to fall over the last 2-years by 4.1% and 3.6%, respectively. However, this is on the heels of revenue increases of 7.4% and 10.3%, respectively, over the same period.
Interesting enough, Gross Margins were flat over the last 2-year at 32.7% and 32.6%, respectively. Considering the increase in sales, it is a concern that Inventory levels (DIO) was up 3.5% this year versus a 2.5% decrease last year. It certainly tables some interesting questions about whether growth expectations were even higher than results or if there were shifts within product offerings that left companies with an improper mix. Also interesting is the fact that gross margin levels have only fluctuated by 0.1% over the last five years with a range of 32.6% to 32.8%.
With respect to Payables, DPO increased by 1.9% in the most current year versus a 4.2% decrease in the prior year. At the current level of 45.6 days versus 44.8 in the prior year, it’s not a huge push still not as high as the 2005 level of 46.8 days.

One of the more notable figures in the scorecard released by CFO.com is the change in EBIT levels over the last 5-years. Revenue levels have increased by approximately 7.9% per year while EBIT levels have increased by approximately 18.8% annually. EBIT levels among the participants has been achieved through an effective leveraging & control of operating expenses rather than increased performance in product margins. It would be interesting to look at 2008 Working Capital proforma results with a flat to low-single digit sales increase. Also, in further review of the study, there was a huge range in results among the participating countries with respect to a total DWC metric. But we’ll dive into those comparisons in a later post…..
Thanks for reading . . . .